TARGET2-Securities: A big win for European integration
Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB
at the Journal of Financial Transformation dinner
London, 27 September 2007
Ladies and gentlemen,
I am delighted to be here today to share with you some thoughts on what is TARGET2-Securities, or T2S in the financial jargon, and what it will be in five years’ time or so.
The Journal of Financial Transformation and the Capco Institute have tonight brought together a remarkable group of executives and experts from the financial sector. Let me therefore thank the organisers for inviting me to speak at this key event.
Britain knows better than most about the Industrial Revolution, about the benefits it brought and the costs involved. At the beginning of the Industrial Revolution, roads and navigable rivers were used for inland transport. The Industrial Revolution improved Britain’s transport infrastructure with a turnpike road network, a waterway network and a railway network.
Railways, in particular, helped Britain’s trade enormously, providing a new and superior transport infrastructure that accelerated industrialisation all over Europe. Indeed, British success with steam locomotion encouraged the building of railroads in most European countries and, in this way, railroads became a standard item of British export. But think also of countries like the United States, which were transformed with the help of the railways from a union of self-sustaining states and distant territories into one nation.
T2S is also about using technological progress and overcoming political borders. Its aim is to create the infrastructure in the settlement field that is needed for an integrated financial market in Europe – just as railroads created national economies in the nineteenth century by shrinking geographical distances and linking together different parts of the country.
Given that the Industrial Revolution was carried out by the private sector, some of you may be wondering why it is that the Eurosystem will develop T2S. Let me tell you briefly.
Seven years ago, the Lisbon agenda demonstrated that not only must Europe do better, but also that Europe can do better, for it has extraordinary potential for improvement.
The Eurosystem has been following with great interest the market developments in this direction. We have observed that there has been significant progress in the integration of settlement systems at the domestic level over the past decade, so that most EU countries now have only one settlement system for all types of securities. Integration efforts at the cross-border level, however, have not been as successful: they were taking too long, possibly owing to the difficulties involved in getting independent and competing organisations to agree on common solutions across multiple countries and many different participants.
It is true that some private initiatives resulted in the merger of central securities depositories (CSDs) in different countries under common ownership. Clearstream and the Euroclear Group are examples of such mergers. However, while the international central securities depository part of these groups developed a dominant position as sole suppliers of cross-border settlement, no pan-European domestic market emerged and post-trading continued to be fragmented along national lines.
Now, how can we say that we want Europe to be the most competitive economy in the world and that it should be the best place to trade and invest when, for instance, Europe lacks a common trading plumbing system, which the United States has already had for more than 30 years?
The Eurosystem’s ambition is to have equal, cheap and harmonised access to settlement services across countries by means of a common technical platform. Our proposal to realise this ambition is T2S. It is based on a vision, of a harmonised European post-trade environment, and on sound preparation, which started with a feasibility study before any further steps were taken.
T2S is not incompatible with private initiatives; indeed, they can complement one another. The T2S facility will be based on integrated processes whereby cash – euro central bank money – and securities accounts will be located on the same platform.
Moreover, T2S will enhance competition as it will enable all CSDs using this common platform to compete with each other in terms of business efficiency in functions other than the settlement of securities. The Eurosystem supports this kind of healthy competition, which is to the advantage of both issuers and investors, as well as users of market infrastructure.
It creates an opportunity to reduce settlement prices in Europe to below the current lowest national level, and this service level would be available to everyone. As often occurs in sectors with network economies, by removing the infrastructure from private competition, you ignite competition among the service providers.
T2S joins other European initiatives, such as the Code of Conduct and the Markets in Financial Instruments Directive (MiFiD) in helping to fulfil the objectives set out by the Lisbon agenda for the provision of better services to issuers and investors. We firmly believe that T2S will speed up market integration and that it will also foster competition, and the European Commission shares this view.
What can T2S do for Europe? At present, T2S is at an embryonic stage, but is has helped markets and central banks to reflect on the current scenario; it will still need five years or so to grow. Then, when it goes live, T2S will facilitate the settlement in euro of all EU securities within one single platform with standard communication protocols. In other words, there will no longer be cross-border settlement of securities across Europe, only domestic securities settlement.
Europe will benefit from T2S. Commercial service providers will benefit from the level playing-field that a common platform, harmonised rules and practices and reduced complexity will bring. Issuers will benefit from lower capital costs. Investors will benefit from better returns. In a nutshell, the CSDs and their users will benefit from the overall economic efficiency of the securities settlement industry.
When the Governing Council of the ECB approved the feasibility study in April this year, it was time to move from words to action. We had to start preparing the user requirements. We had several options, and we made a choice based on a couple of things we know.
We know that the success of the project will depend on its capacity to satisfy the needs of stakeholders and, for this reason, our objective is to draft a comprehensive inventory of the requirements and concerns gathered from the stakeholders through market consultations, through their participation in the groups which are part of the T2S governance and through the information sessions that we organise regularly. We pay close attention to the information we have collected on the business needs, country rules and domestic practices of the CSDs and their users. Furthermore, I can assure you that the ECB listens carefully to and is in close contact with the major market participants in London. In fact, that is one of the reasons why I am here tonight.
We are confident that, as a result of the structures that are in place, all interested parties have been able to express their views and make suggestions, and you can rest assured that this input will have a considerable influence on our work in the coming months.
We also know that transparency is not only an obligation for us as central bankers, but also a real benefit. I recognise that central bankers have followed quite a different tradition for a long time, but with T2S we aim to make it as clear as possible how, and why, we are doing things. For this reason, we openly share all relevant documents even before they are discussed by the Advisory Group on T2S, so that any interested party has a chance to influence developments. Our main task now is to bring together the various proposals we have received to finalise the user requirements.
Our working methodology is based on cooperation with stakeholders. The level of interest shown by market participants was very high from the start, so this method is working very well. The T2S governance structure aims to involve all relevant stakeholders from across Europe, and to ensure the Eurosystem’s responsiveness to market needs in an accountable and transparent manner.
The Advisory Group forms the upper level of the T2S governance structure, and CSDs, banks, central banks, interest groups and regulators are all represented. But CSDs and banks also take part in the technical groups. The work within these groups is being carried out in a spirit of cooperation and partnership. In summary, 188 experts from 77 institutions from all over Europe are involved, together with the Eurosystem, in establishing the user requirements. The discussions have been fruitful and inspiring, and we have not faced any major stumbling blocks, although the discussions have not always been without disagreement.
Is this good? My answer is: “yes”. And this is because, if you succeed in creating a group of people who are willing to analyse, to move forward and to take concrete action, you can guarantee that the members of this fabulous group will have all sorts of opinions. Indeed, the groups composing the governance structure of T2S have turned out to be a fantastic think-tank, and we are convinced that this will be the perfect soil for T2S to develop in a vigorous manner.
The preparation of the user requirements is currently the central part of our work, but it is not the only one. We are now embarking on a second work-stream that focuses on the investigation of the legal issues arising from T2S, such as the assessment of legislative and regulatory regimes, the identification of the legal and contractual arrangements that will be required in the future, as well as the legal arrangements internal to the Eurosystem.
What is next? The Advisory Group will revise the user requirements before they are submitted to the Governing Council of the ECB in December this year. A public consultation will then follow, and the markets will have the first quarter of 2008 to comment.
Based on our experience with TARGET1 and TARGET2, we are working on the assumption that T2S should be ready in 2013. The Eurosystem will, nevertheless, endeavour to shorten this time period as much as possible, as already requested by market participants.
I should like to finish my remarks today with a warm “thank you” to the people and institutions who are working with the Eurosystem in the T2S project, for their openness, hard work and support. We know that T2S can be done, we know that T2S is good for Europe and we know that T2S cannot, and should not, be done without the markets.