The ECB pushes on with its Target2 Securities project after most of the euro central securities depositories agree to embrace the settlement platform when it launches. Helen McKenzie reports

Aclearer picture of the future European settlement landscape is beginning to emerge after years of uncertainty. In July, the governing council of the European Central Bank (ECB) confirmed what most in the industry had anticipated - that its Target2 Securities (T2S) project would go ahead. One month earlier, international central securities depository (ICSD) Euroclear announced the acquisition of two Nordic settlement providers for €470m, a move that will further consolidate the European CSD scene.

The ECB will provide the re-sources needed to build T2S, which will be operated by four central banks - Deutsche Bundesbank, Banco de España, Banque de France and Banca d'Italia. T2S will be a single platform for settling both cash and securities transactions in euros. In settling national and cross-border securities transactions in central bank money more efficiently, T2S will improve the integration of European money and capital markets, says the ECB. Unlike Euroclear's business model, T2S separates settlement from asset servicing functions, which will remain in the remit of national CSDs.

T2S was conceived partly out of the ECB's frustration at the lack of progress towards European settlement integration (Euroclear's efforts aside). Many years after the introduction of the euro, Europe lacks an efficient, integrated securities infrastructure that would support the operation of a single financial market.

The ECB decided to go ahead with T2S after "almost all euro area CSDs", subject to certain conditions, had said they were in favour of the initiative, would enter legally binding contractual arrangements by the end of Q1 2009 and would use the service once it starts operations.

CSDs outside the euro area have been invited to participate in T2S, which will require central banks in the relevant countries to make their currency available in the platform. The Danish CSD has confirmed that it will participate for both krone and euro settlement. The Swedish and Swiss CSDs will participate for euro settlement but are still deciding whether to include their national currencies.

The launch of T2S is expected to be in 2013. Meanwhile, Euroclear is going full steam ahead in its project to consolidate settlement operations with the development of its single platform, a project begun well before T2S was first mooted.

Euroclear's business model involves a number of interim steps towards a single platform. The first phase, the single settlement engine, was launched in early 2007 and replaced the ICSD and constituent CSD core settlement applications.

The next phase, Euroclear Settlement of Euronext-zone Securities (Eses) began roll-out last year. Eses provides clients of the Belgian, French and Dutch CSDs (all of which serve the Euronext markets) with integrated settlement for stock exchange and over-the-counter activities.

The final Single Platform Custody service, which will provide harmonised group custody services, will be implemented in 2009, while Single Platform Settlement, which harmonises group settlement services such as matching and life cycle management, will be rolled out in 2010.

The recently acquired Nordic CSDs, Finland's APK and Sweden's VPC, will be included on the single platform services. Euroclear is acquiring the shares in NCSD, a holding company for the two CSDs which had recently merged. The merger with Euroclear is expected to occur in Q4 this year. Following the merger, Euroclear group CSDs will serve seven European markets, representing about 65% of the Eurotop 300 equity markets.

"There is a lot of user pressure from banks in Europe to have more consolidation in the settlement space," says Anso Thiré, managing director, global capital markets, at Euroclear. "However, compared with the US, it is a bit more difficult achieve full consolidation. The consolidation of a central counterparty and a CSD on to the same platform may be some time away still in Europe."

Tom Ruud, chairman of NCSD says the merger with Euroclear will provide a seamless post-trade environment, helping to make the Nordic market stronger. "Issuers and investors within, and external to, our market will have access to deeper pools of liquidity and broadened counterparty reach with use of this new single settlement infrastructure covering more of Europe's market capitalisation than any alternative."

The NCSD was working on a shared platform for the two markets, says Thiré. "The question was, did they want to do that in one or two stages - the first stage as a Nordic solution and the second to connect it to the rest of Europe. Many institutional investors in the two countries have portfolios that increasingly include pan-European investments. Even if NCSD developed a solution for the Nordic business, which is the bulk of their activity, they would have had to look at connecting to the rest of Europe anyway."

Kjell Arvidsson, chief executive of NCSD adds: "Euroclear's Single Platform is ideally suited to provide the features and functions that our clients require, without having to create a totally new platform ourselves."

Operationally, the Nordic CSDs are similar to Euroclear - both are user owned and governed and in Sweden, particularly, there is a user oriented culture around infrastructures, with high participation in user groups, says Thiré.

As for T2S, he says the ECB initiative could be a threat to "those CSDs that have focused on transaction income, rather than value-based income". There may be a shift away from settlement and into asset servicing, he says, which will bring the CSDs into competition with local custodians that offer the same services. "I don't think T2S is the sole driver of this trend though, I think it would have come about anyway as CSD margins come under pressure," says Thiré.

He reckons there will be further consolidation of the settlement infrastructure in Europe, but it will be slow. Many CSDs are hanging on to their business, and that is natural, he says.

"The ultimate driver of consolidation will be the desire of users to reduce costs, particularly among the larger financial institutions," says Thiré. "Partly through MIFID, users are developing their own solutions to replace the traditional exchanges and reduce their trading costs. It is also beginning to happen at the clearing level.

"Settlement is a bit more difficult, but the push for reduced costs will continue. Users of settlement systems won't be prepared to use providers that are operating with margins of 50-70%. These CSDs will have to cut prices and bring their margins down, for both cross-border and domestic business."

European CSDs have been responding to T2S. Earlier this year, Link Up Markets, a joint venture between seven CSDs was launched. It aims to establish a common infrastructure that allows easy implementation of links between CSD markets and efficient cross-border processing. By connecting to the common infrastructure, each participating CSD has access to the services of the other participating CSD markets across all asset classes (except derivatives). The initiative is open to all domestic CSDs.

Tomas Kindler, managing director of Link Up Markets, says the venture "is not building another settlement engine", but is leveraging existing infrastructures that are already in place in the market. Any differences in market standards will be absorbed by the common infrastructure, he says.

The pressure for greater efficiency and low-cost cross-border settlement will continue into the future, says Thiré. "The new trading venues are multi-market and that is having an effect on clearing and settlement. Institutions want to work with one provider for settlement across a number of markets, because they see this approach as being the most economical way to do business."

Topics