Target2Securities; the long game?

The EC has long looked enviously at the commoditised cost of the settlement of securities transactions in North America. The cost model in the fragmented European industry compares very unfavourably with the utility pricing of the monolithic infrastructure on the other side of the Atlantic. It should be no surprise then that the pressure that the EC applied in the payments market with SEPA seems likely to be repeated in Securities with T2S.

It appears that T2S will continue the good work that Euroclear started with development of its single settlement platform, by delivering a common settlement system for the whole of Europe that can rival the DTCC in per-unit cost terms.  Once such a system is in place, we might then see the drafting or re-drafting of European Law necessary to allow securities to be held at any European CSD. This would potentially create the framework for securities to be settled by T2S at any CSD, removing the monopoly that CSDs currently enjoy within the borders of their country of domicile.

In the wake of the T2S initiative, and if EC legislation did take place, CSDs would then be able to settle transactions in securities issued in any EC country.  Such new legislation would probably also permit other players to enter the market – one can imagine global custodians acting as pan-European CSDs operating directly with T2S and providing its customers with value-added services layered on top of the plain vanilla settlement platform. In short, the post-T2S world might see an increase in the number of European CSDs meaning that the traditional CSDs would face competition from new entrants as well as each other.

If settlement of European securities transactions becomes truly utilitised, the question then posed would be what else would be left for the CSDs to do. The obvious answer would seem to be the provision of value-added propositions around asset servicing, which would play to Euroclear's strengths, but again would pitch CSD into direct competition with CSD. Custodian banks would doubtless join the fray, which would result in something of a competitive bloodbath. It is probable that the eventual outcome of this would be fewer providers giving full-service in a genuinely competitive environment - whether these would be the incumbent CSDs, nascent Custodian CSDs or a mix of the two is still a matter for conjecture. The more immediate question would be - does the EC have the stomach for this kind of punch up?

Hugh Cumberland

Product Strategy Director, BT Global Financial Services