As part of the ongoing drive to remove internal barriers and create a single market within
The European Union, European policy makers have identified a number of areas for harmonisation. One of the biggest developments to this end is the introduction of the Target 2 Securities (T2S) infrastructure as a way of decreasing cross border settlement costs.
However, this in itself is not sufficient to achieve the same levels of efficiency in the post trade ecosystem as are enjoyed in the US.
In an attempt to foster further integration, the European Parliament has now adopted the Central Securities Depositary Regulation (CSDR), which aims to bring together Central Security Depositary (CSD) activity within European markets. The CSD has been specifically
designed to foster increased competition and to create a more open market.
The CSDR targets key areas where there is little or no cohesion between the market practices of individual European states, such as settlement periods. The CSDR introduces a settlement period of T+2 as a common practice across European CSDs. Some other key
changes established by CSDR include, imposed interoperability, segregation of core activities and banking services, and common disciplinary procedures and penalties for failed or late delivery, to name but a few.
All of these measures serve to further the European Central Bank (ECB)’s objective of creating a more efficient and integrated market with increased competition. However, CSDs will need to invest substantially in new infrastructure in order to fulfil their
obligations under CSDR. As in most instances where regulatory mandates require further infrastructure investment, it’s likely that these costs will be passed on to the customers of the individual CSD.
Furthermore, although they mark a welcome step forward in the Single Market project, CSDR and T2S fail to address a number of key prohibitive domestic market practices that will remain as barriers to full harmonisation. In particular, they do not mitigate the
fact that some national corporate laws require CSDs to operate local branches if they wish to provide notary functions and other associated issuance services in that state.
Additionally, discrepancies in national tax regimes continue to provide some clear incentives for investors to operate with local entities. Finally, the ownership structure of CSDs and their strong relationships with national central banks may continue to engender
strong political resistance to foreign competition.
Against this backdrop of simultaneous infrastructure and regulatory change, the International Capital Markets Association (ICMA) and Rule Financial have commissioned an industry-wide survey to help shed light on attitudes towards, and industry preparedness
for T2S. It is hoped that the survey results will highlight industry participants’ understanding of T2S and the potential consequences for individual firms in terms of costs, resources and opportunities. This knowledge will then be used by the European Repo
Council to help guide and shape its approach to the provision of T2S information, guidance and training to its members.