T2S gains multilateral agreement, despite UK concerns

T2S gains multilateral agreement, despite UK concerns

The European Central Bank (ECB) and the 16 national central banks of the euro area have signed a Memorandum of Understanding with 27 European central securities depositories covering obligations and responsibilities for the next stage of the Target2-Securities (T2S) project.

The MoU is a further step in the T2S project, setting out the mutual obligations and responsibilities of the CSDs and central banks in preparation for its next stage, which will involve a contractual agreement on building T2S.

The CSDs in all the euro area countries, as well as nine non-euro area CSDs in Denmark, Estonia, Latvia, Lithuania, Romania, Sweden, the United Kingdom, Iceland and Switzerland, signed the MoU. The CSDs in Denmark, Lithuania and Sweden-with the consent of their central banks and the support of their markets-also confirmed their intention to provide for the settlement of their national currencies in T2S, in addition to settlement in euro.

However, as late of June this year, the Bank of England expressed concern over T2S and raised doubts that it would join the T2S integrated settlement system.

The ECB believes an integrated securities settlement infrastructure in the euro zone could cut settlement costs by up to 90%. Although the UK is not in the euro, the ECB has proposed that the settlement of sterling-denominated securities should also transfer from Euroclear UK and Ireland to T2S.

The Bank of England was concerned that sterling settlement would be part of system under ECB control and asked for a "very clear arrangement" that would allow the Bank and UK users direct control over sterling settlement.

Once launched in 2013, T2S hopes to create a single, borderless pool of pan-European securities, as well as provide a core, neutral, state-of-the-art settlement process. Market users will be able to access these assets through CSDs. The goal of a single IT platform for the settlement of securities in euros is to reduce the cost of cross-border securities settlement in Europe.

Meanwhile, the MoU was presented by the ECB on 19 March to the CSDs. It formalises CSDs' commitment to the project and defines a path leading to the signature of the agreements for development, migration and operation of the new system for securities settlement.

The signing of the memorandum is a major step in preparing for the development phase of the project. It provides the basis for discussions on the formal contractual agreement between the CSDs and the Eurosystem. A finalised formal contractual agreement is expected in the first half of 2010.

The T2S project is currently in its specification phase, involving the preparation of the documentation related to the user requirements and the design of the system, as well as the preparation of the contractual arrangements with the CSDs. The development phase will start in early 2010. T2S is planned to go live in June 2013.

This spring, the ECB published a report on the assessment of the design of Target2 against the Core Principles for systemically important payment systems (Target2 Oversight Assessment Report).

The outcome of the oversight assessment of the Target2 design is positive. The system is considered to be well-established and observe all relevant core principles. The outcome of the assessment is supported by practical experience gained with the live operation of the system.

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