A progress report by the European Central bank on the controversial Target2Securities integrated settlement project descended into a three-way spat between agent banks, securities depositories and the central bank over costs, timetabling and information transparency at a hot and heavy Sibos session in Hong Kong.
The debate, chaired by the ECB and featuring representatives from the central securities depositories (Euroclear and Clearstream) and the agent banks (JP Morgan and Deutsche Bank), centred on the progress that has been made toward establishing the settlement platform in time for the 2013 deadline.
The CSDs, who are likely to see their revenues reduced when T2S is introduced, urged the ECB not to underestimate the barriers that will exist and not to overstep its original remit. "The scope of T2S is an enormous challenge," said Mark Gem, head of business management at Clearstream Banking. "There are plenty of barriers that remain in creating a single pan-European market and they will still be there in 2013. T2S should stick to its mandate and remain lean and focused."
However the banks were equally vocal about the CSDs need to listen to their own customers - the banks - and to ensure that transaction costs are reduced and services are not duplicated once T2S goes live. The banks also called for a more inclusive approach to future T2S debates. "We the users believe we can give valuable advice but we feel that you (the CSDs and the ECB) try to exclude us from the conversations," said Stephen Lomas, managing director, Deutsche Bank. "Please do us a favour and let us in. Do not try to fight us."
Concerns over pricing and governance aspects clearly remain for both banks and CSDs, especially as regards contracts. "The biggest challenge over the next few months will be to get contractual agreement between the CSDs and their customers and to get the various pricing and governance issues articulated and discussed," said Clearstream's Gem.
In outlining the ECB's progress to date, Jean-Michel Godeffroy, chairman of the T2S programme board, ECB, admitted that there had been a seven month delay to the completion of General Functional Specifications document, which outlines the technical requirements for the T2S system, but added that this had been made up by amending the timetable and reducing the time devoted to testing and migration so that the original 2013 deadline would be kept.
There are also ongoing negotiations about the proposed cost for building the T2S system. "We are in a unique situation with the cost of the project. Most projects have a tender process where you pick the best outside contractor. But with T2S we are doing this in-house, through the central bank team," said Godeffroy.
The central bank team comprises representatives from the Italian, Spanish, French and German central banks who have been charged with developing the system.
"They have given us a price, we didn't like it and it is being reviewed. We will go public with the agreed price some time in October or November and then that price and that budget will become a firm commitment," Godeffroy told Finextra.
Other concerns arose over the processes for achieving Delivery versus Payment in the system. The T2S system will have two databases - one for securities and one for cash. Once the system receives instructions from a buyer and seller, these requests are matched and the cash and securities are simultaneously delivered.
It is when the two sides - cash and securities - have to interface that concerns those in the cash management space, such as Roger Jones of the Target Working Group, a European banking industry group for Target2Cash, the pan-European RTGS for clearing Euro-denominated payments.
"Most of the time this is fine but there is a potential impact on the cash side. For example, there are issues like ensuring cash and securities teams have the same operating hours and are using the same Swift messages. We also need to ensure that cash liquidity is maintained.
"In most banks the cash and securities teams are in different departments and this is the problem. Cash management teams would like to be more included in the T2S discussions. We need to ensure there is a forum to make sure that these issues don't cause any concern and that they are resolved now rather than in 2012."
Godeffroy acknowledged the concerns, but remained focus on the more pressing near-term problems facing the project: "Now that we are addressing the operational issues we have to listen to the cash management people. I appreciate that they do not want to be left out but right now the critical point is the three way relationship between the ECB, the CSDs and the agent banks."