TARGET2-Securities 2007 Luxembourg, 19 September 2007 Jean Michel Godeffroy Director General Payment Systems and Market Infrastructure ECB Annex 2

TARGET2-Securities

Luxembourg, 19 September 20 200707

Jean Michel GodeffroyDirector General Payment Systems and Market InfrastructureECB

Annex 2

Outline

1. What is T2S?2. What can T2S do?3. Expected effects of T2S on post-

trading4. First phase of the project: T2S

governance 5. The project: principles and proposals.

Consultation process6. Moving forward

Outline





• … Europe, implementing the Lisbon agenda

• Supporting to the integration of the market infrastructure

• Making cross-border transactions, domestic ones in Europe

• Enhancing competition in a financial service segment largely based on national monopolies

A project for…

Making Europe a better place to invest and trade

What is T2S?

CSD A

CSD B

CSD C

T2SSETTLEMENT

ENGINE

SECURITIESCENTRAL BANK

MONEY

CSD A ACCOUNTS

NCB C ACCOUNTS

T2S platform

SETTLEMENT INSTRUCTIONS

CSD C ACCOUNTS

CSD B ACCOUNTS NCB B ACCOUNTS

NCB A ACCOUNTSNCB A

NCB B

NCB C

What is T2S?

Outline





• Provide a single venue where all EU assets can be exchanged for euro.

• Reduce cost of cross-CSD settlement via a single settlement platform and standardized communication protocols.

• Eliminate financial exposure in cross-CSD settlement through central bank money settlement.

• Provide position takers with the ability to optimise the financing of long positions and borrowing for short sales across all EU assets in euro (and other currencies over time).

• Increase efficiency of collateral management by the intraday transfer of collateral in securities among CSDs over a wide time window

• Support capital markets to provide efficient and stable intermediation between buyers and sellers.

• Reduce complexity and associated operational costs and risks by harmonizing market rules and practices for settlement and settlement related corporate events.

What can T2S do?

T2S does not segregate custody and settlement

What will change?

CSD

Custody

Other…

Reporting

Lending

Coll. Mgmt

Settlement

CSD

Custody

Other…

Reporting

Lending

Coll. Mgmt

T2S

Settlement

Key success factors 1. Right set of

messages, queries & requests

2. Availability3. Response time

Tod

ay’s

worl

dT2S

worl

d

Outline





• Increased efficiency in securities finance, reduced cost of funding and collateral management have positive effects on liquidity.

• Dynamic effects on trading volumes and liquidity due to - increased competition in trading- better pricing of securities- unencumbered access to settlement

• Further savings from reduced fail rates from simplified processing, reduction in operational errors and easier management of funds.

• Acceleration in the harmonisation of settlement related asset servicing.

• Enhanced competition in servicing assets will help investors to reduce cost.

• Reduction in intermediaries’ back-office costs through economies of scale

Expected effects of T2S on post-trading

In a nutshell:

•Increased market liquidity and access to wider investor base lead to

lower cost of capital for issuers

•Increased market liquidity and lower cost of portfolio diversification lead to

better return for investors

Expected effects of T2S on post-trading

Outline





TG1Scope and schedule

National User Groups

Coordination

Group

Advisory

Group 14 NCBs

14 Users 14 CSDs

Observers

TG2Lifecycle

management

TG3Settlement

functionality

TG4Static data

TG6Non-functional

TG5Interfaces

72 persons62 institutions

123 persons 33 institutions

Information Sessions with all Stakeholders

ECB Governing Council

Executive Board PSSC

• 188 experts coming from 77 institutions • All CSDs settling in euro participate• 33 custodian banks

First phase of the project: T2S governance

Outline





Principles and proposals

• A public consultation on the document “T2S: general principles and high-level proposals”, defining the nature and scope of TARGET2-Securities (T2S), has been launched on 26 April 2007.

• Market participants were invited to comment by end June 2007. We got 57 responses.

Principles

• Revision of text of the principles as “key cornerstones” of T2S defined by the ECB Governing Council

• Main purpose of revisions: Achieve common understanding

• These clarifications result from:– Consultation process (in particular 25 June Info

session)– Issues raised at TG level

• Next step: ECB Governing Council to validate the clarifications proposed by the AG

Proposals

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67

I agree I do not agree entirely I completely disagree

Proposal number

Satisfaction per proposal

65%

20%

6%9%

I agree

I do not agreeentirely

I completelydisagree

no answer

Statements on proposals

Proposals

• Assessment of comments by the AG to provide guidance to the TGs

• The Project Team classified each of the 67 proposals into 3 groups before submitting them to the AG:

Proposals - Before the AG

35 Green Proposals: The AG was invited to validate them as they were originally drafted (sometimes with minimal editing changes)

18 Yellow proposals: Further debate was deemed beneficial before taking a decision. The AG was invited to mandate a specific TG to further analyse the topic.The AG would then reconsider the proposal at its September meeting.

14 Red Proposals:The AG was invited to change the proposal

• The most contested proposals were classified as yellow or red, but not asked for validation by the AG– All proposals which had less than 50% of full agreement

were classified as yellow or red (2,23,30,33,35,44,52,57,60 and 67)

• The proposals where validation by the AG was suggested had a high level of agreement among the responders– These 35 proposals were fully agreed by 83% of

respondents on average

Proposals - Before the AG

Proposals – Main debate

Proposals 2, 3, 4 and 5: Original: TARGET2 real-time gross settlement (RTGS) accounts or sub-

cash accounts shall be used as cash accounts for T2S.Reviewed: The cash leg of T2S settlements will take place on T2S

dedicated accounts. A consolidated view on euro liquidity available in T2 RTGS accounts and T2S cash accounts will be provided. Real-time liquidity transfers between T2 RTGS accounts and T2S cash accounts (and vice versa) will be possible automatically and on demand.

AgreedMain issues • Discard T2S cash settlement taking place on RTGS account.• Ensure consolidated view on central bank money accounts.

Automated transfer facilities to address liquidity split.


Proposal 23: Original: The use of night-time settlement is optionalSuggested review: All CSDs are expected to maintain the full

T2S schedule (including both daytime and night time). Strong majority in favour of review. Not yet agreedMain points • If my market does not currently require night-time

settlement, why will it do so in 2013?• Externalities: If one CSD closes during part of the

schedule it delays settlement for users of other CSDs (for cross-CSD trades)

• Competitive pressure: T2S will provide night-settlement in any event; restricting the offer to their users has competitive implications for a CSD.


Proposal 30: Original: Instructions can either be matched in T2S, or they can enter T2S

already matched.

Suggested review: Matching should only take place in a central point: in T2S. An exception to this are pre-matched instructions from exchanges, trading platforms and CCPs which may enter T2S already matched.

Not yet agreedMain points • T2S needs to match in any event (cross-CSD instructions)• TG2 proposal: Matching for indirectly connected participants can be

done by CSDs - Technically possible, but business case challenged• Banks’ view: One matching place as close as possible to settlement• CSDs’ view: Explore possibility to re-use their matching facilities


Proposal 67: Original: Harmonisation and standardisation decisions shall be

guided by the principle of minimising the overall market impact.

Suggested review: Harmonisation and standardisation decisions shall be guided by the principles of (1) maximising efficiency and (2) minimising the overall market impact (in this order of priority).

Agreed

Main points • Efficiency first

Proposals - After the AG

32 Proposals agreed

35 Proposals not yet agreed and now assessed by TGs

TGs will report to the AG in September

Outline





Next steps (until May 2008 at the latest)

1.Finalization of the User Requirements.

2.Economic analysis: Intended to be performed at all stages of the project. • T2S internal cost basis and the resulting cost per transaction• Estimation of the adjustment costs• Identification and estimation of any additional costs• Estimation of the microeconomic yearly savings

3.Definition of the governance structure for the next phase of the project (the Advisory Group to initiate discussions by end September 2007).

4.Legal topics under investigation:• Assessment of national legislative and regulatory regimes• Legal setup and governance • T2S external legal/contractual issues• ESCB internal arrangements

5.Market Consultation.

An outstanding critical issue: The CSDs’ participation in T2S

• CSDs may opt out from T2S, but …

• … which option would be available to users who want to opt in while “their” CSD opts out?

• What kind of information would the CSDs need before deciding to join T2S?

• What degree of CSD commitment does the Eurosystem need before committing real money in the project?

Conclusion: T2S should not be seen in isolation

• T2S is not enough in its own - removal of the Giovannini barriers:harmonisation of market rules and practices.

• Compliance with the Code of Conduct: open access between all infrastructure components in trading/clearing/settlement.

• Whole-hearted co-operation between the Eurosystem, markets and regulators (ESCB/CESR).

THANK YOU

Documents

TARGET2-Securities 2007 Luxembourg, 19 September 2007 Jean Michel Godeffroy Director General Payment Systems and Market Infrastructure ECB Annex 2