How to Use New European Settlement Platform
November 16, 2011
Despite the uncertainty around just when the European Central Bank will launch its new centralized settlement platform, one research firm is willing to come up with what it thinks the upfront and running costs will be to banks and brokerage firms to leverage the new Target2 Securities platform.
The bottom line: if a bank or brokerage firm wants to link to the platform and do all the processing work itself it could need to invest at least E25 million for starters, says Axel Pierron, senior vice president with research firm Celent in a report entitled “Leveraging T2S Infrastructure: What are the Options?”
The costs ultimately depend on just how the bank or brokerage firm decides to link to T2S, whose start date the ECB recently postponed to 2015. Those costs are directly related to just how a firm should interact with the T2S platform.
"We already informed our colleagues at central securities depositories that we have reassessed the starting date and proposed to our governing council that we postpone T2S," Jean Michel Godeffroy, chairman of the T2S program board told a packed crowd at the Society for Worldwide Interbank Financial Telecommunications' annual SIBOS meeting in Toronto in September (Securities Technology Monitor, Sept. 11, 2011).
At that time Godeffroy said that the delay was necessary to accommodate European national securities depositories which wanted more time to test their connectivity with the new system. The ECB also needed to make some last minute additions and add a "buffer" -- additional time from the end of testing to the launch date.
However, some European depositories aren't sold on the merits of T2S and so far none of them have signed a final legal contract with the ECB guaranteeing their connecting to the T2S platform, which could cause smaller ones to consolidate. Those depositories -- and plenty of financial firms -- are questioning whether T2S will even see the light.
Here are the three options and the costs involved as outlined in a research report issued by Celent on Wednesday morning.
1- Indirect connectivity: In this scenario, says Pierron, the financial institution relies on “external providers” to conduct post-trade activities. The external provider can be a subcustodian or central securities depository to handle the transfer of securities and cash; corporate actions and other processing services.
2- Hybrid Approach: In this scenario, explains Pierron, the financial intermediary will link directly to T2S for settling trades, but use an external provider for asset-servicing functions. The external provider can be a subcustodian or central securities depository.
3- Full Self-Settlement and Custody: In this scenario, says Celent, the financial intermediary will link directly to T2S for settlement and do all of other post-trade processing work on its own.
Here are the startup and running costs as estimated by Pierron:
1- Indirect Connectivity: The financial intermediary won’t have to spend anything to link to T2S so there won’t be any up-front investment or running costs.
2- Hybrid Approach: The financial intermediary will have to buy or adapt its current settlement engine which could come to an initial E12 million for only two markets serviced by T2S, according to Celent. The additional running cost would be about E1 million annually
