Financial Markets Operations Management (37 page)

In Chapter 6: Securities Depositories (CSDs and ICSDs), we looked at the two organisations that were established to look after the Eurobond market. The fact that Euroclear Bank (EB) and Clearstream Banking Luxembourg (CBL) were located in Brussels, Belgium and Luxembourg respectively was, in some ways, irrelevant, as the Eurobond was not a type of security domiciled in either country.

CBL's and EB's typical types of client have always included sell-side organisations (e.g. member firms of the International Capital Market Association – dealers, market makers, broker/dealers, investment banks, etc.) together with investment fund distributors and providers. It is not the usual practice for an institutional client to be a direct participant of the ICSDs.

Both expanded into equity and domestic bond markets through a network of depositories, custodian banks and local CSDs. In
Figure 10.7
we can see that there are two options available. The investment manager and sell-side firms can either:

• Have indirect links to the ICSD (B) by using the global custodian (A), or
  
• Have direct links to the ICSD (C).
  

It is possible to appreciate that there is a blurring of the distinction between a global custodian (and its links to the local CSDs through its network of sub-custodians) and an ICSD (which traditionally handled Eurobonds, foreign bonds and global bonds).

However, differences do remain:

• Whilst both ICSDs have become banks (as are the majority of global custodians), they are still regarded as being part of the market infrastructure (similar to the CSDs).
  
• Institutional clients can appoint a global custodian, as we have seen already, but would not be a direct participant of an ICSD.
  
• A global custodian is effectively an intermediary that provides a wider range of services to its clients than provided by the ICSDs.
  
• The ICSDs' payment and settlement instruction deadlines are absolute whilst the global custodians' deadlines can be more flexible. (This is mainly because the global custodians have to allow themselves more time to meet their sub-custodians' internal deadlines and those of the CSDs.)
  

Furthermore, both ICSDs differ in the way they use CSDs. As shown in
Table 10.12
, the Euroclear group controls a number of European CSDs, with Clearstream controlling just two (again, in Europe) – see
Table 10.13
.

We have seen before that the European landscape is fragmented (see
Figure 10.8
)
⁴
compared with the USA where the clearing and settlement infrastructure is centred on the DTCC (equities and corporate bonds) and Federal Reserve System (US government securities).

With the merger of some European CSDs into the Euroclear group (see above) and Link Up Markets (the joint venture to facilitate message exchange amongst several other CSDs – Austria, Cyprus, Denmark, Germany, Greece, Norway, Spain, Switzerland and South Africa in March 2009), it does not seem possible to harmonise clearing and settlement across Europe.

In 2001 the Giovannini Group
⁵
identified 15 barriers that prevented efficient cross-border clearing and settlement within the European Union. The T2S project will help remove six of these barriers:

1. National differences in information technology and interfaces.
   
2. National clearing and settlement restrictions that require the use of multiple systems.
   
3. Differences in national rules relating to corporate actions, beneficial ownership and custody.
   
4. The absence of intra-day settlement finality.
   
5. Practical impediments to remote access to national clearing and settlement systems.
   
6. National differences in operating hours/settlement deadlines.
   

Target2Securities (T2S) is the project owned and managed by the Eurosystem
⁶
with the objective of removing the barriers, inefficiencies and costs found in the current fragmented landscape and replacing them with a single system.

T2S will neither become a CSD nor replace the existing CSD arrangements. Instead, T2S will be integrated with the Eurozone payment system (Target2) using a single IT system with a single set of standards and a single operational framework. T2S will provide DVP through real-time gross settlement in central bank money.

The general objectives of T2S are:

• To reduce risk in the European post-trade environment;
  
• To streamline the European settlement process;
  
• To enhance freedom of choice in the European securities settlement industry;
  
• To reduce the cost of settling securities transactions in Europe.
  

As shown in
Figure 10.9
, the T2S system will integrate: “… both securities accounts and cash accounts on a single IT platform, so that only one interface will be necessary between the CSDs and the T2S platform. T2S will accommodate both the market participants' securities accounts, held at either one or multiple CSDs, and their dedicated central bank cash accounts, held with their respective national central bank. The dedicated cash accounts will be used exclusively for settlement purposes in T2S and will be linked to the participants' cash accounts held in TARGET2 or another non-euro central bank RTGS account.”
⁷

The first migration wave of CSDs is scheduled to start in June 2015, as noted in
Table 10.14
.

There is plenty of information on the ECB's website (
www.ecb.europa.eu/paym/t2s/ html/index.en.html
) plus there are several YouTube videos, of which three are particularly useful:

• YouTube (online) “T2S Benefits”. Available from
  http://www.youtube.com/watch?v= wPmeHjA1VeQ&list=PL347E929CBF4A76F7
  . Published by ECB Euro 8 May 2012.
  
• YouTube (online) “T2S and Beyond” (Conference on securities settlement in 2020) Frankfurt 4–5 October 2011. Available from
  http://www.youtube.com/watch?v=ORCu KWh21JY&list=PL347E929CBF4A76F7
  . Published by ECB Euro 8 May 2012.
  
• YouTube (online) “How is the T2S Community preparing for wave 1?” (Panel Session) 25 June 2014. Available from
  http://www.youtube.com/watch?v=AVF2BaWGv81&index=8&list=PL347E929CBF4A76F7
  . Published by ECB Euro 25 June 2014.