Yves Mersch: Reaching for perfection - building the market
infrastructure of tomorrow
Opinion piece by Mr Yves Mersch, Member of the Executive Board of the European Central
Bank, published in Eurofi Magazine, 7 September 2016.
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Last year the Eurosystem launched TARGET2-Securities, or T2S, a pan-European platform
for securities settlement in central bank money. This is a major advancement in Europe's
securities infrastructure, allowing banks to carry out cross-border securities transactions in
the same way as they make domestic transactions, and at lower cost. It also enables banks
to manage their collateral more effectively by creating a single, centralised pool of liquidity.
With T2S, banks can move collateral quickly and easily to where it is needed, rather than it
getting blocked in local markets where it is not being used.
T2S is just one part of the infrastructure that forms the backbone of Europe's financial
market. The Eurosystem has been working hard over the last decade to ensure this
infrastructure is sound and efficient. What's more, it forms the foundations of the capital
markets union (CMU) by providing the technical network through which capital can move
freely around the EU. The free movement of capital means greater access to financing for
Europe's businesses and more diversified investment opportunities for investors. Continuing
with the example of T2S, this platform makes it much easier for a bank based in Portugal, for
example, to buy securities in Latvia and to use them as collateral for transactions in France.
T2S therefore makes it technically and physically possible to achieve the objectives of CMU:
mobilising capital wherever it is found in the EU.
Moreover, the Eurosystem's work to build a strong financial market infrastructure has been
the trigger for regulatory change in Europe. For example, as T2S was being developed, it
became clear that greater harmonisation across borders would amplify the benefits of the
securities settlement platform. T2S has thus driven an extensive harmonisation agenda,
bringing together the market to align rules and practices. The CSD Regulation laid down
harmonised rules and requirements, which have created a more level playing field in the
post-trade arena.
Despite all the work done so far, new challenges are constantly emerging that require the
Eurosystem to adjust and enhance the financial market infrastructure further. Even a safe
and efficient market infrastructure can be enhanced and complemented with additional
functionalities and features. For example, as digitalisation changes the way the financial
industry operates, so too must the infrastructure which supports it adapt to the ever-changing
environment. The Eurosystem is keen to embrace the opportunities that these changes bring
to provide new and enhanced services and functionalities.
One innovation currently being investigated by the Eurosystem is distributed ledger
technology (DLT). DLT offers the possibility to share records of information across defined
networks, which could potentially revolutionise the way asset ownership is recorded or how
products are ordered and delivered. It is, however, still a very new technology requiring
further testing, which prevents, for example, large-scale use within the Eurosystem's market
infrastructure. However, the Eurosystem is currently assessing and reflecting what its
potential impact on the financial market infrastructure could be and what possibilities it could
present in terms of new services.
The Eurosystem is also currently looking into ways in which the three cornerstones of the
financial market infrastructure - money, collateral and securities - could be brought closer
together to improve efficiency. For example, a market consultation has been held to ask the
market for its views on ways in which TARGET2, the Eurosystem's real-time gross
settlement system, and T2S can be streamlined to increase overall effectiveness, potentially
by creating a single interface for both systems. The Eurosystem greatly values the input of
the market itself and experience has proven that this combination of public and private
partnership produces the best possible results.
Innovation is not a threat to the existing infrastructure, but an opportunity to make it even
better. That is why the Eurosystem welcomes innovation in all areas and why it will continue
to stay abreast of changes in the market in order to ensure it is delivering the safest, most
efficient infrastructure possible.