Gertrude Tumpel-Gugerell: TARGET2-Securities gains from integrating
the European post-trade infrastructure - the case for T2S
Speech by Ms Gertrude Tumpel-Gugerell, Member of the Executive Board of the European
Central Bank, at the IEA conference on the ECB's proposal for TARGET2-Securities, Dublin,
30 November 2007.
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Ladies and gentlemen,
I am delighted to be here today at the Institute of European Affairs (IEA) to share with you my
vision for the TARGET2-Securities (T2S) initiative as part of the integration of the European
settlement industry for the benefit of market participants.
I am delighted to be here, because the IEA plays a particularly important role, as an
independent opinion-former, in fostering European debate and thoroughly analysing and
communicating the need to integrate the currently fragmented European post-trade
infrastructure for securities and the benefits of such integration. For us, the ideal solution is
for T2S to act as a single European backbone offering settlement services for all domestic
and cross-border securities transactions in central bank money. I will now explain our
reasoning in this regard.
The aim of T2S is to make cross-border securities settlement transactions across Europe in
central bank money as secure, efficient and cheap as domestic settlement transactions are
today. Consequently, T2S will represent a genuine opportunity to achieve costs which are
among the lowest in the world, benefiting financial participants. For example, Europe is
comparable to the United States in terms of its economic size. But whereas firms in the
United States operate in a single, large domestic post-trade environment with one supplier of
post-trade services regardless of where the trade is effected, in Europe firms have to operate
across many smaller, national markets and bear the higher costs of connecting to all of these
markets either directly or via expensive intermediaries. As a result of this lack of integration,
Europe lags way behind the United States in terms of both the volume and cost of
transactions. The cost gap is particularly large for cross-border transactions, with estimates
suggesting that the difference can be as much as several hundred per cent.
The Eurosystem takes the view that today's challenges are best tackled by involving market
participants in solving the current economic and financial gaps. The Eurosystem is acting as
a market catalyst and playing a unique facilitation role, bringing together market participants
to create a truly integrated European financial market. The Eurosystem continues to play an
active role in the payment industry by providing - in the form of TARGET2, which went live
just last week on 19 November - borderless core infrastructure for real-time settlement in
central bank money.1 Further support for the single market will come from the streamlining of
collateral management systems through the CCBM2 (Collateral Central Bank Management)
project.
T2S will build on the newly released TARGET2 system and bring payments associated with
securities settlement together with pure cash settlements across the European Union.
The Lisbon agenda clearly demonstrates that not only must Europe do better, it can do
better. We can say that we want Europe to be the best and most secure place to issue and
trade securities and that we want it to be the most competitive economy in the world.
However, Europe lacks a common post-trade "plumbing" system, whereas the United States
created such a system years ago. T2S joins other European initiatives, such as the Code of
Conduct and the Markets in Financial Instruments Directive (MiFID), in helping to fulfil the
objectives set out by the Lisbon agenda for the provision of better services to issuers and
investors. We firmly believe that T2S will speed up market integration and foster competition.
The T2S settlement system will act as a driver to promote harmonisation within the European
securities industry, creating opportunities for cost savings and allowing market participants to
select and choose post-trade partners irrespective of their location within the single market.
The impact of T2S on harmonisation is already being felt, building on valuable work by the
CSDs. The ICSDs' experience in bringing together several national CSDs has created
valuable impetus in this respect. The next speaker will also contribute to this debate by
highlighting the advantages of such harmonisation.
The Eurosystem, inter alia through the T2S project, will play a leading role in working with
market participants to harmonise market practices at the European level for the benefit of
those participants. This work is likely to remove even more barriers of the kind already
identified by the Giovannini Group, as well as helping users to identify the irreducible costs of
unresolved barriers in the new efficient borderless settlement environment. This work will
also increase the pressure for swift action to harmonise practices that do not constitute pure
settlement activities, especially in relation to corporate activities, taxes, laws and regulations.
T2S will harmonise the real-time life cycle management functionality for settlement
instructions. T2S will also harmonise the settlement model and will offer daily real-time and
night-time cycle modules. Market participants will therefore follow one common set of
harmonised settlement procedures irrespective of whether they are settling securities
domestically or cross-border.
T2S will provide a neutral, borderless, core infrastructure crystallising the gains from
harmonisation and providing support for competition between service-providers in the
posttrade industry for securities. This will foster the changes required in intermediation between
issuers and investors by providing impetus for financial market participants' development of a
competitive, efficient and secure European financial market.
Furthermore, T2S will also create a single pool of assets within Europe, essentially all of the
securities held by participating CSDs, exchangeable for each other via central bank money at
low cost, in real time and in an extremely reliable settlement system. Market participants
across Europe will therefore be able to pool all of their securities in one system, just as cash
is now pooled in TARGET2, without the need to distribute and allocate securities and central
bank money within several independent national platforms. This will increase the efficiency of
collateral management and reduce market participants' collateral and/or liquidity needs. T2S
will therefore have the effect of reducing market participants' costs and contributing to the
optimal allocation of investment opportunities. This will also allow for the faster re-use of
securities, as well as central bank money - again, for the benefit of market participants. The
use of TARGET2 and T2S will eliminate the risk currently associated with cross border
settlement, thereby providing for efficient and stable intermediation between buyers and
sellers within the capital market segments.
These new features will therefore create valuable new options for commercial and
investment banks as regards the management of their collateral and the optimisation of their
funding costs. The indications given by market participants suggest that this is likely to lead
to very significant reductions in costs. This will feed through to increased trading activity,
reduced trading spreads and lower service prices, thus improving welfare.
Europe will benefit from T2S. Commercial service-providers will benefit from the level
playing-field that a common platform, harmonised rules and practices and reduced
complexity will bring. Issuers will benefit from lower capital costs. Investors will benefit from
better returns. In a nutshell, the CSDs and their users will benefit from the overall economic
efficiency of the securities settlement industry.
We know that the success of the project will depend on its ability to satisfy the needs of
stakeholders. For this reason, our objective is to enhance the comprehensive user
requirements supplied by stakeholders by means of the next market consultation process
due to take place over the coming months. I can assure you that the ECB is listening
carefully to the views of the market, which is another reason why I am here today: to listen to
your views and suggestions. We want to stay in close contact with market participants.
The forthcoming public consultation will commence on 20 December, and the market
participants will have three months in which to provide any additional comments and
suggestions they may have regarding the T2S user requirements.
The finalisation of the T2S user requirements is a central element of this project, but it is not
the only one. We are now embarking on a second phase work stream investigating the legal
issues arising from the T2S project and looking at the future governance structure of T2S.
I would like to finish my remarks today by saying a big "thank you" to all of the stakeholders,
individuals and institutions working with the Eurosystem on the T2S project for their
openness, hard work and support. We know that T2S can become a reality, we know that
T2S will be good for Europe, and we know that T2S should be implemented in cooperation
with market participants.
With T2S, there will no longer be a need for cross-border settlement of securities across
Europe; instead, there will just be one domestic securities settlement for the whole of the
single market.
Thank you.