Settlement, the next frontier

  • Post-trade is experiencing radical change amid a dramatically shifting landscape

Trade settlement is being transformed by new rules and market structures, creating opportunities for innovation.

Post-trade is experiencing radical change amid a dramatically shifting landscape. The European Central Bank’s (ECB) Target2 Securities project together with the forthcoming CSDR will establish in the next few years a renewed competitive environment among Central Securities Depositories (CSDs), International Central Securities Depositories (ICSDs) and custodian banks.

T2S is a centralised settlement platform designed by the ECB which aims to provide CSDs across the European Union with a harmonised settlement service, decreasing settlement costs and increasing harmonization and efficiency. It represents a ground breaking change which will reshape the post-trade, by bolstering opportunities and competition beyond national borders.

London Stock Exchange Group (LSEG) has long been committed to increasing the competitiveness of the European capital markets and as such has supported the ECB in the implementation and development of the new platform. The decision to invest in the first wave of T2S for 1 June 2015 through Monte Titoli further demonstrates this. Monte Titoli, as a CSD, is well-positioned and equipped to support customers, through its knowledge and expertise with more than €3.3 trillion of securities under custody, 42,000 financial instruments served as issuer CSD and 50 million trades settled per year for 400 customers, which include many major international financial institutions.

Ahead of the launch of T2S, LSEG also announced in July 2013 that it was developing a new CSD based in Luxembourg, expected to go live in the first half of 2014.

First wave

The new T2S settlement platform is seen as an opportunity to partner with international customers, helping to provide smooth transition to the new environment and allowing them to take advantage of early entrance.T2S is expected to provide a range of benefits to users including liquidity optimization, enhanced collateral management, efficiencies from harmonization of procedures and much more. 

Monte Titoli chose in 2011 to be the first CSD to embrace the T2S concept by announcing its intention to participate as first-wave participant; accordingly it is anticipated that it will migrate onto T2S in June 2015, ahead of many other CSDs.

In late 2012, the ECB asked for banks to indicate with a non-binding commitment whether or not they intended to be directly connected with T2S rather then indirectly through a CSD. The deadline was 15 October 2013 and 32 legal entities have made that commitment.

Cittadini believes T2S will have a major impact on Monte Titoli and the wider market.

“T2S has the potential to dramatically affect our business as it will create conditions to enable cost reduction for clients, enhanced services, all furthering the competition in this space,” he says.

“The settlement business will be important in offering custody and collateral management services in a larger playing field, including 24 providers who will join the new platform. The union of these three services - settlement, custody and collateral management - will be what each CSD must look at in order to decide on its future..”

New opportunities

For all of these opportunities, the level of change is novel and unprecedented. The CSD Regulation (CSDR) will begin to come into effect this year and by 2015, CSD functions will be harmonized across Europe, including the imposition of a T+2 settlement period. CSDR will also enable a ‘passport’ system so that CSDs can offer their services in countries other than their own.

However, some market participants believe it may be unwise for CSDs to change their service propositions too drastically.

Furthermore, any bank-related activity, such as re-hypothecation and securities lending, will have to be managed under a separate entity, subject to regulations such as Basel III. As this will increase the costs of that business, firms may look for partnerships with customers before providing asset servicing.
Cittadini is optimistic about the future.

“For a long time Monte Titoli had been in the position of being one of the most competitive CSDs in Europe, but we were not in a position to fully export offerings because the legal systems of other countries prevented it. Now we can, and competition between CSDs will become even greater,” he says.