European Settlement Keep the Transactions Coming

The European Central Bank wants to standardize the way that securities deals are settled in Europe, in a bid to revive capital markets that are underdeveloped compared to the United States. It's a process that is proving complicated.
Pan-European settlement clearing could help boost capital markets and trading in Europe.

It's got to be said that securities settlement is a subject that even bankers are typically only interested in when something goes wrong. Reliable transactions are what they need and expect.

That's why the banking sector will be looking expectantly to Brussels this weekend, when financial services provider Euroclear will carry out a trial run of a new European-wide securities settlement platform, called Target2Securities, or T2S.

A spokesperson for Euroclear confirmed that the test would take place but declined to comment further. Sources in the industry say the test run will be an important indicator of whether T2S can be introduced as planned.

The platform is the result of a European project costing billions of euros, with which the European Central Bank hopes to standardize the settlement of securities throughout the 19-nation euro currency bloc.

The plans for a joint platform go back a long way. T2S was first announced in 2006, and three years later the ECB signed a declaration of intent with securities settlement providers for the new platform. However, the launch of the mammoth project has suffered several setbacks.

Clearstream, the settlement and custody services provider owned by Deutsche Börse, operator of the Frankfurt stock exchange, will switch to the new system later. The plans also concern German banks, which are getting ready for the introduction of T2S.

I hope that the upcoming test brings clarity about when Clearstream will be connected. Jeffrey Tessler, Deutsche Börse executive board member

Settlement concerns how the purchase price is transferred from the buyer's bank to the seller's bank following the sale of a government bond, for example. At the same time, the bond moves from the securities account of the selling bank to the securities account of the buying bank. There is still no unified system for this in Europe, and the differences between the various systems are thought to constitute a significant barrier to European securities trading.

For this reason, ECB President Mario Draghi regards T2S as an important step on the way to European capital markets union. It is hoped that capital markets, underdeveloped in Europe compared to the United States, can breathe new life into Europe's struggling economy as the continent's many banks continue to slim down their operations in the aftermath of the 2008 financial crisis.

Mr. Draghi said on Monday in Frankfurt that the new settlement system would "help to reduce financial fragmentation and make Europe more attractive to investors".

To ensure that all securities settlement specialists do not switch to the new system at once, the launch is taking place in a series of waves, but there have been troubles along the way.

Snags were encountered in the first wave with Monte Titoli, Italy's central securities depository, which eventually migrated to the new system after a delay. Euroclear was then scheduled to switch over in the second wave and Clearstream in the third.

This staggered start was intended to prevent Euroclear and Clearstream from switching at the same time and potentially both failing at the same time. The two companies are among the largest operators on the market: Clearstream holds €13.3 trillion of securities in safe custody, while Euroclear holds securities worth €27.5 trillion.

Euroclear admitted in October that it would not manage the switch, originally scheduled for March 2016, as quickly as planned. According to the ECB's current timetable, Euroclear will now migrate to T2S with the third wave in September. This has also led to delays in Clearstream's plans. If everything goes smoothly, the Deutsche Börse subsidiary will move to the new platform in February next year.

Deutsche Börse is therefore watching its competitor in Brussels keenly. Jeffrey Tessler, a member of the executive board at Deutsche Börse, told Handelsblatt that the company was on track with the implementation of its plans.

"I hope that the upcoming test brings clarity about when Clearstream will be connected," he said, adding that ongoing uncertainty was leading to "unplanned additional costs" and that the company was having to keep resources available for several migration scenarios.

Deutsche Bank, Germany's largest bank, also has high hopes for T2S. A press spokesperson said that the benefits of the platform went "well beyond the international settlement of securities" and that the system would not only cut costs, but would also allow customers to pool liquidity and to use collateral across borders.

Deutsche Bank is also hoping that the imminent test run at Euroclear will be successful. "But ensuring that the market is properly prepared for the changes is more important than adhering to the schedule," the spokesperson said.


Michael Brächer covers financial markets and regulation for Handelsblatt in Frankfurt. To contact the author: [email protected]