Euroclear ups the ante over Target2 for Securities

Last week at the Sibos conference in Sydney, Australia, Jean-Michel Godeffroy, director general, payment systems, the European Central Bank (ECB) was seen loitering nervously near the exhibition stand of international central securities depositary, Euroclear.

Apparently a member of the Euroclear staff asked him if he was OK, to which Mr Godeffroy replied, 'I have an appointment with Pierre Francotte,' Euroclear's CEO.

And the relevance of this you may ask, well, I am sure ECB staff do not make a habit of loitering near the exhibition stands of financial service providers unless they have something serious to discuss.

Godeffroy was later ushered into a meeting room where, without the benefit of being a fly on the wall, the conversation perhaps went something like this (although it would have been in French and Belgian and perhaps peppered with more expletives);

Francotte: Bonjour Jean-Michel

Godeffroy: Bonjour Pierre

Polite conservation ensues for a few minutes

Francotte (in a polite but raised voice) to Godeffroy: What is the ECB trying to achieve with its Target2 for Securities Jean-Michel. Surely, this can only lead to further market fragmentation within Europe.

Euroclear is less than pleased with the ECB's plans to use Target2, the ECB's payment system for high value payments in euro, as the predominant system for DVP settlement in euro in central bank money for equities, corporate and government fixed income transactions.

Currently CSDs use national payment systems to settle the payment leg of securities transactions or in the case of Euroclear, Euroclear Bank performs that function. However, according to Euroclear, the ECB's Target2 for Securities or T2S proposal means that national CSDs would no longer be able to settle in central bank money; that would be "outsourced" to T2S; they would be required to settle in commercial bank money only.

T2S is a classic example of how regulators and central bankers tend to work. Come up with an idea, which in theory may sound great (after all Europe's clearing and settlement infrastructure is fragmented, why not try to force consolidation by using Target2), but do not consult the market first before you put it out there.

Consolidation of Europe's fragmented clearing and settlement infrastructure is already a political 'hot potato' and securities depositories like Euroclear obviously has its own nest to feather in terms of its plans to consolidate five settlement platforms into its Single Settlement Engine. Euroclear's argument is that they and the market in general are already making significant inroads by standardising securities settlement platforms and market rules governing corporate actions. Then along comes the ECB with plans of its own. Is it a recipe for disaster in terms of creating more market fragmentation?

T2S, Euroclear argues, could damage the work that is already being done by market participants to harmonise Europe's clearing and settlement infrastructure. "There is a risk that commitment to [harmonisation] and commitment to invest in change will fall away if the markets see a risk of double migration in the T2S proposal," Euroclear states.

Whilst the ECB may be trying to encourage further harmonisation of Europe's disparate clearing and settlement infrastructure, the question is to what extent is it willing to go to achieve this? Will T2S transform the ECB into "a full CSD" which would replace eurozone CSDs altogether?

Euroclear has called for further clarification of the ECB's T2S proposal, particularly in terms of whether it would generate additional cost, complexity and inefficiency and whether migration to T2S would be mandatory or voluntary; the latter it says raises doubts as to whether T2S would gain the critical mass required to warrant investment by the CSDs.