" We are working very hard to ensure that we keep creating scale so that we can keep prices in the domestic market low. My cross-border business is not an exercise in imperialism; it is an exercise in generating scale."
SIX Securities Services
T2S – the bigger picture
Target2-Securities (T2S) is one of the largest infrastructure projects launched by the eurosystem. According to the ECB, it will be a key driver for the harmonisation of post-trade services and standards. One recent media headline suggested that, “T2S could be Europe’s saviour.” Preparations are not, however, confined to securities market participants and infrastructures within the Eurozone. In an interview with Radar, Thomas Zeeb, CEO SIX Securities Services, takes stock of the impact of T2S on market participants outside the eurozone, who are nevertheless strongly engaged with markets in the region. Will T2S work in their favour?
When it comes to preparing forT2S, how much pressure are you and your non-EU peers under operationally and technically, compared to those inside the eurozone?
I don’t think we are under any more or less pressure from a technical and operational point of view, in the sense that every CSD will have to make some fairly significant technical changes to accommodate an additional player in the loop.
Will that effort be rewarded with additional efficiency?
To be honest, it is not as though settlements were a big problem in the past in our case with 99.8 per cent straight through processing in the domestic market. It is not top of my problem list.
Beyond the technical connections, do you and your peers outside the eurozone have any choices that CSDs within the eurozone don’t have in relation to T2S?
Not really, except in the very limited sense that within the eurozone, CSD functionality has effectively been renationalised through T2S, which is not the case with us. However, we need to circumscribe what exactly we mean by our peers outside the eurozone. I am not aware of any other CSDs outside the eurozone that, like Euroclear and Clearstream inside the eurozone, actually handle cross-border business. The impact on us will therefore always be a little bit different, given the role of Switzerland in Europe and of SIX in the Swiss financial ecosystem.
Theoretically, we do have an option not to join T2S, but given that the vast majority of our cross-border business comes from Swiss banks who use us to gain access to these eurozone markets, the optionality isn’t actually that high. The extra scale that the cross-border business brings also helps us to keep domestic prices low. I could in theory exit the international business, which is what a decision not to join T2S would involve, but that is obviously not on the cards.
After all, it is hard to imagine being able successfully to run half an international business. All my clients would be forced to seek an additional provider for their eurozone business and those providers would most likely say, “I’ll give you a decent price for eurozone settlement, but it would be even better if you gave me all your USD, Yen, Sterling and other portfolios as well.
So effectively if I exit the EU business, I exit my international business. All securities market infrastructures have relatively high fixed costs to cover their integrity and business continuity requirements. Without the volumes that international business brings, those costs would accrue entirely to the domestic market. That would mean that to cover my costs, I would have to raise my fees in the domestic market and that is, quite understandably, not something that our clients would appreciate.
On the contrary, we are working very hard to ensure that we keep creating scale so that we can keep prices in the domestic market low. My cross-border business is not an exercise in imperialism; it is an exercise in generating scale, because the Swiss market on its own is too small to ensure the kind of competitive pricing that it currently enjoys.
Is there a way that your investment in preparing for T2S can be turned into a competitive advantage?
There is a short-term and a long-term view on that. In the short term, there is no way around the fact that all CSDs, whether inside or outside the eurozone, are investing large sums of money in a solution that is still looking for a problem – and we have no alternative but to do so.
Do your domestic clients – in particu-lar, the Swiss banks – have a strong view on T2S or are they delegating that issue to you?
All the banks that we have spoken to, whether they are existing or prospective clients and whether they are inside or outside the EU, are taking a fairly sensible wait-and-see approach. Essentially they are looking at which market infrastructure will ultimately provide them with the most appropriate and best value access to the T2S environment.
Can they really afford to wait?
In theory they can afford to wait. It all depends on the mix of their business and whether they are prepared to go through an intermediary. If they want to have direct access, they need to be thinking over the next six to eight months what that means for their IT and product development. There will also be changes that bank participants will have to make to ensure that they are able to interact effectively with the new settlement system; for example, to maintain a robust reconciliations process.
The reality is that, at a more fundamental level, most banks have more than enough on their plates at the moment, in terms of both competitive and regulatory challenges. The last thing they want to do is spend a huge amount of money and time to deal with the project work of the European Central Bank. They want us to take care of that for them and make it as simple and transparent for the market as possible.
What about the longer-term benefits?
I think there is upside, but it will take a little bit longer to realise. It is really related to the consolidation that is likely to accelerate once Target2-Securities is in place and operating. Over time, I believe we will tend to see the smaller and less flexible CSDs in the eurozone struggling to remain competitive. When you can consolidate your collateral with a bigger CSD, it is much more efficient and there is nothing to stop you settling small market settlements through a provider who has access to multiple markets.
I therefore see consolidation as inevitable. As that starts to happen – and it will take a few years – there will be an opportunity to bring those clients on board for us and for what I expect to be another two to three players that remain standing at the end of this. A key factor in being a member of that small group will be how efficiently you can manage collateral across the different pools that will exist both inside and outside of the eurozone.
Industry participants face a series of converging pressures at the moment: tightened regulation; massive cost pressure; and potential liquidity constraints that are a consequence of some of the regulation. Meeting those challenges will requires much more efficient use of collateral. In that context, all of our efforts are focused on providing a value proposition for managing collateral across multiple collateral pools globally as efficiently as possible, but with low operational impact for our clients. T2S is only one piece in the puzzle. •