Preaching to the choir?
Most coverage of T2S in the media has focused on the views of financial intermediaries. Do their clients share their enthusiasm?
Earlier in 2014, the ECB published a series of interviews conducted by Mehdi Manaa, Head of the Market Infrastructure Development Division, Directorate General Market Infrastructure and Payments, European Central Bank with representatives from different segments of the value chain: issuers, investors, banks, CSDs and CCPs.
The questions covered business as well as technical and regulatory considerations. The excerpts below suggest that at the start of the securities transaction chain, appreciation of the consequences of T2S is far from uniform.
Mick McAteer, Director of the Financial Inclusion Centre
Chairman of the Financial Services User Group (FSUG)
In your opinion, what benefits could investors expect from T2S?
In theory, T2S should deliver tangible benefits for end-investors. The European financial market infrastructure is, let’s be frank, ridiculously complex and fragmented – certainly compared with the US system. T2S, if implemented properly, should address much of the unnecessary complexity and fragmentation in our market infrastructure and lead to a streamlining of the critical processes involved in market transactions. Furthermore, in theory, there should be more competition amongst central securities depositories (CSDs). This could result in significant reductions in settlement costs which, if other parts of the market supply chain are working and regulators are supervising markets effectively, could in turn lead to reductions in costs for the real customers of financial markets – end-investors and real economy firms.
Similarly, in theory, T2S should contribute to the development of more stable and resilient financial markets. The less fragmented infrastructure and more streamlined processes should also allow for better monitoring of financial markets and in turn more effective systemic risk management.
There is an additional, less obvious benefit. Complexity and fragmentation are the enemies of transparency and accountability. A more streamlined, less fragmented market infrastructure should be more transparent and that means it should be easier for society and its representatives to hold the various market operators and supervisors to account. Transparent and accountable markets are more efficient and sustainable in the long term and inspire greater confidence.
Vincent Dessard, Senior Policy Advisor, European Fund and Asset Management Association (EFAMA)
How do you expect T2S to influence fund and asset management?
From the fund and asset managers’ industry perspective, we do not expect T2S to directly influence asset management activities. Indeed, most asset management activities fall neither within the scope of the CSD Regulation nor within that of T2S.
The direct impact will be restricted to exchange-traded funds (ETFs), which will adopt the T+2 settlement cycle. However, indirectly, there will be an impact:
- on the buying and selling of the underlying assets;
- on collateral: in a more remote manner, T2S could negatively impact the quality of the collateral delivered to hedge derivatives (both for bilateral and for centrally cleared transactions) as it will facilitate access to central bank funding through delivery of high quality assets against credit line facilities.
Markus Kaum, Head of Division at MunichRe/Chairman of Joint Working Group on General Meetings
Do you expect T2S to trigger regulatory changes that will affect issuers?
Most market participants currently see T2S as a settlement engine, which will not change the regulatory environment. I personally believe that T2S will provide better efficiency and increased speed for cross-border security transactions and that both effects may expose national or certain service providers’ inefficiencies, as the users will be able to make an unhindered assessment of such services. Some intermediaries argue that in order to reap the full benefits of increased efficiency and speed within T2S, ‘regulatory changes’ may be required even before T2S is fully operational. These calls for regulation seem to mainly concern legislative proposals which have turned out not to be acceptable to investors and issuers across Europe so far.
As an issuer representative, I would argue in favor of first implementing T2S fully before discussing the regulatory changes that some market participants believe to be necessary. Both as an issuer and investor, we strongly favor the approach of T2S achieving the envisaged results mainly by improving mar¬ket infrastructure. While T2S itself provides a new level above existing national market infrastructures, all the envisaged benefits will only be achieved when existing market infrastructure and IT technology, especially at global and local custody banks, are also improved in order to deliver state-of-the-art operations to issuers and investors.
Although I would not expect a tidal wave of regulatory changes as a result of the introduction of T2S, there are certain areas where regulatory changes are needed in order to improve the current situation with respect to cross-border security transactions, especially as regards the free exercise of rights of investors that have acquired a security. For instance, from the point of view of an investor in registered shares, the transfer of the shareholder data from the end-investor to the issuer is very well organized domestically in all major European markets, but there are severe, sometimes insurmountable problems when it comes to the transfer of those end-investor data across borders. The introduction of T2S may even lead to a greater lack of transparency, especially in situations where competition among CSDs will lead to issuers or investors moving out of their traditional markets with respect to either central or investor custody of securities. As a result of both issuer and investor demand for the unhindered exercise of shareholder rights across borders – which is based on the mutual knowledge of investors and issuers – I expect regulatory change to bring pan-European clarification that end-investor data has to be forwarded from the bank of the end-investor to the issuer. This can be achieved very easily, and hopefully will be achieved within the context of the revision of the Shareholder Rights Directive.
As a further but more indirect result of increased cross-border investment in Europe I would expect formalities to be harmonized and regulated on a European level. For example, currently the proof of entitlement presented by an end-investor (shareholder) to an issuer, showing that a certain person is indeed a shareholder, is not harmonized within Europe. A certificate issued by a bank in one member state to one of their customers may not be recognized by an issuer in another member state due to formalities. End-investors will no longer accept that they cannot exercise their shareholder rights across borders owing to such differences in formalities.
Susannah Haan, Secretary General, European Issuers
To what extent are issuers following the T2S program?
Most issuers are not really following the program – only a minority among my members are interested.
Do you think that they have access to the right level of detail and documentation regarding T2S?
No, I don’t think that they have access to the right level of detail – companies want high-level summaries of the key points relevant to them; normally there is too much technical detail for the subject to be ac-cessible to most issuers, hence in part the lack of interest. What would be useful would be a one-page summary from time to time, written in business language that issuers can understand, i.e. not too much technical jargon, and more focused on the issues that companies care about.
Do you think that this will allow them to measure the changes and opportunities that T2S implies for issuers?
As to whether we will be able to measure the changes, the danger for us is that T2S may lead to more cross-border settlement and that more cross-border transactions will mean less access to information for issuers, and so companies will continue to lose information on their shareholder base as it becomes more international. So T2S could be more of a threat than an opportunity from the issuer perspective. This we can measure via anecdotal evidence; probably the CSDs would have better access to information on the market as a whole.
The full interview series can be found here: https://www.ecb.europa.eu/paym/t2s/pdf/specser/T2S_SpecialSeries_issue4.pdf