The European repo market may be big but it is not efficient. The €6,000bn market for the lending of securities, vital to market liquidity, is handicapped by fragmented settlement systems. These make it tricky and expensive to do business.
Help may be at hand. On Wednesday, the European Central Bank will update the International Repo Council, the market’s trade body, on its proposed Target2-Securities (T2S) project. This would involve asking central securities depositaries (CSDs) such as Euroclear and Clearstream to outsource the settlement of trades to a new, centralised system.
Is this what the market needs? After years of griping, some progress is finally under way. Euroclear aims to settle 65 per cent of European equities, by market capitalisation, on a single system by 2010. (Currently each national market has its own system.) But it is not clear that further consolidation will follow. This explains why some banks are welcoming the ECB’s intervention.
T2S is a big leap, requiring heavy investment with uncertain success. The new system would have to interact with existing CSDs, which would still be responsible for other services, such as dividend payments and collateral management. It is not a given that T2S would become the dominant system. It would settle securities only within the eurozone and CSDs could choose not to use it. Small CSDs that outsource some services might be keen to join; larger ones could still operate independently, increasing fragmentation.
A single, consolidated European settlements system is indeed highly desirable. Whether it is practically and economically viable for the ECB to deliver it is another matter. The best outcome for the market may well be that the threat of losing business to T2S sparks further consolidation among existing systems.