Banks and brokers have been urged to urgently adapt their European post-trade infrastructure to the region’s new settlement system as it could save them millions in extra collateral they must find to meet new regulations.
A study conducted by Oliver Wyman, the capital markets consultancy, found market participants could save up to €70m in annual costs that they are set to incur when Target2Securities (T2S), a major settlement project led by the European Central Bank, comes into effect from next year.
The survey estimated that broker-dealers with €100bn in trading assets and liabilities across key T2S markets could save between €37-€70m annually.
A global custodian bank with €400bn in assets under custody could save up to €50m while a regional bank with a home bias and €140bn in securities could save around €10m-€30m, the survey found. The report was commissioned by Clearstream, the post-trade services unit of Deutsche Börse.
The survey marks the first attempt to quantify the impact of the ECB-led project, which will be phased in from next year after nearly a decade in the making. The massive IT project is part of the plan to create a single regional financial market by settling cross-border settlements in European Central Bank money, rather than the current fragmented market of domestic central securities depositories (CSDs).
Market participants will be able to settle their transactions via just one CSD rather than multiple venues. CSDs oversee the settlement of securities, where a transaction is confirmed at final and the security swapped for cash. Clearstream, which operates several CSDs, is set to join in 2016.
The study argued that by consolidating their cash and securities in the system, market participants could conserve their cash, cut capital requirements and cut operational risk.
“Now that T2S is happening now, it’s a matter of what people do about it,” said Marc Robert-Nicoud, Clearstream board member in charge of strategy. “When you look at Basel III’s risk weighted asset ratios, that’s a huge advantage in terms of netting,” he said.
Global regulators such as the Basel Committee and Iosco are tightening capital, liquidity and clearing rules and many will have come into effect by the time Europe’s largest CSDs have connected to T2S. Banks will be able to apply lower risk-weights for collateral parked in central banks and clearing houses and net the amount of cash held in settlement.
The incoming global rules are tightening the sources of liquidity for market participants, leading to worries of a squeeze on collateral, the insurance needed for trading.
A research paper in April by Celent suggested that many users and operators were waiting for more clarity on what the market will offer them under T2S, and many would have to make contingency plans during the transition.