As the powerhouse economy at the heart of Europe, what happens in Germany reverberates across the continent. More manufacturing-based than some of its neighbours, it has survived the global downturn remarkably well, although its position as one of the EU’s leaders has put pressure on it to help its struggling neighbours - when Greece needed a bailout, there was a huge domestic outcry about the support the German taxpayer had to give to its less disciplined neighbour.
As the powerhouse economy at the heart of Europe, what happens in Germany reverberates across the continent. More manufacturing-based than some of its neighbours, it has survived the global downturn remarkably well, although its position as one of the EU’s leaders has put pressure on it to help its struggling neighbours - when Greece needed a bailout, there was a huge domestic outcry about the support the German taxpayer had to give to its less disciplined neighbour. And as Ireland and now Portugal have followed Greece’s lead, the burden is starting to show - Chancellor Angela Merkel is taking an increasingly tough line about the need to rein in public spending.
This is all set against a backdrop of concern about Germany’s status as one of the world’s largest manufacturers. It’s not cheap to hire people in the country, and it’s really expensive to let them go if times start to get tough. While German manufacturers have remained relatively loyal, their international competitors have no such ties and have looked to reduce their costs in the fast-growing Asian markets.
Even so, Germany was one of the first major Western economies to come out of recession at the start of 2010. Growth since has been relatively slow, hovering around the one-two per cent mark, though as its downturn was comparitively benign, there haven’t been huge losses to make up.
But the financial markets remain in rude health. Although Germany has pretty much conceded the position of Europe’s leading financial centres to London, and several national banks had to take state support to survive the downturn, the funds industry is doing well.
INREV, the European Association for investors in non-listed real estate vehicles. says that Germany has overtaken the UK as the preferred location for investment in non-listed real estate funds. 36 per cent of investors said German retail was their choice - a real change from the year before when the country didn’t even get into the top 10.
T2S
Germany is also gearing up for the prospective implementation of the cross-border trading initiative Target2-Securities (T2S).
In July 2008 Eurosystem, the council of the European Central Bank (ECB), the monetary authority of the eurozone, made the formal announcement that it will build T2S, the ambitious IT platform to provide harmonised delivery-versus-payment settlement in a variety of currencies for almost all heavily traded securities circulating in Europe. This will make cross-border settlement identical to domestic settlement in terms of cost, risk and technical processing.
Under T2S each participating central securities depositary (CSD) will outsource to T2S its core account holding and securities transaction settlement functionalities. CSDs will have a legal relationship with T2S, while participants will continue to have their legal relationship with their CSD.
CSDs will start testing the T2S software in January 2014 and the platform is expected to be ready to go live in September 2014, according to the latest project plan.
T2S will consolidate settlement across all countries in. It will be a state-of-the-art settlement engine offering centralised delivery-versus-payment (DvP) settlement in central bank money. It will be operated by the Eurosystem on a cost-recovery basis, to the benefit of all users. T2S will be neutral towards all countries and market infrastructures and towards the business models adopted by all CSDs and market participants.
The T2S concept is based on 20 General Principles, formulated in cooperation with the market and aimed at ensuring the resilience, integrity and neutrality of the Eurosystem’s settlement platform.
The main characteristic of T2S is that it will make cross-border settlement identical to domestic settlement, in terms of cost, technical processing and efficency. A single set of rules, standards and tariffs will be applied to all transactions in Europe, dramatically reducing the complexity of the current market infrastructure. Cross-border fees will be considerably lowered, making the European securities markets more attractive and cost-effective.
Transactions in T2S will be final and safe. The use of DvP on a real-time gross basis will eliminate the counterparty risk, ensuring that a participant’s counterparty fulfils its obligations. The use of central bank money, i.e. the transfer of cash between participants’ accounts held at the respective national central banks, will eliminate the settlement agent risk. In T2S, both the securities and cash legs of the transactions will be settled in DvP mode: the securities will only be delivered to the buyer when the cash is delivered to the seller.
T2S will only perform settlement and will be a service offered to central securities depositories (CSDs), and not a CSD in itself. The CSDs will be the only parties involved in a contractual relation with the Eurosystem and will remain responsible for the legal and business relations with their clients. They will continue to maintain their customers’ accounts and to perform all activities pertaining to the rest of the post-trading value chain. Such services include custody, asset servicing, corporate actions processing, and tax and regulatory reporting.
T2S will have a multicurrency dimension. It will extend beyond the euro area, enabling the interested non-eurozone national central banks to connect to T2S with their currencies. Today most CSDs organise DvP settlement in central bank money with only one central bank. In T2S securities will be settled against any of the available currencies.
T2S will ensure real-time DvP and settle across borders by employing the so-called “integrated model”: both securities accounts and cash accounts will be integrated on one single IT platform, so that only one interface will be necessary between the CSDs and the T2S platform. T2S will accommodate both the market participants’ securities accounts, held at either one or multiple CSDs, and their dedicated central bank cash accounts, held with their respective national central bank. The dedicated cash accounts will be used exclusively for settlement purposes in T2S and will be linked to the participants’ cash accounts held in TARGET2 or another non-euro central bank RTGS account.
The use of an “integrated model” will allow T2S to connect any securities account at any participating CSD with any cash account at any participating central bank, within the same currency.
Competition
As one of the world’s largest markets, there has always been competition from both local and global players to grab market share. In the past three or four years, though, this has only increased. Those custodians that have reported growth over the past year have tended to be in the international providers, with domestic banks getting somewhat left behind.
This has been exacerbated by consolidation within the sector. BNY Mellon bought BHF Asset Servicing, including its fund administration business Frankfurter Service Kapitalanlage-Gesellschaft last year, while other multinationals have made similar deals. It makes BNY Mellon the second largest custodian in Germany, just behind State Street, which itself grew significantly as a result of buying Deutsche Bank’s global custody business in 2003. Other majors with significant share include J.P. Morgan, Citi and HSBC Trinkaus.
This has really squeezed the local players, and the work going forward on T2S is only making the market tougher. “The local banks have survived on their relationships with their clients, many of which go back years or even decades,” says a representative from one of the global players. “But as new regulation and new technology comes in, they are finding it increasingly difficult to keep up. These problems are increased when their clients see the service others are getting from bigger organisations, who can absorb the cost of changes and advances in technology.”
