How is BNP Paribas Securities Services preparing for T2S?
TARGET2-Securities (T2S) is the outsourcing of the delivery versus payment settlements from all the central securities depositories in Europe to the eurosystem.
We have about 50 million settlements a year. The majority of them are in Europe and the majority of them are in T2S markets. So this outsourcing is incredibly important for us, and we’re working on four workstreams on T2S right now.
The first one involves getting together with all of the local market groups, and working with them as they start their individual implementation of T2S. We are trying to keep local market needs in mind, but also due to being pan-European, we are also keen to promote harmonisation in each market. Getting that balance right is very important to us.
I think harmonisation is happening in more areas than just settlement. T2S working groups now go all the way into corporate actions and asset servicing—even though T2S is just about a very simple settlement procedure.
The second area we’re working on is making sure we can pass on the advantages of T2S to clients. As it stands, the infrastructure project brings with it some handy upgrades in settlements. There are improved prioritisation capabilities; increased functionalities around hold and release; better partialing and linking of settlements; and auto-collateralisation. As a custodian, we must upgrade our systems so we can pass on these benefits to our clients.
The third workstream concerns the fact that T2S harmonises a lot of settlement. So we have to make sure that we can exploit this to drive the costs down. We have economies of scale, but we have to build on them to give real economic advantages to our clients. For us, that means building up our operational centre in Lisbon, where we already have 850 people mainly working on settlements across Europe.
The final workstream involves constructing more tailored solutions for some very big clients, which are looking at how they can change their post-trade model because of T2S. Some of them are trying to take more control of settlements and need to find an asset servicing model that compliments this. We have a product for that called “sponsored access” and we are working with a small number of very big clients to see if that will work for them.
What are some of the challenges of the infrastructure project and how does it fit into a long-running trend of consolidation?
Some of the bigger players are reviewing their post-trade models, but the problem is that no-one can really conclude these reviews because we don’t really know enough about T2S pricing for CSDs. Without knowing that component part of it, it’s very hard to make decisions. My gut feeling is that most people will consolidate in Western Europe in the run-up to T2S, and then leave the big decisions as to whether to become a direct participant or not until after the T2S phases are through—a logical step to take.
Consolidation has been happening throughout my career—30-odd years. And throughout it all, the agenda in Western Europe has been driven by European harmonisation. We’ve had immobilisation, dematerialisation, central counterparties brought in, netting—even the euro. And T2S is really just another step in that process. All of these things are ultimately leading to clients buying custody services for their processes, not their geography. That will make having scale even more essential.
Which sectors do you feel will be ultimately harder to standardise?
We provide clearing, settlements and post-trade services such asset servicing, and T2S will sit alongside all of these functions. Once these services become more harmonised across Europe, you can really perform them from almost anywhere, and in our case, we will mainly be working from Lisbon. But the asset servicing sector is very far off from being harmonised. There is some progress, but things such as tax, in particular, remain completely different, and the actual events that companies do in different markets differ completely. While these remain so particular, we think that asset servicing has got to stay local.
Are corporate actions still an issue?
In our business, and in the post-trade world, all of the big losses are in corporate actions and asset servicing, and sometimes they can be very substantial indeed. Most of the players involved in the post-trade space in Europe are very aware that there’s not much point saving cents on settlements if you’re going to increase your risk in corporate actions—if something goes wrong there you can lose millions.
There are a couple of things that have made corporate actions more difficult. Firstly, hedge funds and prime brokers that supply them tend to wait until the last minute when deciding what to do. That always brings a degree of risk into the whole process.
Secondly, I think corporate events have become more complicated, and as European companies have to recapitalise themselves following the crisis, this trend will continue. So you get back to tax again, I’m afraid. It’s just a very complicated area for transaction banking. Corporate actions are still a problem.
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