Brian Bollen speaks to some of the key players in the CEE region about the future of the region and their readiness for T2S implementation.
The state of readiness of individual countries in central and eastern Europe (CEE) and their infrastructure providers for Target2Securities (T2S) differs greatly and this holds clear implications for how the future might unfold. Looking eastwards from Vienna, the biggest visible difference is arguably between the haves and the have-nots.
The haves being the countries which have adopted the euro, such as Austria and Slovenia, whose central securities depositories (CSDs) will be connecting to T2S with their whole settlement business. And the have-nots being those that have not and look unlikely to in anything resembling the short-term future (Poland and the Czech Republic spring to mind in this latter context as markets whose CSDs will not be connecting to it, although the CSDs in Hungary and Romania will link to it for euro settlement business).
While it is important not to overstate the importance that T2S might have in the region in terms of at last rendering it one homogenised mass, it is almost as important not to underestimate the impact it could have on markets, market participants and service suppliers. “T2S is in essence a centralised IT platform but it is also a driving force behind discussions on quick and efficient settlement across Europe, in domestic and cross-border market activity alike,” says Peter Felsinger, Head of CSD at OeKB.
“What are the challenges we face in the region?” he continues. There is no standard answer to that question or to whether it will deliver value to participating countries and their institutions, he adds. But as the platform will allow OeKB to connect to many of Europe’s markets and settle on the same terms and at the same costs as larger players the way is open for it and similar organisations to attract new players and custodians and so build that area of their asset servicing business. The corollary is, of course, that those which stay on the sidelines run the risk of losing business and finding themselves in commercial difficulties.
“Our own strategy is to offer a common standard interface and a common standard business model so our customers can connect easily and use our services,” says Mr Felsinger. “The landscape will undoubtedly change for smaller market CSDs that don’t follow suit in terms of a common interface and business model; reduced to conducting purely domestic business with very high costs of settlement, they will find it difficult,” he continues.
In extremis, if the infrastructure proves to be overly expensive to use, international investors who are looking for opportunities in equities and other financial instruments might be dissuaded from conducting such business in those unconnected markets. In which case, countries which since the collapse of former USSR-led Communism have traditionally been in favour of foreign investment will in one way be cutting themselves off from international finance (dating said collapse from the fall of the Berlin Wall on November 9 1989). By contrast, markets which open their infrastructure to international investors will succeed.
“In boom times no-one worries excessively about the cost of infrastructure, but when we are in a prolonged recession that changes,” says Mr Felsinger. Only time will tell if this is too gloomy a prognosis, and/or whether foreign direct investment might take up the slack. An informed worm’s-eye view of the market would suggest that those countries that stay out of the system will inevitably struggle most. Poland can probably take care of itself, but smaller CEE markets, much less-established on the international investment radar, could be particularly vulnerable.
OeKB, which is busy readying the decommissioning of its proprietary systems in parallel with preparing for T2S, is optimistic about its own future as it reduces costs and increases efficiencies and becomes an increasingly regional player. “We see a lot of potential business in helping international clients link to the Austrian market but also to markets such as Russia, Hungary, the Czech Republic and Slovenia,” says Mr Felsinger. “We will also bring the securities of these markets on the T2S platform.” For the record, OeKB offers local investors a route out of domestic markets as well as providing international investors with a route in.
No discussion of the region would be complete without some consideration of the giant bear in the room that is revanchist Russia, acting in such a manner as to raise concerns about a New Cold War. While protesting that this strays beyond his sphere of direct day-to-day knowledge, Mr Felsinger summons up a few words that emphasise how commercial realism almost always triumphs over political ideology. “Events of the past few months have clearly made life more complicated, because of sanctions, for example, but we will stay connected,” he observes. In terms of commerce Russia needs the west, is the clear inference, and the west needs Russia. Pragmatism rules.
Only the start of the journey
February 2017 is not the end of the T2S journey. Rather, asserts Graham Ray, head of product management, investor services, at Deutsche Bank, it is potentially the start of the reshaping of the future global landscape which could see yet more exchanges join forces and create a single platform for clearing and settlement.
Western Europe is ahead of the curve while CEE slightly behind in terms of coming to terms with the challenges and the opportunities it poses. The T2S platform is designed to reduce cross-border settlement costs, optimise liquidity and promote inward investment. T2S could be a great opportunity for the CEE markets, the challenge is one of scale and the independence to set their own growth agenda – the scale of the CSDs in T2S already and the ability for those CSDs to provide Investor CSD services can put pressure on the local market infrastructures. These markets need to reconcile whether the benefits outweigh these challenges. “We also need to see if there will be a link between joining the Euro and committing to the T2S platform,” he says.
Looking beyond the short-term implications for the CEE region and towards longer-term market developments elsewhere, there are clear opportunities for further radical change not just in market infrastructure but in the way in which clients and their securities services suppliers work together, he continues. “Forging new partnerships to maximise efficiencies and profits will become the norm. It will be interesting to see whether existing market participants move up the value chain and whether new entrants will challenge incumbent providers as has been projected in industry papers.”
“We all want to be ready for T2S to deliver benefits but we also want to recognise that those benefits can be transposed into other regimes,” says Mr Ray. “We look at the underlying components to bring them together to create new client solutions. Over the past several years our industry has been forced to respond to mandatory change imposed by European authorities, and it has become increasingly clear that we must have a European strategy that is not only independently viable but will also fit into a broader global strategy.”
“T2S remains for now a European event but there is no reason why it should not spread geographically into Asia and the USA and into asset classes other than securities, further spreading the benefits of market access, safety and optimisation of liquidity and collateral. Using one single central bank rather than many creates opportunities. What is exciting is that partnerships are becoming true and real. Discussions demonstrate the value of true leadership. From delivery comes opportunity.”
Barely had he uttered these words than the news broke that Liquidity Alliance members will have streamlined access to T2S via their Eurozone peers in Spain and Germany. Just like Iberclear (Spain’s CSD) and Clearstream (Germany), ASX (Australia), Cetip (Brazil) and Strate (South Africa) will benefit from access to the large and harmonised collateral pool T2S will create. T2S will be accessible to Liquidity Alliance members when their domestic collateral services will be extended to provide cross-border collateral mobilisation in real time.
The Liquidity Alliance will thereby add a global dimension to what the European Central Bank had conceived as a purely European project. T2S will not only make cross-border settlement and respective collateral flows in Europe more attractive, but will also boost collateral liquidity beyond and within Europe.
Jesús Benito, chief executive officer of Iberclear, described the Liquidity Alliance’s initiative as a major milestone in its history, allowing all members to tap the huge collateral resources that T2S will make available. “In this way, we will be able to maximise the full potential of T2S, enhancing its capabilities and extending its reach at a time when the efficient access and use of collateral has become a priority,” he said.
Clearstream commissioned two studies with the aim of helping customers make the most of T2S. A study by PricewaterhouseCoopers (PwC) in 2013 showed that the benefits of T2S go far beyond increasing cross-border settlement efficiency. In addition to greater mobility of collateral, there is plenty of room for streamlining the custody chain and thus reducing risks therein, it adds.
The 2014 study by Oliver Wyman revealed the T2S benefits banks can unlock by consolidating their securities and cash holdings in Europe directly with CSDs and central banks. Complementary case studies demonstrated that brokers, asset managers and banks could save between €30m-€70m annually if they take timely action to delay and consolidate assets across major T2S markets. Thanks to the access to T2S via Iberclear and Clearstream, the Liquidity Alliance members will also reap these benefits for their customers which were previously only available to financial institutions in T2S markets.
For its own part, in July this year, Deutsche Bank announced a partnership with Clearstream and Euroclear to help clients consolidate, optimise and more efficiently assign their collateral inventory as part of the TARGET2-Securities (T2S) initiative. The partnership will provide clients with a single entry point from which they can reach the collateral pools and distribution channels used by all key institutional and market infrastructure firms. As part of Deutsche Bank’s broader collateral and liquidity solution, the agreements with the two international securities depositories will open the Bank’s architecture to offer clients access to a vast range of institutional collateral takers.
This forms part of Deutsche Bank’s larger T2S strategy which is designed to provide clients with direct access – through a centralised technical hub – combined with specialised local expertise and client service. Deutsche Bank says the partnerships with Clearstream and Euroclear will give Deutsche Bank clients the opportunity to make better use of assets held domestically to secure exposures and financing transactions in tri-party, whilst consolidating the view of inventory with their preferred provider.
Says Jo Van De Velde, managing director and head of Euroclear’s product management division: “By connecting to Euroclear’s Collateral Highway, clients can source, mobilise and allocate securities from wherever they are held, unlock central bank liquidity, post collateral in response to CCP margin calls and access a broad array of secured transactions including tri-party repos and securities loans. Today’s announcement signals another significant step in the development of an open and industry-led collateral ecosystem.”
Jean-Robert Wilkin, head of product management of Clearstream’s Global Securities Financing division, described the move as progress on the journey to bring global exposures and collateral locations efficiently and reliably together, and said Clearstream was pleased that it would be growing its collateral pool with Deutsche Bank’s liquidity.
Northern Trust also threw its hat into the ring with the announcement in September of its Target2- Securities (T2S) strategy, designed to offer Northern Trust’s clients an enhanced range of asset safety holding structures, liquidity assurance, and liquidity products to meet their individual requirements. To support this strategy, Northern Trust has selected Deutsche Bank AG and Euroclear SA/NV. Under the terms of the appointments, Northern Trust will establish direct market connectivity in a number of key European markets through Euroclear’s Investor Central Securities Depository (CSD) solution. Deutsche Bank will service the assets held in Northern Trust’s accounts directly at Euroclear’s investor CSD.
Citi declares CEE integration complete
As the tension between Russia and Ukraine looks like taking rather longer to subside than first thought, Citi’s integration of the central and eastern European business it agreed to buy from ING Securities Services in late 2012 was logged as complete not far off schedule in the early summer of 2014. Reto Faber, EMEA head of direct custody and clearing at Citi in London, reports that the final client migrated around mid-June, bringing the process to an end.
The final stage, migration of the former ING SS Bulgaria book, was delayed for purely technical reasons. “For every other office we already had infrastructure in place but we had to build a new direct custody and clearing capability, and that is time-consuming,” explains Mr Faber.
The integration process took slightly longer than originally expected, reflecting the complexity of the portfolios acquired as well as technical demands. Local requirements in the region related to the extreme levels of due diligence that must be carried out by investors on their would-be service providers also played a part in slightly delaying what was otherwise a fairly swift operation.
When discussions began with ING SS for Citi to buy the securities services business of ING’s offices in Bulgaria, Czech Republic, Hungary, Romania, Russia, Slovakia and Ukraine, the region was reeling from the aftershocks of the global financial crisis. “We thought the time was right to buy,” says Mr Faber. “We had been watching ING SS in the region for several years and had come to the conclusion that it was a perfect match for us at Citi. The business book complements ours well and we have the economies of scale required to build it further, and to give it the time and attention it needs to meet technical requirements such as those presented by T2S and regulatory demands.”
Through the acquisition, says Mr Faber, Citi is now indisputably the leading player in securities services in the CEE. It has approximately doubled the value of regional assets under custody and claims more than 50% market share in the region as a whole, rising to 65-70% in Romania.
He looks forward confidently to fending off competition (the list of pan-regional potential rivals includes names like Deutsche Bank, Unicredit and RBI) some of which tried without success to win former ING SS business. “Competition is fierce but barriers to entry are high in this business: it would be very challenging to match our infrastructure,” he says, going on to predict that the competitive landscape in CEE securities services will continue to polarise. “While we expected the Ukraine situation to have a short-term impact on DCC revenue we remain confident about the outlook normalising over the medium- to long-term.”
Returning to the subject of T2S and its potential impact upon the CEE region, Mr Faber suggests that T2S will ultimately be bring new developments in a number of countries including Hungary, Slovakia and Romania, and even Latvia, Lithuania and Slovenia. “Markets will not change significantly, but there will be a significant extra infrastructure cost imposed upon providers,” he adds. Players who have a relatively modest presence in custody and asset servicing who might find those additional costs as a signal that it is time to leave the market. “This fits in with the broader theme of continuing consolidation in the market, and we see more of it happening,” he concludes.