AFME 8th Annual European Post-Trade Conference
"Capital is expensive, liquidity has a price. "
London - With much of the regulation written over the last three years slated for implementation, a huge change is being imposed on the industry.
One of the most highly anticipated projects is Target2-Securities, set for a go live date in late June. It is Europe's post-trade harmonisation flagship and continues to move forward in earnest.
But as the launch date nears, defaults in the platform could cause delays.
Platform testing is ongoing across the first wave of participants, which includes London Stock Exchange Group's Italian CSD, Monte Titoli. Until February, the situation was a little bit alarming, said Paul Bodart, T2S board member at the European Central Bank.
"We were creating more defects than we were able to solve," he said. "So the board said to the ECB we need to change the way we address this and the good news is the trend is going downwards."
But not all defects are expected to be corrected by the launch date, he added, and pushing it forward to after the summer is under consideration.
"We cannot launch a platform that is not stable enough," said Bodart. "We believe that there is a window of opportunity to delay the launch to early September, so we have a two month window to bring more stability to the platform without impacting all the other waves."
Future participants will include ICSDs Euroclear and Clearstream.
For now, European post-trade infrastructure is still viewed as being complicated and expensive, especially when compared to the US, said Alan Cameron, head of relationship management, International Banks and Brokers, at BNP Paribas Securities Services.
There are simply too many entities providing the infrastructure, he added. "What we need is for these infrastructures to be interoperable. This will come with T2S."
Simplifying processes, said Cameron, is essential to keep fees down in a capital constrained world.
In securities services and investment banking, competition is pushing fees down while the ever-increasing cost of technology and regulation has led to an entrenched view that scale is essential. As a result, the industry is facing a relentless battle for market share and loss of pricing power and fees.
"This looks set to continue for the foreseeable future or at least until considerable capacity is taken out of both industries," he said. "Both sectors struggle to grow revenues to match the growth in overall fees in the securities industry."
Photo L to R: Moderator Peter Norman, author and journalist; Alan Cameron, BNP Paribas Securities Services; Diana Chan, EuroCCP; Keith Saxton, techUK; Paul Symons, Euroclear
Cameron said there are two elements required for a low cost infrastructure in Europe: infrastructures that allow us to simplify complex processes; and for the infrastructures to build scale.
Diana Chan, CEO of EuroCCP, a pan-European equities clearing house, provided a snapshot of interoperability for CCPs. There are eight in equities alone, three of them interoperate with each CCP. Interoperability among the eight CCPs would require 28 bilateral contracts and 56 margin transfers, plus all the settlements that need to take place among them, she explained.
"I like the concept of making things simpler, and how do we make it simpler? Is by actually going through a period of investment where we would expand interoperability and then let the marketplace lead to consolidation," she said.
In terms of lowering risk, what's needed is infrastructures that allow at least efficient use of capital and liquidity, BNP Paribas' Cameron said. Collateral for example, is usually only needed for seconds, but to have it in the right place at the right time takes days.
"Capital is expensive, liquidity has a price," he said. "With standardisation and simplification you get rid of operational risk."
Up to now, technology spend has generally been budgeted towards the front office far more than in the post trade infrastructure space, said Keith Saxton, chairman of the Financial Services Programme at techUK.
"If one was to turn around and look back down the supply chain of the trade and apply some of the smarts that we apply in the front office, we might start to get ourselves in better shape," he said. "And indeed there are some very significant new capabilities being built, particularly around real-time collateral management."
Another development is blockchain technology that underpins cryptocurrency Bitcoin. The question was raised: could a digital ledger like blockchain replace a CSD?
At the current pace of 10 transactions a second, it's not about to replace systems in a hurry, said Saxton. However, there are considerable resources going into identifying how blockchain technology could be used.
"It is one of the things that could be a game changer. There are many reviews and papers being written by central banks, by regulators, by industry bodies, by the technology industry in terms of potential application of blockchain," he said. "Securities settlement is a very good example of something that might be very applicable to the use of that technology."
Notably, Nasdaq recently announced a project to incorporate blockchain technology across its enterprise. But even considering it for the securities settlement world still has hurdles to overcome.
EuroCCPs Chan pointed out that though an audit trail is created, in the case of collateral management legal issues around rehypothecation and the velocity of collateral would need to get solved.
Paul Symons, head of public affairs at Euroclear, added that regulatory intervention is inevitable: "My fear is this may well be the disruptive technology that we have all been waiting for, but that actually the regulators will decide how it's applied in our industry."