Securities Settlement in 2020 T2s and beyond

1. Securities Settlement in 2020T2s and beyond Prepared by: Strate

2. Panel 1: How will T2S affect the post-trade industry • T2S is game changer for Europe and creates a more integral Financial Market Infrastructure . • T2S will create more challenges and opportunities. • Post-trade landscape will be characterized by new forms of partnerships and probably further consolidation will happen at different levels of the value chain. • The spotlight will be on service levels and all stakeholders will have to innovate and differentiate from their competitors. • T2S will lower the costs through shared infrastructure and this will also reduce investments at the National CSDs. • T2S will result in synergies between Agent Banks and CSDs, which could lead to consolidation. • T2S will enable better Pan-European value added services. • Cost of Cross border settlement cost will be reduced but Domestic settlement cost will increase.

3. Panel 1: How will T2S affect the post-trade industry (Contd.) • In any big infrastructure project, • the timing and the cost will be unknown during the initial stages of the project. • Volume to be processed will be unknown even after performing the Business Case. • Type of Governance required for the Stakeholders will be unknown. • The global Financial Market is in the amidst of Tsunami of Regulatory Changes. • Collateral Management is very critical to mitigate the risks. • T2S will impact Issuer and Investor CSDs. • The tectonic plates are moving aggressively and the entire Financial Market must be agile to handle these situations. • Currently, T2S is one of the Top 5 projects in Europe. • T2S will foster competition in the post-trade world that should lead to lower costs for Issuers and Investors. • T2S will lower systemic risk associated with cross border settlements (Eurozone), increased liquidity and improved transparency.

4. Panel 1: How will T2S affect the post-trade industry (Contd.) • T2S will provide greater opportunity to manage Collateral efficiently. • Revenues will be under pressure so there will not be budgets for fancy projects if and unless they reduce risk. • Agent Banks are moving to Global Custody, so CSDs will have to compete hard and this could lead to consolidation • Europe is in big crisis, hence the scope for investment budget will be very minimal. • T2S requires more political intervention in order to achieve the tight deadlines. • Asset Servicing will be one of the areas to be expanded in ICSD arena. • Harmonization comes at a cost. • Technology will carry on enabling connectivity at a worldwide level.

5. Panel 2: What does the future look like for CSDs in Europe • BATS achieved interoperability of CCPs in Europe so it allow competition and there is price comparison but access through technology. • T2S will enable Pan-European CSDs. • T2S will facilitate consolidation in Europe and there will be few CCPs after the consolidation and this will enable healthy competition among the CCPs. • In Europe, there are 10 Exchanges, 20 CSDs and 42 Regulators, where does the rationalization lie?? • In future, there will be less intermediaries. • T2S is going to be catalyst for consolidation of CSDs and Agent Banks. • European CSDs must ensure the safety of domestic Market. • T2S will facilitate creation of new CSDs in Europe and they will be different type of CSD and they will not have any legacy and start fresh. • LSE agrees with the vertical integration.

6. Panel 2: What does the future look like for CSDs in Europe (Contd.) • In the T2S environment, Customer engagement is key. • T2S will have risk of concentration but there are checks and balances to counter this. • Another school of thought on T2S is, National CSDs will cease to exist and the challenge is how does the European Market is going face it. • Collateral Management will be the key driver for Consolidation of Agent Banks and CSDs. • T2S will be a foundation for harmonization of settlement cycles, account structures, securities laws, tax rules • T2S will enable broader geographical participation • SIX-SIS is considering joining T2S in Euro currency but the Central Bank of Switzerland is not part of T2S

7. Panel 3: Will it be possible to bring settlement prices in Europe down to US levels • T2S is an additional layer hence the settlement cost in Europe will not come down immediately, as ECB will have to amortize the cost of T2S. • In USA, there were 7 Stock Exchanges and each having its own CCP and all the Stock Exchanges merged into 1 Stock Exchange and all CCPs merged into one CCP due to competition. • US has vibrant pool of diverse and competitive intermediaries. • US geography has 27 Member States. • DTCC is a User Co-operative organization and not Profit seeking company. • Investment required in Europe, to get to where USA now, is much bigger. • The cost of settlement will be higher in Europe as not all countries in Euro, hence the currency exposure will make the cost higher. • USA has the same legislation throughout the country, hence harmonization was not an issue. • The Settlement Cost in the USA is USD 0.02 (2 Cents)

8. Panel 3: Will it be possible to bring settlement prices in Europe down to US levels (Contd.) • T2S is preventing European CSDs to innovate effectively. • CSDs are entering into the Agent Bank space, so pressure is mounting on the Agent Banks to expand internationally. • Too much competition will erode the management of risk and efficiency. • CSDs are entering into the Agent Bank space, so pressure is mounting on the Agent Banks to expand internationally. • As per Oxera, Monitoring prices, costs and volumes, the cost distribution on the value chain is provided below: • 2009 – Brokers - 70%; Trading Platforms – 5%; CCPs – 2%; Custodians – 22%; CSDs – 1% • 2020 – Brokers - 45%; Trading Platforms – 5%; CCPs – 2%; Custodians – 10%; CSDs – ??% (Not known) • As per Oxera, Monitoring prices, costs and volumes, the cost distribution on the value chain is provided below: • Domestic fees will be equal to the Cross Border fees.

9. Panel 3: Will it be possible to bring settlement prices in Europe down to US levels (Contd.) • In order for European settlement fees to come down to US level, the following factors must be taken into consideration: • Volume, Scale, Ownership, Regulation, Investment and Currency • Trusted third party role of VP in Denmark has ensured that investors never lost their right to the securities but cash has been lost when Banks have gone under. • Cost may not reduce from day one, although T2S is expected to create large scale gains for settlement volumes, there are other factors which could hinder: • Market differences and complexity in terms of Currency, tax and Corporate Laws in Europe • Different Model: Direct Holdings / Indirect Holdings • Considerable adaptation costs for Markets and CSDs.

10. Panel 4: How likely is it that the concept of a multi-currency securities settlement platform will spread beyond Europe • In South America, there are many initiatives towards deeper economic integration: • Mercosur – Argentina, Brazil, Paraguay and Uruguay and other associate countries. Main objective is to diminish obstacles to regional trades • Andean Community of Nations – Bolivia, Colombia, Ecuador and Peru. Main objective is to achieve faster, better, balanced and more autonomous development • South American countries are characterized by important differences in the form of: • GDP Size, Political Orientation, Macroeconomic Policy, Monetary Policy and Different financial market size, diversity and infrastructure • T2S concept in Latin America and Brazil • Single currency is a dream but it is placed far in the future • Integration projects still have to face important barriers • Brazil Financial Industry is keeping a close eye on the benefits represented by T2S.

11. Panel 4: How likely is it that the concept of a multi-currency securities settlement platform will spread beyond Europe (Contd.) • Nasdaq Dubai - Story of Integration • Prior to July 2010, there were 3 equity markets in the UAE – A Country with a population of 8 million. • In July 2010, Nasdaq Dubai outsourced its operations and technology to DFM (Dubai Financial Market) – the local exchange. • The objective was to have one consolidated liquidity pool and furthermore, the focus was to give institutional and local retail investors equal and easy access to participate in the equities market. • Trading, Clearing and Settlement were harmonized. • The intent was to use unified trading and back-office platforms. • Lessons learnt from the consolidation • Settlement models do have impact on liquidity. • Regulatory harmonization via protocols and MOUs between Regulators is vital. • Simplicity is key to allow better investor accessibility

12. Panel 4: How likely is it that the concept of a multi-currency securities settlement platform will spread beyond Europe (Contd.) • Africa is looking towards a deeper economic and financial integration with or without the adoption of a common currency. • Initiatives in Africa: • SADC Central Banks Regional Electronic Settlement System requirements and co-existence of sovereign rights. • West African French Franc Zone – Ivory Coast as the hub for Benin, Burkina Faso, Mali, Niger, Senegal and Togo. • East African Community – Burundi, Kenya, Uganda, Rwanda and Tanzania • Multi currency will be the norm in the short to medium term • Interoperability Vs African T2S and Why? • Interoperability supported in Principle 20 of CPSS/IOSCO (Principles for FMI) • Strate has a strategic tie-up with Linkup Capital Markets and this allows the respective CSDs to function without changing things drastically and the Link-up to take care of all necessary conversion.

13. Panel 4: How likely is it that the concept of a multi-currency securities settlement platform will spread beyond Europe (Contd.) • Japan Experience • ASEAN Trading Link initiatives to establish the common platform by electronic linkage among seven ASEAN exchanges, which enables cross border transactions. • ABMI initiative to develop Bonds market in the Asian region in order to raise long term funds within the region. • Political systems as well as degree of economic growth in Asia are diversified. • The Market structures and regulations in the region are in a variety of forms. • Therefore, various barriers are still existing for standardizing cross border settlements within the region.

14. Panel 5: Will there be greater integration among the world’s major CSDs • CSDs worldwide are part of their regional CSD association • ACSDA – American Central Securities Depository Association. • ECSDA – European Central Securities Depository Association. • AMEDA – African Middle East Depository Association. • AECSD – Association of Eurasian Central Securities Depositories. • ACG – Asia Pacific CSD Group. • Collaboration among CSDs are very common. • Exchange programs are happening among CSDs worldwide. • DTCC organized Great Workshop and Management Team from various CSDs participated in this workshop and shared their knowledge and experience. • Will cost bring economies of scale or economies of scale bring down the cost? • Merger of CSDs at the regional level is very cumbersome due to the complexity of the legal framework, tax laws etc.

15. Panel 5: Will there be greater integration among the world’s major CSDs (Contd.) • CSDs usually sign MOUs with other CSDs, if knowledge is to be shared among the CSDs. • CSDs must be regulated, as it is a highly risky business. • The prime objective of the CSDs is to protect the investors hard earned money, hence safety first. • T+0 must be possible and in future (not too far), the securities can be transacted similar to the withdrawal of cash from the ATM, anywhere in the world. • Because of scale of economies effect, there is a trend of integration that two or more CSDs merge into one CSD, within a jurisdiction. • Need for adopting common taxonomies within a jurisdiction

16. Panel 6: Multi-currency / Multi-country Systems – What are the issues • T2S as a Multi-currency and Multi-Country system has two main objectives: • To provide securities settlement in Central Bank money. • To overcome fragmentation of the European post-trading infrastructures. • Cash accounts in Central Bank money and securities accounts in the same platform allowing efficient real-time DvP in Central Bank money. • Non-euro National Central Banks will retain full control over their currency. • Regulators will continue to fulfill their mission in a cooperative way. • CSDs will retain full control over their securities accounts. • Market to benefit from transparency. • To reap the full benefits of T2S, the legal environment and market practices must be harmonized. • One of the main agenda for the EU regulators is to frame single rule book.

17. Panel 6: Multi-currency / Multi-country Systems – What are the issues (Contd.) • Effective Regulation will enable the following: • Financial stability • Reduction of systemic risk • Protection of Investors • Cash accounts in Central Bank money and securities accounts in the same platform allowing efficient real-time DvP in Central Bank money. • In the highly turmoil period, collateralized credit line must be based on the exposure. • Currently, in Europe Intrinsic Spillover is one of the major issues, i.e if there is a problem in one of the currencies / countries, then there could be knock-on effect in other currency/country. • There is an increasing pressure for Risk Management. • Effective regulation is needed above standards.

18. Closing Remarks by CEO of T2S • T2S is put in a Tsunami of Regulations. • T2S is not mandatory, however the entire project is driven by the CSDs in Eurozone. • European logic is different from the normal logic i.e. Economics will be addressed first and politics later. T2S must be done first and then Regulations will be streamlined. • T2S is a catalyst and it will trigger the following: • No. of traditional CSDs is going to reduce • CSD per country may not be required • New category of CSD i.e Investor CSD will emerge • Consolidation of CSD / ICSD / Agent Banks • Settlement price will be in somewhere in between USD 0.02 to USD 0.70, it will be difficult to achieve US levels in terms of settlement price. • T2S will offer freedom of choice to the Investors.

19. Closing Remarks by CEO of T2S (Contd.) • T2S outside of Europe • Very difficult due to legal framework and national pride (as mentioned by Monica Singer) (for African countries). • Existence of ECB and Euro system will facilitate the success of T2S implementation. • Co-operation amongst CSDs globally • Links between CSDs are required for mobilization and collateral management. • Governance is a critical issue for FMI and Regulators.