Target 2 Securities: A CSD perspective

1. Target 2 Securities:A CSD perspective World Bank Conference 31 May 2007 Mark Kirby, Managing Director Euroclear SA

2. Introduction • Some of the stated objectives in the T2S outline proposal are admirable: • Reduce the cost of cross-border settlement • Provide a single technical point of access to 13 markets • All CSDs agree with these ambitions • The problems in achieving these are technical and pragmatic • Focusing on two key themes … • What are the consequences of separating functions between T2S and the CSDs? • Would T2S enable CSDs to decommission systems?

3. Does T2S consolidate or fragment? • T2S concept involves a fundamental restructuring of infrastructure systems: • Achieves consolidation of DVP/FOP settlement in T2S • … but at the price of fragmentation of corporate actions, collateral management etc • Fragmentation introduces additional processes • Services which were previously integrated in CSDs become split between different platforms • Creates a need for an extra layer in processing • Corporate actions, collateral management etc also involve processing off securities and cash accounts • Does this separation actually work? • What is the impact on efficient, risk and cost? • Has anybody else done it before?

4. Fragmentation: a collateral management example • Efficient securities financing, fails management and collateral management requires continual sweeping of transaction data and balance data to assess collateral needs: • Settlement fails • Borrowing requirements • Liquidity requirements • Highly dependent on up-to-date real time access • Processes require action the very moment a given data element changes • In a T2S world, securities balances would be held in T2S not in the CSDs • Internal reading of CSD databases would be replaced by external message queries • Unavoidable elapse time • CSDs would need to poll T2S continually • Massive message volumes required • Significant impact on collateral and liquidity efficiency • Greatly reduced reliability

5. Can CSDs decommission systems? • Major feature of the T2S proposal is the proposition that 13 settlement systems can be decommissioned and replaced by one, generating big cost savings • CSDs’ ability to decommission systems is not a matter of policy preference; it is: • Dictated by functional, operational and legal considerations • Strongly influenced by service level considerations • This is relevant because if CSDs cannot decommission systems, the costs of T2S come on top of existing industry costs

6. Can CSDs decommission systems?Functional considerations • T2S proposal envisages T2S providing end-of-day securities balances to CSDs (e.g. for corporate action processing) • Conclusion: CSDs cannot decommission account structures architecture/databases • T2S proposal envisages T2S databases only holding data required for settlement purposes • Conclusion: CSDs must maintain other databases with full data • T2S proposal envisages input & matching taking place in CSDs • Conclusion: CSDs cannot decommission lifecycle management systems • T2S will cover euro central bank money settlement only: • Conclusion: multicurrency CSDs and/or CSDs settling in commercial bank money cannot decommission any systems at all

7. Can CSDs decommission systems?Service level considerations • Other key areas where CSDs could continue to provide services but at reduced levels of efficiency • Intraday deadlines on voluntary and optional corporate actions • Critical for calculating acceptance levels and determining underwriting obligations • Customer reporting (for back office and regulatory purposes) • Real-time settlement management • Real-time registration processes • Overall, many fundamental questions about technical and operational feasibility remain unanswered

8. Cost comparisonsApples and pears • Highly publicised comparisons between current CSD charges (average ~ 40c) and proposed T2S charge (average 29c) • … but CSD tariff covers wider service scope than covered by T2S and which would remain provided by CSDs in a T2S environment: • Operations • Daily timetable management • Reconciliations & investigations • Client support • Help desk/call centre • Documentation • Training • Transaction taxes • Other reporting services • These equate to ~ 40% of existing settlement costs

9. Open areas of debate • Governance • Is it right for market infrastructure to be migrated to the ECB in this way? • The ECB is the world’s most independent central bank. How responsive do we expect it to be to market demands? • Economic feasibility • Do the numbers add up? • Cost of build • Cost of CSDs amending their systems • CSD running cost “savings” • Legal framework • How will the governing law be established? • What liability would the ECB be prepared to provide?