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TARGET2-Securities (T2S) could help banks address 11 percent, or EUR 33 bn, of the EUR 295 bn capital shortfall in the Eurozone estimated by the Organisation of Economic Co-operation and Development (OECD) as required to meet Basel III capital adequacy requirements rules designed to make banks safer. These capital savings would be via reduced liquidity consumption, according to a study undertaken by Clearstream and PricewaterhouseCoopers (PwC) that has now been released. Additional T2S benefits identified are reduced risk in the custody chain and enhanced collateral mobility to meet other new regulatory requirements designed to make the financial services sector more robust. These benefits would be on top of the efficiency gains and cost savings associated with lower settlement fees and harmonised post-trade processes already expected from the introduction of T2S.
The capital savings could be unlocked thanks to the opportunity to pool cash accounts in T2S. Pooled cash accounts would enable participants to centralise and net off cash payment obligations associated with their settlement activity in all T2S participating markets. A bottom-up analysis by Clearstream of millions of cross-border settlements in Germany, France, the Netherlands, Belgium and Italy showed that pooling cash settlement into a single account would reduce Clearstream’s own liquidity requirements by a daily average of 15 percent during peak settlement periods. Transposing this to the broader settlement volumes in the Eurozone would translate into an estimated EUR 33 bn of Tier 1 capital savings outlined in Basel III rules for all Eurozone banks – a significant amount of the close to EUR 300 bn shortfall the OECD has estimated using 2011 year-end positions.
T2S is also expected to introduce opportunities for custodians to reduce risk in the custody chain for holding securities. This is key at a time when depositories and global custodians face new liability risks for loss of assets, as set out under the Alternative Investment Fund Managers Directive (AIFMD). Many central securities depositories (CSDs) have indicated plans to establish direct links with one another, creating the conditions for market participants to centralise settlement and safekeeping with a single or a limited number of CSDs without sacrificing settlement efficiency or incurring the high infrastructure costs of maintaining accounts with each CSD. Instead, they can pool their assets with a T2S-participating CSD of their choice which acts as an investor CSD. By holding assets directly with the CSD, depositories and global custodians have the potential to remedy the new liability impact AIFMD imposes on their operations.
In addition, the research findings show that collateral mobilisation is also boosted via T2S. The internalisation of settlement and harmonisation of processing cycles delivered by T2S across some 22 markets will remove much of the labour and other costs associated with today’s complexity of moving securities across borders. This also eliminates some of the fragmentation and over-collateralisation inherent in today’s post-trade environment.
Philip Brown, Head of Client Relations Europe and Americas and member of the Executive Board of Clearstream, said: “Our study shows that TARGET2-Securities has the potential to help market participants to much better meet their capital requirements and hence to address what will continue to be one of their major concerns. This is another example of the opportunities that T2S will bring if the market pulls together and mobilises around it. The potential relief on participants’ capital requirements should be a key trigger to gear up to T2S which, ultimately, will also make the market more robust.”
Thorsten Gommel, Partner at PricewaterhouseCoopers, Financial Services Consulting division in Frankfurt, said: “Despite being prepared for so many years and relatively shortly before going live, this is the first study that quantifies the benefits of TARGET2-Securities for Eurozone banks by putting it into the context of the broader regulatory agenda. Defining the right network strategy will substantially reduce liquidity consumption and capital needs.”
TARGET2-Securities (T2S) is a central pan-European platform for national cross-border settlement of securities in central bank money, set to be launched in June 2015. Basel III, the Alternative Investment Fund Managers Directive (AIFMD), the Undertakings for Collective Investment in Transferable Securities Directives (UCITS V) and the European Market Infrastructure Regulation (EMIR) are all examples of new rules and regulations affecting financial institutions. They are aimed at making them more robust and freeing the markets from systemic risk.
Methodology
The Clearstream and PwC research into the impact of T2S on market participants comprised a series of internal studies, supported by in-depth focus interviews with a number of market participants and a quantitative estimate of the effects of Basel III rules on market participants. The Clearstream/PwC report, “The 300 billion euro Question: Survey on the Benefits of TARGET2-Securities” can be found on the Clearstream website (www.clearstream.com/T2SPaper.pdf) or on the PwC website (www.pwc.de/t2s).
The 300-billion-euro Question - Survey on the Benefits of TARGET2-Securities
