Post-Trade Processing in Europe

by Anshuman Jaswal, PhD,  Axel Pierron, July 13, 2010
Regulation
EMEA

Abstract

The European Central Bank (ECB) has proposed a pan-European platform, Target2-Securities (T2S), that would allow central securities depositories (CSDs) to streamline their trade settlement processes. The initiative is expected to reduce costs and processing times, but the revenue implications for CSDs and custodian banks need to be considered along with the effect on their business models.

In a new report, Post-Trade Processing in Europe, Celent looks at the possible impact of T2S on the post-trade processing space. It is expected that the revenues CSDs derive from settlement activities will be reduced substantially. The remaining areas for competition and differentiation for the CSDs are cross-border asset servicing and value-added asset servicing, which are not their traditional strengths. As a result, we will see various forms of consolidation.

The following table looks at the various parameters that could determine the success and even the survival of the various CSDs in Europe. The two CSDs best placed are Euroclear and Clearstream, due to their settlement volumes, assets in custody, and geographical reach. Another important factor would be whether the CSD has linkages with trading groups because these synergies would also help in their home markets. An important change the CSDs require post-T2S is the infrastructure to compete on a pan-European basis. So, existing linkages through a multinational network or with international trading platforms would be an advantage, because these would reduce the time to market and development costs.

Presence of Parameters to Determine Survival After T2S

  High
custody
volume 
High 
settlement 
volume 
Present
in more
than one
market?    

Part of
trading
group
Part of
clearing and
settlement
group    

Banking
license    

Likelihood of
consolidation
(merger/
takeover)?
 
CC&G/
Monte Tittoli
  
No Yes Yes  LSE
Group 
Yes No No
Clearstream Yes Yes Yes Deutsche  
Borse
Yes  Yes No
Euroclear Yes Yes Yes No  Yes  Yes No
Iberclear/
Meffclear
No No No BME
Group
Yes  No No
OeKB
Austria
 
No No No No  Yes  No Possible
VP Denmark No No No  No Yes  No Likely
VPS Norway No No No Olso Bors
VPS
Yes  No Possible

“Disintermediation is very likely to happen in some countries, while in others, the outcome of T2S is unclear,” says Axel Pierron, Celent Senior Vice President and coauthor of the report. “While T2S is attempting to increase the integration of the European securities market, harmonization and a level playing field can not be created solely by a new settlement infrastructure. Political will and changes in national regulation and market practices will have to be addressed as well.”

“Various assumptions have been made regarding T2S by the ECB, including the fact that all the CSDs in the EU will participate,” says Anshuman Jaswal, Celent Senior Analyst and coauthor of the report. “These assumptions and the performance of the project need to be reviewed regularly to ensure that the desired objectives are being met. The dynamic market conditions and fast-improving technology have not removed the need for T2S in the first place.”

This report looks at the developments in the field of post-trade processing, such as the Code of Conduct and T2S. It considers the issues that will arise from having a common platform for settlement and whether the private sector initiatives could be an alternative to T2S. The recent developments will also have a widespread impact on the custody market, as both CSDs and custodians vie for a share of the increasingly complex and shrinking post-trade processing pie. 

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

5

Overview

6

 

Giovannini Barriers

8

 

Code of Conduct (CoC)

10

 

Trade Verification

11

Pan-European Settlement Platforms

13

 

Target-2 Securities (T2S)

13

 

Euroclear’s Single Platform

18

 

Link Up Markets

20

Custody Asset Servicing and Securities Servicing

23

Challenges for Custodians in Europe

25

Effect of T2S on CSDs and Sub-Custodians

28

 

T2S Effect on Settlement Costs Unclear

32

Conclusion

33

Leveraging Celent’s Expertise

35

 

Support for Financial Institutions

35

 

Support for Vendors

35

Related Celent Research

36

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