Minutes from the Joint Nordic-Baltic T2S NUG meeting hosted by the Riksbank in Stockholm 19 January 2010

Transcription

1 /BG Minutes from the Joint Nordic-Baltic T2S NUG meeting hosted by the Riksbank in Stockholm 19 January ) Chairman's introduction (Mats Wallinder) The chairman welcomed all participants to this joint meeting of the Nordic-Baltic National User Groups on T2S (NUGs). He expressed a particular welcome to the chairman of the T2S Programme Board, Mr Jean Michel Godeffroy. The Nordic-Baltic countries have a tradition of co-operation, not only through a common history, but also by having the banks present in many of the markets. The last meeting was held in Copenhagen (March 2009) and prior to that a meeting was held in Helsinki (March 2008). (Attendees of the meeting, annex 1) No additional topics were put on the agenda. 2) National status (CSDs, Central banks and Market participants) The market representatives have expressed an interest in learning more about T2S. The concerns regarding the project are rather similar in all countries; costs and pricing, the account structure (for direct holding countries) and CSD Eligibility criterion 5. The Baltic States have the intention of not joining T2S with their national currencies, but rather with the Euro. The Nordic and Baltic CSDs have signed the T2S MoU and the contractual negotiations in order to establish a framework agreement has started. However, there are still a number of outstanding important issues that need to be resolved in this work. When if comes to the Central Banks, also a framework agreement for non-euro Central Banks need to be established. Each country's delegation gave a national status update: Denmark: Denmark has the intention of joining T2S for their national currency. The main concerns are the account structure in T2S (due to the investor account structure) and CSD Eligibility criterion 5. Estonia: The NUG has been active for a year now. Estonia has the intention of joining T2S with the Euro rather than with their national currency. The CSD is represented in the Advisory Group (AG). The CSD is working closely with the market participants and the Central Bank on T2S issues. The main concerns with T2S are the costs and the pricing structure. Iceland: Iceland expressed interest in the T2S project and will setnp a NUG. The CSD has expressed its interest in T2S in a letter to the ECB.

2 Iceland may have to invest in a new RTGS-system. The main concerns with T2S are the costs and how to adapt the current system to T2S. Latvia: The Central Bank has decided to become more involved in the work on T2S and the bank will co-chair the Latvian NUG with the CSD. 2 scenarios for connectivity: o Connect with introduction of Euro as national currency (most probable) o Connect before introduction of Euro (settlement in Lat not envisaged) The main concerns with T2S are the costs and pricing structure, the risk of small markets being penalised and how to ensure that both users and the CSDs will have an active role in the governance of T2S. Lithuania: Lithuania prefers to join T2S with the Euro rather than with the national currency since volumes of settlement in Euro is steadily increasing and also because of the introduction of a Baltic MTF. The Central Bank is no longer represented in the AG. Norway: Since T25 will be built the Norwegian market needs to look at what benefits it may bring to them. The Central Bank has started to investigate what is needed if the market should decide they want to join T25 for the Norwegian krona. An impact analysis is being done by the internal project run by the Central Bank. The Norwegian Central Bank is working closely with the Riksbank and the other noneuro Central Bank's (UK, Denmark, Norway, Sweden and Lithuania). The main concern with T2S is the governance structure. Finland: The Finnish Central Bank has been very active since the start of the T25 project. Within the bank the focus of the work on T2S has been on identifying a clear separation of responsibilities on the respective parties; the users, the CSD and the Eurosystem. There has been an active interaction with the market in the FINNUG. During 2009 focus has been on the introduction of the CCP and the new Finnish securities legislation. The FINNUG is developing user requirements for the migration to the Euroclear EUI platform that are rather far-reaching. The main concerns with T25 are legal issues (because of the direct holding system in Finland), governance issues and the pricing. Sweden: The investor account structure is important for the retail business of the Swedish banks. The Riksbank has an internal T2S project and will set up a reference group of stakeholders in the market to monitor progress in this project. The Riksbank participates in meetings at the ECB: o Advisory Group, 2

3 o Task Force on Separate Legal Entity (the Riksbank has just nominated a member to that group), o A Riksbank staff is a member of the T2S Programme Board, but not representing the Riksbank. Regular meetings are held with the other non-euro Central Banks. The current set up in the Swedish market is the integrated settlement model where the Riksbank has outsourced its cash accounts to Euroclear Sweden. The set up in T2S is likely to be very similar. The latest version of the CSD Eligibility criteria for T2S implies that CSDs, who's national currency is in T25, are not allowed to enable users in non-euro currency markets the choice of settling in T2S or in the domestic Central Bank. Hence one of the conditions under which the market participants in Sweden expressed their request to the Riksbank to enable SEK settlement in T25, has changed and the implications hereof is being analysed. Other main concerns with regards to T2S are costs and pricing, governance, the end investor account structure. 3) T2S Project status and next steps (Jean Michel Godeffroy) Mr Jean Michel Godeffroy made an oral presentation of the different aspects of the T25 project. T2S project status and next steps, slide presentation, annex 2. Technical documentation The User Requirements Document (URD) was frozen by the Advisory Group on 15 January 2010 and the T25 URD v5.0 shall be the basis of developing the T25 platform. As of now only minor changes will be made in the URD. Every change to the URD has to be approved by the Governing Council. The General Functional Specifications (GFS) and the General Technical Design (GTD) was approved by the T2S Programme Board (T2SPB) in November 2009 and is published on the T25 website. The User Detailed Functional Specification (UDFS) is under preparation. Review of the timing of T2S There are two reasons for the delay of T25. First of all the four central banks (4CBs) that will build T2S have overestimated the help they would get from the Target 2 project, Central Banks in general are not as familiar with the functioning of securities markets as they are with payments. Secondly, the cooperation between the 4CBs and the ECB needs to be improved. The interaction needs to be much quicker in future. Mr Godeffroy confirmed that the T2SPB is currently reviewing the project plan. Given that the technical documentation (GFS, GTD) took longer than expected, the original launch date ofjune 2013 may no longer be achievable. The Governing Council will decide on this matter later this year. External Governance of T2S The CSD Contact Group (CCG) includes only representatives from the ECB, T2SPB and the CSDs. The reason is that Eurosystem and the CSDs are the two contracting parties. The CSDs will outsource part of its settlernent activities to the ECB. In the Advisory Group (AG) there are representatives from the users, the CSDs, the National Central Banks, the ECB, 3

4 CESR and the EU Commission. There is a proposal to the Governing Council that the mandates of the CCG and the AG should be extended until the Framework Agreement enters into force. A special Task Force has been set up to investigate the possibility of having a separate legal entity as the provider of the T2S services when it is launched. It is a request of several non- Euro Central Banks and in particular the Bank of England to investigate this issue. The Task Force will report its findings to the AG in March this year. In the T2SPB there is currently one seat for Central Banks outside of the Eurozone, that intend to bring their currency to T2S and that is held by Mr Jan Schiftlerqvist from Sveriges Riksbank. He is representing the markets outside the Eurozone in the T2SPB. Legal work The legal work is divided into three areas: Eurosystem, internal aspects. There is the T2S Guideline which contains rules and instructions on how the Governing Council wants the Central Banks in the Eurozone to work. Eurosystem, external aspects. There is the Framework Agreement with the CSDs. This is the actual contract between the Eurosystem and the CSDs. There will also be an agreement with network service providers. And finally, there will be a Currency Participation Agreement with the non-euro Central Banks. Horizontal legal issues. There are a number of legal issues such as: o Liability regime o Competition and regulatory compliance o Harmonization of national regulatory environments o Feasibility of a T25 agency o Tax Mr Godeffroy mentioned that the Framework Agreement between the Eurosystem and the CSDs has to be validated by the national securities regulators. Since the CSDs will be outsourcing their settlement activities to the Eurosystem, the set-up of the outsourcing needs to be approved by each national securities regulator. This work has already started but it is complicated since the national rules for allowing outsourcing differs between European markets. The European regulators would need to reach a common view on the issue of outsourcing. The Eurosystem wants, if possible, to have the regulatory approval before the Framework Agreement is actually signed. Financial aspects Mr Godeffroy mentioned that the transaction volumes have decreased after the financial crises last year. The delay in T25 means that everyone involved in the project will need to work longer, which leads to higher investment costs. The intention of T2S is to reduce the cost of cross-border trading by as much as 90 %. The vision is that the cost for a domestic trade and a cross-border trade would be the same in T25. The cost structure will be uniform in T25, there will be no rebates. The reason for this is that it will be the bigger banks who perform most of the cross-border trading that will gain the most when the cost for cross-border trading will come down. The ECB is neutral when it cornes to consolidation arnong the CSDs. T2S will not drive smaller CSDs out of business. 4

5 Specific issues Mr Godeffroy said that the countries with a direct holding account structure should not be disadvantaged in T2S. A special workshop is proposed by T2S Team to be held on 11 February with Sweden, Denmark, Finland and Norway to discuss this issue further. The Baltic countries are all both on the way to the Euro and on the way to T2S. The ECB will hold a specific meeting with these countries to discuss how the issues could be coordinated. Questions to Mr Godeffroy In response to a question on the prices that the CSDs will charge their clients when T2S is up and running, Mr Godeffroy said that the pricing in T2S will be transparent. The cost for a CSD to participate in T2S will be known to everyone. If a CSD tries and pass on excessive fees to its clients, the latter will see it. This is why the ECB has no intention to regulate the prices that the CSDs charge to their clients. Competition among the CSDs will see to it that no excess prices could be charged. Mr Godeffroy mentioned that information about the prices that will be charged in T2S will not become public until July this year. He said that the ECB needs to consider this issue carefully since they will have to announce a price that will be charged at the launch of T2S based on the information that is currently available. Mr Godeffroy also confirmed that the information about the prices in T2S is an important part of the Framework Agreement that the CSDs will sign. The signing of the Framework Agreement is not likely to take place until some time after July How could the ECB make sure that there actually will be competition among the CSDs? Mr Godeffroy responded that CSD Eligibility criteria 3 and 4 were the best way to assure that competition will be real. Criterion 3 reads "Any CSD, which wishes to join T2S, must make each security/isin for which it is issuer CSD (or technical issuer CSD) available to other CSDs in T2S upon request" and criterion 4 reads "A CSD in T2S commits to offer to other CSDs in T2S basic custody service on a non-discriminatory basis". It could be a task for the regulators as well as the T2SPB to monitor that the CSDs comply with all of the CSD Eligibility criteria. The Danish NUG had two questions. The first one was whether it would be possible to use securities held on a securities account outside of the Eurozone as collateral for receiving credit in Euro, e.g. via the T2S auto-collateral facilities. Restrictions on location of securities was considered to be an issue that may potentially distort the level playing field in the European Union. Mr Godeffroy responded that collateral rules for credit in any currency are defined by the Central Bank of that currency. It is rather a policy issue and beyond the scope of T2S. T2S, as such, does not set any limits. The second question was about night time settlement and the possibility for Danish banks via the VP to have access to Euro-credit facilities during night time. It was pointed out by the Danish NUG that participants in T2S who have a branch located within the Eurozone could have access to credit in Euro from the Eurosystem via that branch. For a participant outside of the Eurozone this is not possible. This was considered to be an issue that distorted the level playing field in the Danish market. Mr Godeffroy answered that a level playing field does not mean that a Danish local participant should have the same rights and access to the credit in Euro as a participant inside the Eurozone. In the latter case, the Euro is the domestic currency; 5

6 in the former case, it is a foreign currency. Also the participants from the Eurozone will not have equal rights and access to the credit in Danish Kroner compared to Danish banks. This is a policy issue of the National Central Banks, not of T2S, which respect currency sovereignty. How will the ECB ensure that also the users from small markets will be involved in the governance of T2S? Mr Godeffroy reminded that there is work going on to see if there is a possibility to set up a separate legal entity that will be the provider of the T2S services. In any case there will be an Advisory Group where the users from both inside and outside the Eurozone will be represented. In the current AG there is already a large representation from the non-euro area. There was a question whether T2S would be launched even if the UK market would not join. Mr Godeffroy said that T2S would go ahead also without the UK. But, T2S would bring more benefits if the UK joined. The UK market would have access to a larger pool of liquidity if they are part of T2S and the transaction price charged in T2S would be lower if the UK joined. It would therefore be beneficial for everyone if UK is part of T2S. 4) Direct holding accounts On the issue of the direct holding accounts Mr Godeffroy confirmed that the ECB is committed to facilitate the access to T2S for the direct holding markets without imposing major changes on these markets. 4a) CSD eligibility criterion 5 Access criterion 5 reads: "A CSD in T2S commits towards other CSDs in T2S to carry out its central bank money settlement in T2S if the currency is available in T2S". The reasons behind this criterion are the following: This criterion requires that a CSD outsourcing its settlement to T2S to effectively bring to T2S the volumes derived from DvP settlement in central bank money for the currencies that are in T2S. The criterion acknowledges however that, when the currency is not in T2S, the CSD cannot conduct DvP settlement in central bank money in T2S. This requirement is an indispensable condition for the successful introduction of T2S. As any network industry, the financial viability of T2S is dependent on network externalities generated by a "critical mass" of transactions. Without this criterion, some CSDs might join T2S with their full domestic and cross-border volumes, while other CSDs might join only with their cross-border/cross-csd volumes. In this situation, the CSDs bringing their full volumes would be subsidising the cross-border volumes of the other CSDs. It is therefore essential that T2S is protected from such free-riding behaviour, which is detrimental to other CSDs and hinders the implementation of T2S' main obj ective regarding the necessary increase of competition between CSDs. 4b) Special functions in T2S The slides covering special functions in T2S, daily schedule and connectivity are all included in aimex 3. Ms Katrin Sagar from the ECB made a presentation of the special functions available in T2S. Please see the enclosed slides. 5) Daily schedule for settlement in T2S Ms Sagar made the presentation on the daily schedule for settlement in T2S which is included in annex 3. There were some comments from the attendees on this subject. The Norwegian Central Bank pointed out that this schedule would mean that non-euro Central Banks would need to extend their opening hours. This is a huge change both for the Norwegian market and 6

7 for the Central Bank. Ms Sagar mentioned that certain cut-off times in T2S could be specific for certain currencies in T2S, but not End of Day and Start of Day. The issue of the daily schedule has been discussed in the FINNUG. One problem is that the daily schedule starts already the day before the settlement day. In order to adapt to this new condition the Finnish legislation needs to be changed. Another issue that has been lately raised by the 4CB is the timing of the maintenance window. The FINNUG reiterated that the timing of the maintenance window needs to be decided by the market, not by the 4CBs. Any changes initiated by the 4CBs would need to go through the same change management procedure as any other change, i.e. via the AG, T2SPB and the GC. The 4CB have proposed to align the maintenance windows in T2 and T25. Currently the maintenance window in T2 is between 23:00 01:00, while it is between 03:00 05:00 in T2S. The Danish NUG pointed out that all corporate actions are dependent on the end-of-day holdings. Only 45 minutes, between 18:00 18:45, is a too short period to process all corporate actions. The Euroclear Sweden representative mentioned that this concern had been raised with the ECB almost two years ago. The participants of the meeting pointed out that adoption to night time settlement is a major challenge for both market participants and Central Banks. It was mentioned that in some markets, the concerns and potential costs in adoption to night time settlement had been forwarded to the T2S team in the work of establishing the T2S user requirements. The T2S project team's proposal at that time was that the CSD/NCB could allow the users to choose whether it will participate in night time settlement, although the T2S project team also then confirmed that night time settlement is mandatory for the participating CSD. However, the local markets then questioned whether this would work, as the current CSD rules imply that all market participants should present payment capacity at a given point in time, otherwise the settlement process would be very inefficient. Ms Sagar informed the participants that discussions on different aspects of daily schedule are ongoing in different forums with non-euro NCBs, in Subgroup on Operational Framework and in Corporate Actions Subgroup. 6) T2S Connectivity Ms Sagar made the presentation of T2S Connectivity which is included in annex 3. Cornments made after the presentation included the importance of having obj ective criteria for accepting bidding from the different providers. Another comment was on the information fiow between T2 and T2S and between T2 and National Central Banks. The problem is that in T2 the information format is ISO while in T2S it is ISO This needs to be reconciled. Another comment referred to the dedicated cash accounts in T2S. Euroclear Sweden is concerned that a dedicated cash account in T25 is not earmarked for a certain CSD in T2S, but could be used by the payment bank for settlement in all CSDs in T2S. Ms Sagar explained that T25 dedicated cash accounts are a sub-set of the RTGS system of the currency and opened for a payment bank in T2S by the respective NCB. The representative of the Riksbank was interested to know whether it would be possible for a NCB to appoint a CSD to manage the T2S dedicated cash accounts of the Riksbank's participants. This could be essential especially for a "small" RTGS system. Ms Sagar clarified that technically it may be possible in T2S. 7

8 7) Legal issues Mr Mogens Kruse, General Councel at VP in Denmark made a short presentation of a legal issue in relation to T2S relevant for the Danish market. Please see annex 4. VP, the Danish CSD, operates a direct holding system in which rights in securities (e.g. transfer of ownership and pledge transactions) are attached and evidenced via book-entry in a central register. Investors are protected from loss caused by wrongful book-entry via mandatory rules on strict liability for CSDs. Accordingly, VP will always be responsible to its clients in case of a wrongful book-entry regardless if VP has made a mistake or if it is T2S that makes the mistake. Therefore, depending on the final T2S legal framework, outsourcing of maintenance of securities balances to T2S may potentially create risk for VP in case a mismatch of securities balances between VP and T2S. Mogens Kruse raised attention on two provisions in the current draft T2S Framework Agreement that may challenge the Danish (and other Nordic countries) legal tradition of central registration of rights in securities: a presumption rule where securities balances on the T2S platform shall be considered as binding for the CSD and a rule on limitation of liability. This means that if something goes wrong in T2S and the clients of a CSD are affected, the CSD will have to pay compensation to its clients without having any possibility to get recourse from T2S. An additional source of risk of mismatch may occur in case a CSD upkeeps separate official timestamps in the CSD after migrating to T2S local registry timestamp and T2S timestamp. If a right on securities should be registered, there could be a delay between entering the right to the local registry and to T2S and meanwhile some instructions could be settled, which cannot be rewound. In order to avoid this risk, VP in 2009 decided to introduce T2S timestamp for securities transactions settled on the T2S platform and to upkeep its own timestamp for other transactions. This will require a change in the Danish law. 8) Continued cooperation in the Nordic/Baltic region All delegations mentioned that they thought these meetings are very useful. These meetings should continue, preferably more frequently in future. Twice a year was suggested. The users urged the CSDs and the NCBs to take the lead on the way forward. Another suggestion was to identify concrete issues that are relevant for several of the Nordic/Baltic markets. A work shop could be set up to discuss these specific issues. The result of these discussions could be reported to the members of the Nordic/Baltic NUGs. Users who are present in more than one of these markets should try and reach a common solution for all these markets. 9) Conclusion and action points The Norwegian Central Bank will investigate the possibility of arranging the next meeting of this group. The suggested time for the next meeting would be in September this year. The issues to be discussed could be coordinate by each NUG. The SWENUG will discuss issues that could be discussed in this forum at its next meeting in March and circulate the suggestions to the other NUGs. 8

9 There will be a work shop proposed by the ECB to discuss the account structure and CSD Eligibility criterion 5, on 11 February in Copenhagen. Representatives from the NUGs of Denmark, Finland, Norway and Sweden are invited to participate. Any other issues that the NUGs would like to discuss should be sent to the ECB on 29 January at the latest. 9