OBJECTIVES OF T2S STAKEHOLDERS

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TARGET 2 SECURITIES PROJECT TEAM T2S-07-0247-rev Frankfurt, 4 September 2007 Introduction OBJECTIVES OF T2S STAKEHOLDERS This note presents an initial step in the future governance discussion of T2S.

1 TARGET 2 SECURITIES PROJECT TEAM T2S rev Frankfurt, 4 September 2007 Introduction OBJECTIVES OF T2S STAKEHOLDERS This note presents an initial step in the future governance discussion of T2S. It launches the debate by first trying to fully understand the objectives, interests and concerns of the various stakeholders; it does not suggest any specific solution in terms of future governance at this stage. AG members are invited to indicate to what extent their own objectives, interests and concerns are reflected in this note. The next step (expected for the October AG or, at the latest, the November AG) will be to identify possible solutions. In parallel, the Eurosystem will hold an internal debate via the PSSC. The decision on future governance will ultimately be taken by the Governing Council and the intention of the debate preceding this decision is to seek making the wide spectrum of perspectives known to the Governing Council. A preliminary draft of this note was circulated to AG members on 4 September 2007 for comments. Seventeen responses were received and considered. The note has been restructured to distinguish shared objectives and specific objectives of the various shareholders and to try to make the key points for the various stakeholders more visible. The note concentrates on the three main stakeholders that are represented in the Advisory Group: CSDs, their users and the Eurosystem (see section 1 on stakeholders). The expectations which the different stakeholders have from the T2S service are largely shared (see section 2). However the various stakeholders have different roles and responsibilities in financial markets and in the T2S project. This leads to specific objectives which are presented in section Stakeholders References to the Eurosystem 1 in this note are restricted to its operational role in T2S to develop and operate a technical platform, restricted to securities settlement services in central bank money, provided to CSDs for the benefit of their customers. The main focus is therefore on the financial risk 1 Central banks of other currencies are considered possible stakeholders of the T2S project, since they have been provided with an opt in clause.

2 adopted in pre-funding the platform (for the Eurosystem as a whole) and the responsibilities taken as provider of the platform (which are shared by the Eurosystem and within it would be in principle assigned specifically to the 3CB+). Moreover, like CSDs for the settlement leg, the Eurosystem has an interest in providing efficient services for the central bank money leg. The Eurosystem has broader interests and responsibilities which are largely shared by other European public authorities, in particular, providing a contribution to European integration in securities settlement. They thus appear as shared objectives, since they are also broadly subscribed. References to CSDs are restricted to those which commit to join T2S. It is understood that these CSDs will maintain their current services and responsibilities towards their users, while using a common settlement engine provided by the Eurosystem. The main focus is therefore (a) on the risk they face as a result of using a settlement engine provided by another entity and (b) on the importance for each of them to identify a business case to commit to T2S (i.e. opportunities raised by T2S exceeding the adaptation costs). CSDs which do not commit are not expected to be directly involved in the governance structure of the future phases of the project. The note does not enter into the debate when, how and with what gradualism will the commitment of CSDs take place although it is understood that the result of this process will condition the governance structure for future phases of the project. Users is a very broad term. For the next version of this note, it might be worth to distinguish different categories of users (end investors as compared to intermediaries, settlement banks as compared to investment banks, the specificities of stock exchanges and CCPs in different countries), but this was not possible before the September AG meeting. For the purposes of this note, users will pay settlement (and other) fees to CSDs which will then in turn pay settlement fees to the Eurosystem. While the CSDs are the only contractual partners of the Eurosystem, the effective use which users make of T2S is of great relevance for the Eurosystem. Major users of CSDs are thus also major stakeholders for the Eurosystem. The main focus for users is to reduce costs and expand market coverage. While the reduction of settlement-related costs (in particular cross-border ones) is an objective largely shared by all stakeholders, it is assigned to users because they have the most to gain from it. 2. Shared objectives a) Related to the Single Market To integrate the securities market in Europe. To remove barriers to the single financial market in the area of clearing and settlement without diminishing competition. To ensure full compliance with the Code of Conduct.

3 To have a harmonized cross-border settlement process in which all Giovannini barriers are removed. On-going compliance of CSDs with EU and (to the extent that they are not yet harmonised) national legal and regulatory requirements. To ensure a level playing field where neither CSDs nor commercial banks have a structural competitive advantage over services that both institutions may provide. b) Related to the T2S service 1. To have a state-of-the-art settlement service that makes cross-border settlement as effective as domestic settlement. 2. To maintain (or increase for cross-border transactions) current levels of legal certainty in their settlement operations. 3. To ensure that a lean governance structure is implemented allowing for swift decisions and short reaction times. To balance this with a transparent decision-making process that allows the input of all stakeholders to be considered. To ensure that it continues to support the evolving needs of the European capital markets. To ensure an efficient project organisation by the 3CB+ as prospective providers of the service on behalf of the Eurosystem. 4. To have a clear separation between the role of the Eurosystem as provider of the settlement platform and the exercise of regulatory/ supervisory/oversight responsibilities by individual central banks. In addition, to have a clear separation between the role of the 3CB+ as prospective providers and the role that the four central banks will have as the other central banks - in T2S. 3. Specific objectives Of the Eurosystem To avoid reputational and legal risk. Insofar as T2S is entirely financed by the Eurosystem, to maintain full control of all decisions which have an implication on the cost of T2S and on the way to recover that cost (i.e. pricing).

4 To have a reasonable prospect of recovering its investment. To provide efficient central bank money settlement services on the cash leg of securities settlement transactions (where these transactions settle in central bank money). Of the CSDs that decide to join T2S 1. For each CSD to identify its business case to join T2S To maintain the flexibility to influence the adaptation of T2S to their future needs. While CSDs acknowledge that they cannot individually maintain the same level of influence over developments under a common platform, they need to be reassured that they can maintain an appropriate degree of influence. In particular, they need to evaluate how their business model is impacted in order to anticipate adaptation costs and ensure that they may develop new and enhanced services in order to stay competitive. a) New opportunities To be able to offer additional services and new products on top of T2S (i.e. value added services, securities financing services and any other service the CSD already offers today and may offer in the future). To be able to maintain or increase their activity in terms of geographical scope. In particular if other CSDs decide not to join T2S despite the wish of their users to settle in T2S. b) Reduced costs Insofar as T2S will imply adaptation costs for CSDs, that the user requirements provide a solid basis to reasonably anticipate these adaptation costs (which will depend also fundamentally on the business strategy adopted by each CSD). That adaptation costs are offset by new business opportunities, or by the reduced running costs (due to restructured CSD system/processes) or reduced need for future investments, due to the common T2S platform. 2. To contain the risk of having their settlement engine developed by another entity. Since these CSDs will no longer invest in their current settlement platforms, and since such a component is a critical and integral part of their service, they need therefore to be absolutely sure

5 that T2S will fulfil all legal and operational processes in an efficient manner and will be delivered in time (in particular if other CSDs decide not to join T2S). The following are some instrumental points to reach this goal: That there is a contractual framework which defines service level requirements and legal liability (including potential penalties). To have full control over outsourced processes and adequate security and auditing arrangements. In addition an auditing of the technology infrastructure (i.e. code review, inspection of data centres) must be possible for regulators /supervisors or auditors. To minimise commitment to the Eurosystem. Of users of CSDs While T2S has arguably a greater impact on the business model of CSDs, the business case analysis which users have to make is similar to that of the CSDs. Like CSDs, users need to evaluate how their business model is impacted by T2S in order to anticipate adaptation costs and ensure that they may develop new and enhanced services in order to stay competitive. Like CSDs again, they wish to maintain the flexibility to influence the adaptation of T2S to their future needs. 1. To reduce the total running costs due to a restructured post-trade process with a common process for all T2S markets via one access point. 2. To enable them to consolidate all their European securities settlement business (in all currencies) on a single platform, while possibly remaining the client of multiple CSDs. 3. To reduce costs related to settlement fees (in particular for cross-border transactions) and settlement funding (in particular through the use of central bank money/collateralised credit for cross-csd settlement). In this respect, to ensure that T2S prices are non-discriminating and reflect only those costs which are borne by T2S. 4. To ensure having this service offered by a neutral player that does not exploit monopoly rents. 5. To maintain or increase their level of influence over the settlement services they receive (as compared with the current level of influence over the settlement services provided by CSDs). This requires transparency in T2S discussions and avoiding that a bilateral forum between the

6 Eurosystem and CSDs substitutes the present bilateral forums between each CSD and its users. 6. To ensure that the service responds to the needs of new industry initiatives.

2. Authorisation and ongoing supervision of CSDs. 4. Prudential rules and other requirements for CSDs

2. Authorisation and ongoing supervision of CSDs. 4. Prudential rules and other requirements for CSDs COMMENTS BY THE CNMV ADVISORY COMMITTEE ON THE EUROPEAN COMMISSION'S CONSULTATION DATED 13 JANUARY 2011 REGARDING CENTRAL SECURITIES DEPOSITORIES (CSDS) AND ON THE HARMONISATION OF CERTAIN ASPECTS OF SECURITIES