Cost and pricing issues in T2S How will T2S pay off?

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1 Cost and pricing issues in T2S How will T2S pay off? Conference at Narodowy Bank Polski 23 June 2009 Helmut Wacket T2S Project Team European Central Bank

2 Economic feasibility of T2S 2

3 Methodology of the economic impact analysis T2S EIA compares 2007 CSD average settlement fee to T2S average settlement cost under 2007 market conditions T2S URD specifies expected market conditions 2013, especially for traffic volumes T2S EIA conservative approach: 2007 market prices versus T2S calculated full cost recovery Full cost recovery calculated on basis of expected 2013 volumes T2S EIA average cost is no indication of any to be expected T2S average settlement fee in 2013 but a comparator to current market conditions 3

4 T2S EIA and T2S Pricing T2S EIA Provide background for decisions by the ECB Governing Council and CSD decision bodies To allow comparison between 2007 settlement costs and situation if T2S were to start operation in 2007 Based on 2007 market conditions Documented scenarios to evaluate different hypotheses T2S Pricing To provide for: Full cost recovery Create level playing field Fair treatment of stakeholders To comply with: Equal access Transparency Unbundling of services Expected 2013 market conditions 4

5 Results of the economic impact analysis Settlement Fee per Instruction Settlement fee per instruction compared under 2007 market conditions: Scenario 1 Scenario 2 Current average fee: 73 cents 62 cents T2S fee 2007 conditions 32 cents 21 cents CSD add-ons 7 / 24 cents 6 / 24 cents Total settlement fee 39 / 57 cents 26 / 44 cents Benefit settlement fee 34 / 16 cents 36 / 18 cents 5

6 Results of the economic impact analysis Custodian / Banks reproted savings with T2S Custodians / Banks savings with T2S in operation (rounded to Euro Mio p.a.) Scenario 1 Scenario 2 Back office savings 48 Mio 58 Mio Required investments (13) Mio (16) Mio Collateral savings 53 Mio 68 Mio Total savings Euro Mio p.a. 89 Mio 110 Mio 6

7 Results of the economic impact analysis Overall results of the static cost analysis T2S EIA static cost analysis (rounded to Euro Mio p.a.) Scenario 1 Scenario 2 ECB Study Re-scaled Clearstream study Re-scaled Euroclear study Even in the worst case scenario (euro area 50%) the T2S business case remains positive 7

8 Results of the economic impact assessment including dynamic effects Static impact Dynamic impact Volume Scenario 1 Euro area only ECB survey (net impact, minimum) 145 1,119 Rescaled Clearstream study (gross benefits) 376 2,891 Rescaled Euroclear study (gross benefits) 274 2,110 Volume Scenario 2 Euro area with UK, Swiss, Sweden and Danmark Static impact Dynamic impact ECB survey (net impact, minimum) 223 1,594 Rescaled Clearstream study (gross benefits) Rescaled Euroclear study (gross benefits) 390 2,914 8

9 T2S cost Based on, inter alia, a strong business case, the Governing Council decided on 17 July 2008 to launch T2S 9

10 T2S Pricing 10

11 Pricing follows stringent criteria Objectives Principles Challenges Create level playing field in settlement Provide for full cost recovery of T2S Equal access conditions Transparent, simple pricing policy Unbundling of services Full cost recovery under conservative assumptions and building of a reserve to compensate for volume fluctuations Adaptability of pricing policy and fee structure Intention to match revenues to cost of services Only CSDs are the contractual parties for T2S Ensure fair treatment of diverse T2S stakeholders 11

12 Some considerations concerning pricing Two concepts: transaction based pricing versus pricing based on capacity usage Broad consensus to base the future pricing proposals largely on price per service / price list approach Possibly integration of elements from system usage approach proposal: Differentiated pricing per time of day / peak system usage Differentiated pricing for processing complexity, e.g. queries Draft pricing list to centre around settlement instruction based pricing (in addition, some fixed fee elements ma be proposed) 12

13 Some considerations concerning pricing Volume discounts No volume discounts? Volume discounts calculated at CSD level (individual CSD or group)? Volume discounts calculated at user level? Further assessment including legal restrictions Guaranteed settlement fee Guaranteed settlement fee of maximum 15 cents for DVP transaction for early joiners 13

14 Timelines envisaged Pricing Objectives April 2009 completed Target date Early Joiner conditions June 2009 Draft Tariff structure June 2009 SLA Principles June 2009 Draft SLA September 2009 TCO September 2009 Volume estimate September 2009 Tariff November 2009 Volume discounts/rebates (if any) November 2009 Adaptation Risk early

15 T2S brings cost reduction but how much will it cost Total cost of ownership 1 Jan June 2020 Income from migration to 30 June 2020 Total cost of ownership 1 Jan June 2020 Volume estimates * Price list 15

16 Total cost of ownership 1 Jan June 2020 ECB development and migration phase 1 Jan June CB development and migration phase 1 Jan June 2014 Cost of capital during development and migration phase ECB operational phase 1 July June CB operational phase 1 July June

17 Dynamic effects The raison-de-être for T2S is not to in source all domestic settlement volumes to one common platform, but to enable the creation of a less fragmented European post-trade environment with the dynamic effects that would follow from a larger integrated market and where today's cross-border trades will settle as easily as domestic trades. Comparison with the United States, where all trades settle in one settlement system, DTCC, at considerably lower costs and following much larger volumes compared in size of market and GDP to Europe, shows the dynamic effect that can be expected following the introduction of T2S. This dynamic effect will be studied during the next months. 17

18 Tariff Structure 18

19 Q & A 19

T2S Economic Impact Assessment (EIA)

T2S Economic Impact Assessment (EIA) T2S Info Session 12 June 2008 Bernhard Stricker T2S Project Team European Central Bank T2S EIA Agenda T2S EIA Methodology overview T2S conservatively expected impact