Clearing and CCP activities in T2S Further harmonization

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1 Clearing and CCP activities in T2S Further harmonization Christophe Hemon 1

2 Agenda Introduction : Who we are, what is the range of our services Future and possible landscape at T2S horizon Harmonization efforts already agreed in T2S Potential harmonization candidates Code of conduct Conclusions 2

3 Broad range of markets served. TODAY ETCMS Energy & Freight Brokers Securities Securities Exchange Traded Exchange Traded Financial & Financial & Equity Derivatives Equity Derivatives Fixed Fixed Income Income Swaps Swaps Commodities Commodities & & Energy Energy COMMODITIES UK & Ireland Belgium France NL Bank Frankfurt CASH 3

4 How it could look like in.. the future T2S environment by 2013 New MTFs ETCMS Energy & Freight Brokers Securities Securities Exchange Traded Exchange Traded Financial & Financial & Equity Derivatives Equity Derivatives Fixed Fixed Income Income Swaps Swaps ommodities ommodities & & Energy Energy ICSDs With the participating CSD s NCSDs out of Europe 4

5 Our clearing services in the securities markets Strong interaction with the Euro- system infrastructures Trade capture Novation Position Management Netting Fails Management Buy-in Risk management Margin payment T2S Settlement T2 Default management Collateral Management CCBM2 5

6 The success keys of T2S based on harmonized procedures Settlement in T2S (as per T2S UR proposals) will be processed in a harmonised way (mainly but not exhaustively) 1. Single harmonised settlement window for all participating CSDs (night time, and day time, Start of day process, End of day process ) 2. Single priorities and sequencing rules 3. Single intraday deadline (DVP, FoP) 4. Single set of messages per type of scenario 5. Single set of statements reports. 6

7 Other potential harmonisation efforts that would bring benefit for the clearing activities in T2S 1. Settlement life-cycle Should T+2 and T+3 continue to co-exist in T2S? Would the use of one single settlement life cycle not contribute to reduce fails due to unavoidable arbitrage between markets Should the netting effect across multiple trading venues be facilitated if based on the same settlement life cycle? 2. Sending of «already matched instructions» CCP settlement net instructions should be based on a single and harmonised instruction (instead of 2) that will reduce the number of messages and the associated costs 3. liquidity need in T2S Collateral is a rare and costly resource and T2S should prioritize collateral on flow before the collateral on stock. T2S functionalities should reduce CCP liquidity issues 7

8 Other potential harmonisation efforts that would bring benefit for the clearing activities in T2S 4. Referential data and Corporate action management At CCP level all the cleared transactions related to one ISIN should be fungible to allow the netting across multiple trading venues and therefore CA management on pending instructions need to be harmonized per type of event, regardless the exchange and the participating CSD where the ISIN is eligible. 5. Start and end of eligibility for settlement per ISIN should be harmonized in each participating and concerned CSDs 8

9 Other potential harmonisation efforts that would bring benefit for the clearing activities in T2S 6. Partialling procedure Does the current T2S proposal answer the CCP s demand? Does it answer to future extension of free choice of the settlement location in and outside T2S? Partialling threshold should be identical and the lowest per type of ISIN to ensure the flat account principle for CCP accounts 7. Netting mode, recycling period of CCP instructions, Buy-in Part of the CCP services that offers the «guarantie de bonne fin» of each cleared transactions and resulting netted instructions Netting mode is closely linked with the recycling rules Buy-in rules and recycling period can not be handled separately 9

10 Code of Conduct and interoperability Accelerates the need of the harmonisation effort prior to T2S Interoperability opportunities implies the dismantling or at least rearrangement of the current vertical silos which implies new interface and additional IT costs Such opportunities can not be envisaged without a minimum of harmonised practices and standards between CCP s. CCP s that will offer to clear one market should ideally proceed on harmonised practices : netting mode, recycling period, buy-in. These are the preliminary conditions to guarantee the success of interoperable models Such harmonization subjects should be discussed at EACH 10

11 For discussion. and as conclusion The removal of the 15 GIOVANNINI barriers is a MUST that neither the Code of Conduct, nor T2S will resolve but these initiatives are a driving force to help and accelerate their removal especially for a CCP : GB1 (standard and interface), GB3 (Corporate Action harmonisation), GB9 (national restriction on the location of securities), GB13 (transfer of ownership) T2, T2S, CCBM2 cannot be implemented at an acceptable cost if not based on standards, harmonized and rationalised practices. But they can not jeopardize the increasing competition typically based on different levels of services in the clearing and settlement industry A trade-off between both principles need to be found THANK YOU! 11