TARGET2 SECURITIES : INITIAL ASSUMPTIONS AND QUESTIONS : REPORT OF THE NATIONAL BANK OF BELGIUM ON THE OUTCOME OF THE MEETING WITH THE BELGIAN MARKET

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1 Financial Markets Department Cashless Payments Monday, 11 September 2006 TARGET2 SECURITIES : INITIAL ASSUMPTIONS AND QUESTIONS : REPORT OF THE NATIONAL BANK OF BELGIUM ON THE OUTCOME OF THE MEETING WITH THE BELGIAN MARKET Introduction The National Bank of Belgium (NBB) organized a meeting concerning TARGET2-Securities with the Belgian market (some banks, the NBB-SSS, Euroclear and Euronext) on 31 August This report summarizes the outcome of the meeting and the written comments we received on the questionnaire. Some banks, the NBB-SSS, Euroclear and Euronext answered to the questionnaire. Euroclear provided the NBB with a paper which constitutes the Euroclear Group s response to the questionnaire. As this paper was also sent by Euroclear to the ECB, the main concerns of Euroclear are only cited in the introduction. Therefore we invite the ECB to refer to the Euroclear Group s response in order to take note of their detailed comments on the questionnaire. The Belgian Finance Federation (Febelfin) was not able to consult the whole sector on the questionnaire due to the holiday period. More time should indeed be needed to get the standpoint of the whole financial sector on this project. According to Febelfin, the answers to the questionnaire are a preliminary step of the feasibility study. They reflect the first opinion of some Belgian banks and must as such not be not be considered as a final go-ahead. The comments of the banks must be considered as technical not as policy-oriented. The views expressed by Euronext must be considered as the answer of the whole Euronext Group and not as the individual response of Euronext Brussels. On the whole, the participants expressed the view that it was difficult to enter into more technical questions before answering basic questions on the general context. They had the view that the objective and the realistic feasibility of the project go far beyond the technical aspects. The Belgian banks which were consulted felt that it would be difficult for the banks to oppose to the project as they know very little about it and as a lot of questions remain open. Governance must clearly establish where show stoppers can be activated. According to them an impact and a costs/benefits analysis should be at least provided before continuing the discussions. Not only the investments costs have to be valued but also the costs relating to contingency and migration of the market. It was also mentioned that the figures concerning the benefits which were quoted up to now were not backed-up by a thorough analysis. The market considered that the most important prerequisite was that T2S must allow to decrease effectively the costs for intermediaries and end users. The impact of T2S on the banks should also deserve a significant attention. Belgian banks are making substantial investments for the harmonisation of the Euroclear Settlement for Euronext Securities (ESES) markets. The harmonisation resulting from the Euroclear Single Platform must be maintained and could be considered as a starting point for European integration.

2 The banks wondered (1) what was the objective of T2S, (2) to which issue did T2S intend to answer, (3) what was the link with other initiatives in Europe, and (4) how could we go forward in Europe with the clearing and settlement with such a project. There is indeed a clear risk that T2S will interfere with the EC initiatives and will considerably slow down the harmonization momentum as a result of the uncertainties created by T2S. Some banks mentioned that the market evolves faster and faster and that the post-trading activities must remain competitive. They feared that T2S would put a brake to the evolution. Euroclear also wanted to express some global considerations. They believe that the ECB s one month consultation period, across the month of August, was an inadequate period for the market to consider, develop and submit its views on such a significant proposal affecting the future structure of eurozone settlement. They have significant reservations about the ECB s current proposals which they believe will greatly increase fragmentation in settlement processing, adding to the costs of all market users. As the banks, Euroclear does not understand the market failure which T2S is designed to rectify and why this proposal is not accompanied by any analysis of the costs and benefits. The main concerns of the Euroclear Group are as follows : (i) Splitting DVP settlement from asset servicing and safekeeping creates a new source of inefficiency. (ii) T2S would result in the fragmentation of eurozone systems away from non-eurozone systems and remove the ability of existing CSDs (like Euroclear CSDs and the Nordic CSD) to provide multi-currency settlement. (iii) The T2S proposal creates a risk that the momentum in settlement infrastructure consolidation and harmonisation which has built up in Europe will fall away. (iv) Improved cross-border settlement cannot be delivered by providing a single system for book entry debits and credits alone. (v) Harmonising account structures and the supporting legal arrangements across the eurozone is a complex task. (vi) The regulation and governance of T2S is unclear. The NBB-SSS expressed concerns relating to the potential limited scope of assets and services which could be provided by T2S. The NBB-SSS is one integrated application. Separating the settlement services from the other services of the CSDs would mean that the NBB-SSS should develop a new platform for the remaining services. This would raise the costs of the NBB-SSS. Generally speaking, Euronext believes that, whichever initiative with regard to post trade harmonization is launched at the European level, it should preserve the investments, (in time, money & know how), that were already made so far by Euronext and its partners, LCH.Clearnet and Euroclear, especially the ESES initiative and the Single Platform project. All the work done and all the harmonization efforts already realized should serve as basis for any new initiative in this domain. Moreover, Euronext believes more clarity is needed as to the benefits expected for the financial community: T2S should not have undesired side effects on the prices and a clear cost/benefit analysis should be performed, for all the stakeholders (exchanges, CCPs, CSDs, banks...) before moving forward. All the potential collateral effects on the CSDs' and other service providers' business should also be carefully studied. Finally, Euronext has the view that T2S should in no way put at risk the ongoing ESES and SP initiatives by creating uncertainty in the mind of the market participants. 2

3 1 Initial assumptions on TARGET2-Securities scope of services Market participants are invited to express whether the assumptions below are in line with their expectations and are encouraged to present alternatives. No parallel settlement with CSDs: Once T2S is fully deployed, no division of settlement activity is expected between T2S and CSDs: neither in time (day/night) nor by type of asset (debt/equities). Euronext : One central settlement platform should be used for performing the settlement activity of the Eurozone markets in central bank money in order to deliver the full benefits and economies of scale of the harmonization and consolidation of the European markets. The settlement windows should be as large as possible for efficiency reasons taking into consideration the TARGET2 opening hours. Euronext believes that it is up to the participants to decide if a night-cycle should be necessary as of the start of TARGET2-Securities. If a night-cycle was not available, the required optimization tools (back-to back-circles, immediate re-use of assets upon final settlement, appropriate settlement algorithm, ) should be at least in place. Settlement of fixed-income instruments should ideally take place as soon as possible during the day cycle for efficient collateral management purposes. The Gradual deployment: The T2S will probably be implemented in a phased manner. In this respect, we interpret the market s priority to be the daylight DVP1 settlement of debt securities. NBB-SSS : As the NBB-SSS is an integrated application, they cannot settle a part of the transactions on their platform and a part on T2S without making new IT-developments in their system. So they are not in favour of a gradual deployment. Euronext : The working assumption is that T2S will have to be rolled out gradually on the different markets of the Eurozone as it could not be envisaged to do a big-bang for obvious risk and financial stability reasons. According to Euronext, two approaches could be envisaged at this stage: 1. A phased migration by instrument types: fixed-income instruments, equities, warrants, funds including trackers, for all markets 2. A phased migration by markets to be compared to the migration path retained for the migration on TARGET2. The migration of the different markets on T2S could be a rather long process as a maximum of 25 markets will be impacted by this roll-out. Euronext would tend to prefer the migration path, likely to be the second scenario that could deliver immediate economies of scale for the markets. A migration by instrument types will force market participants to maintain multiple IT interfaces. From a general point of view, the roll-out should be organised in a way that minimizes the number of new or temporary interfaces. The sequencing should of course take into account the markets that are already integrated on a single platform, and re-use the assets already developed by those markets at the time of their integration. The migration plan will have to be further discussed with all the stakeholders based on a clear costs/benefits analysis. Settlement frequency: Real-time settlement with optimisation mechanisms will be offered (DVP model 1 and FoP). The business case for offering batch settlement will be investigated. Selfcollateralisation facilities will be offered. 3

4 Euronext : The central settlement platform will have to provide optimization tools as indicated earlier under the point No parallel settlement with CSDs. Euronext would like to underline that trades executed on the markets organized by Euronext cash markets (Euronext Paris, Euronext Brussels, Euronext Amsterdam and Euronext Lisbon 1 ) are cleared by LCH.Clearnet SA which provides central counterparty clearing and netting services. Net positions are routed by LCH.Clearnet to the various settlement platforms. The optimization tools to be developed and implemented by the central platform have to be adequate and to answer the specific needs of both net and gross settlement facilities. Nature of participation: Service offered to CSDs (directly) and their participants (indirectly). Euronext : This point will have to be further elaborated once the exact scope is defined. Regulatory, legal and fiscal aspects will also have to be taken into consideration in this context. User Committees: User committees will be established to ensure the involvement of CSDs and their participants. Euronext : All the interested parties (CSDs, Exchanges, CCPs, banks, investment firms, ) could be invited to join those user committees at the various stages of the project. Synchronisation and coordination will be key in order to fully exploit the benefits of a project such as T2S. Cost and pricing: Investment and running costs to be covered by fees. T2S would make no pricing distinctions between what are now domestic and cross-border transactions. Fees would be levied on the participating CSDs on the basis of a published fee schedule. CSDs would apply their own fee schedule to their customers. This should translate for end-users in lower prices for the sole DVP settlement service in central bank money, thanks to the economies of scale allowed by the recourse to T2S for the provision of that service. Euronext : The ultimate aim of a central settlement platform will consist of making the concept of cross-border redundant for transactions between EU Member States participants. T2S should de facto minimize costs for all the stakeholders. Retail investors should also benefit from those costs reductions. 2 Answers of the Belgian market to the questions Scope of assets and services - Do you agree TARGET2-Securities should cover the settlement in central bank money of all debt instruments and equities in euro? Or would you prefer CSD platforms to continue to offer settlement of securities in central bank money for some assets (e.g. non-eligible assets for Eurosystem credit operations; batch settlement)? According to the banks, all the securities which are currently processed in the CSDs (not in the ICSDs) should also be processed on T2S following a phased implementation by type of assets. The banks wondered how settlement of investment funds would occur. It was mentioned that the Eurosystem must be aware that the processing of equities and eurobonds is highly more complicated than the one of government bonds. 1 Transactions concluded on the Euronext Liffe are not impacted by the T2S project apart from the settlement of the underlying of the derivatives contracts further to exercises and assignments. 4

5 Euronext : Ideally one platform will have to be used for the settlement of a given security code. T2S will offer settlement in central bank money in Euro, at least in a first stage. Non- Euro denominated financial instruments that are currently primarily deposited with one (or several) CSDs of the Eurozone could settle against Euro on the T2S platform. We should avoid as much as possible having multiple settlement platforms for a given financial instrument to fully grasp the benefits of the harmonization and consolidation efforts in Europe. - Would you expect T2S to cover also the settlement of euro bonds? The banks saw no need for the eurobonds being processed on T2S. The settlement of Eurobonds could remain in commercial bank money. They remarked that T2S could only be a solution for the Eurobonds settling in euro. It could be considered in a second phase if it makes sense. Euronext : Some Eurobonds 2 are currently admitted to trading on some of the Euronext markets. However, Euronext recognizes that this is a specific asset class that usually settle in commercial bank money through the leading International Central Securities Depositaries (ICSDs), namely Euroclear Bank and Clearstream Banking Luxemburg. - Is it absolutely necessary to complement the T2S service with other CSD services (e.g. collateral management services; securities lending services) or can the provision of these services remain at the CSD level (CSDs could be considered as users of T2S for these services)? A common view is that separating DVP settlement from custody could be highly inefficient. How could CSDs continue to offer collateral management (margin calls, tri-party repo, )? Service levels should not be diminished in order to stay competitive at world scale. The securities lending which prevents the fails must absolutely be linked to the settlement process in T2S but is should be further analyzed how a platform without legal status could provide the securities lending. It was emphasized that if we wanted to keep the same efficiency, the scope of T2S should be enlarged. With the current architecture of the NBB-SSS, an automatic securities lending facility on T2S is a must as this facility is bound to the settlement process of the NBB-SSS. Banks pointed out that there are a lot of types of collateral management. It is not a must that all the types should be on T2S. Nevertheless, we must be aware that the more we segregate the more difficult it would be to manage. Euroclear manages 300 billion euro in collateral. It wondered how it could continue to perform this task if it had no view on the securities during the day. Euronext : Fails curing mechanisms should be included in the scope of T2S, even if not in the early stage, to preserve and maximize the settlement efficiency which is rather high in some of the Eurozone markets. 2 The number is rather limited. 5

6 - On the assumption that equities will settle in T2S, is there a business case for equities (or other assets) to settle in real-time (DVP1 with optimisation mechanisms)? Or should also the possibility to settle in batches be provided? According to the banks, there is no need for batch settlement. Equities should settle in realtime (DVP1 model). Euronext : Trades executed on the markets organized by Euronext cash markets (Euronext Paris, Euronext Brussels, Euronext Amsterdam and Euronext Lisbon 3 ) are cleared by LCH.Clearnet SA which provides central counterparty clearing and netting services. Equities settlement would have to settle a minima in multi-batches spread along the operating day. Real-time DVP model 1 should be the ultimate objective. - Do you believe T2S should offer facilities for matching and release/blockage of instructions? The banks believe T2S should offer full facilities for matching and settlement (release/blockage of instructions, freeze-unfreeze of instructions, priority management, cancellations, ). If the matching criteria could be standardized, the NBB-SSS would prefer that the matching would occur on the T2S platform. For fiscal reason (withholding tax), the NBB-SSS must be able to block a settlement. This blockage could be done by an ad hoc function on T2S, or by the routing function. Reason: the NBB-SSS manages a fiscal system called "X/N system" that is linked with the settlement system: "X accounts" are free of withholding tax (Eligible investors), "N accounts" are subject to withholding tax. In case of interest payments, the NBB-SSS deducts the withholding tax from the payment (N accounts). Transfers of securities between X and N accounts give rise to adjustment payments (payment or refund of withholding tax). Some types of transactions (for example repo's) and some types of securities are not allowed on N securities. The NBB-SSS must check the transfers to N accounts. Euronext : Matching, release/blockage mechanisms are part of the settlement process as a whole. As such, those functionalities would have to be supported by T2S. - For certain securities, should T2S have a connection with another platform (e.g. trading platforms) which would do the matching? The banks believe T2S could have a connection with other platforms (e.g. trading platforms like EMTS, BTS, ), however a distinction between trade matching and settlement matching should be respected. The NBB-SSS believes that T2S must have connections with some other platforms (trading platforms, Stock Exchanges, CCP : these entities send matched settlement instruction to T2S). - Should T2S offer the same opening times as TARGET2? 3 Transactions concluded on the Euronext Liffe are not impacted by the T2S project apart from the settlement of the underlying of the derivatives contracts further to exercises and assignments. 6

7 Banks : T2S should allow the daytime and the night-time settlement. A the end of the settlement day, T2S should close a little bit earlier than TARGET2 in order to leave a minimum time-slot for cash management (treasury management around cut-off time). Euronext : The T2S settlement window should be as large as possible for efficiency reasons taking into consideration the TARGET2 opening hours. There could be an economic interest in settling some specific types of instruments (fixed income) earlier than the TARGET2 opening time. Stock exchanges and CCPs - What specific issues are relevant for CCPs as participants in CSDs which are on the T2S platform? Banks : CCP - transactions get priority in the settlement processing. NBB-SSS : T2S must offer an intraday cash overdraft facility and a securities borrowing facility. Euronext : LCH.Clearnet SA provides central counterparty clearing and netting services to Euronext exchanges. CCPs particularities and requirements will have to be taken into consideration when designing the T2S platform. - What specific issues are relevant for stock exchanges and trading platforms which either clear via a CCP or directly settle in a CSD? Banks : Conflicts should be avoided with regards to available cash or collateral at NCB - level. NBB: o Irrevocable instructions (Stock exchange) o POA (power of attorney); i.e. the approval of a settlement by the participant Euronext : T2S should support and facilitate CCPs settlement. It should also preserve the possibility for the stock exchanges to develop direct links with the settlement platforms. Non- settlement in the euro area and settlement outside the euro area - Does your CSD offer settlement services in currencies other than? If yes, what is the relative weight of these securities (in relation to total custody and total settlement volumes)? What type of securities are they and in which currencies are they denominated? What could be the alternative for these non- denominated securities once a CSD joins T2S (knowing that T2S will operate only in )? o o For securities denominated in an other currency than euro, the NBB-SSS settles only FOP instructions (DVP instructions are settled in the books of a paying agent or of an ICSD). These securities represent only 2%-3% of the value in custody. Currencies in the NBB-SSS are : USD, GBP, JPY, CHF, HUF Euronext : One of the CSDs of the Euronext markets namely Euroclear Nederland is offering non-euro settlement facilities. 7

8 Euronext notices a growing interest for non-european listing. T2S should offer the possibility to settle trades in those securities; this would certainly improve the attractiveness of the Eurozone markets for foreign issuers. Ideally, clearing and settlement should take place in the currency of the original trade. If a trade is concluded in US dollars, then clearing and settlement should be performed in the same currency, in this case, against US dollars. - What could be the solution for denominated securities settled in non-euro area CSDs? According to the NBB-SSS, cash settlement in another currency could be used. Euronext : This specific point could be discussed with non-euro CSDs in a later stage. Interoperability links should probably be foreseen between the concerned CSDs or groups of CSDs. Account structure - For T2S to offer cross-border settlement which of the following basic options (or which combination of options) do you deem more feasible: (a) users who wish to be able to settle a given type of asset open a securities account in the CSD issuing that asset; (b) CSDs participating in T2S open reciprocal accounts (links), so that users need only maintain an account with their local CSD?; (c) users settling assets issued in a CSD where they do not have a securities account designate a local custodian According to the banks the most feasible option is b. NBB-SSS : as the NBB-SSS has no link with other CSDs or ICSDs, they choose option (a) and option (c). Option (b) cannot be a mandatory option, but only a free one, as they think it will be very difficult to run. Euronext : This point will have to be analysed very carefully in the frame of the feasibility study. Account structures are by definition rather different and complex to understand according to the various CSDs rules and practices. Regulatory, legal and fiscal aspects will also have to be taken into consideration when establishing the account structure of the central settlement platform. - What is the most feasible securities account structure in T2S? - To what extent are sub-accounts for wholesale customers (to omnibus accounts of participants) needed for the monitoring and efficient processing (transmission of instructions) of wholesale customers transactions? Banks : the monitoring and efficient processing of wholesale customers transactions can be realised: o either through segregated securities accounts; o either through omnibus securities accounts provided the settlement system offers sufficient monitoring tools (release/blockage of instructions, freeze-unfreeze of instructions, priority management, ). 8

9 With preference for the second option. NBB-SSS : at a minimum T2S must segregate the participants own accounts from the customers accounts and the pledged accounts. For the customers accounts the participants must have the choice, apart from an omnibus account, to open a limited number of segregated accounts (for indirect participants, foreign participants, brokers, global custodians). - In countries where a direct holding structure is in place, what would be the optimal level of aggregation? Not applicable for the Belgian market - As a potential user of T2S, would you prefer the payments associated to securities transactions to be credited / debited (a) directly on your TARGET2 RTGS account/special purpose TARGET2 RTGS account with the usage of all TARGET2 control and monitoring tools (ICM), (b) on a dedicated account within T2S (linked to the RTGS account) possibly with the usage of ICM tools? Banks :Both scenario s are feasible (however if night settlement is foreseen only scenario (b) is valid). Remark : If (a), the cash reporting should contain enough detailed information (references, ) for reconciliation purposes. The NBB-SSS prefers option (b). Corporate actions - Let us assume T2S settles continuously (i.e. day and night) and after the end-of-day securities are repatriated to the issuing CSD. How much time do you believe is needed by the issuers, the paying agents and the CSD to conduct their functions (custody, corporate events )? Processing time : 02 to 04 hours. - Is there a specific period during which these functions must be performed? After the end-of-day processing. - Which corporate events are processed on the basis of an intraday position (i.e. knowledge by the CSD of the end-of-day position is not sufficient)? What would be the requirements of CSDs for processing corporate events intraday? In the NBB-SSS, no corporate actions need the intraday positions. Euronext : Intra-day record dates, if any, should be removed. Corporate actions should be processed based on end of day positions also referred as OST on stocks. However, market claims are processed on the settlement flows (OST on flux ). Those market claims would have to be linked to the settlement process. This point will have to further elaborated in order to define the precise roles and attributions of both the CSDs and T2S. Communication 9

10 - What are your preferences in terms of communication protocols and communication network? Banks : Swift ISO NBB-SSS : a B to B network and/or SWIFT Euronext : Preference should be given to agreed international standards (eg. ISO and ISO 20022). - What role should CSDs play in the routing of settlement instruction to T2S? See answer of the NBB-SSS to the question on matching - For CSDs: What are your preferences in terms of communication with regard to the mirroring of accounts at the beginning and the end of the day? Is there a need for realtime communication during the day between CSDs and T2S? NBB-SSS : This will depend of the finality rules that will be applicable to the cash and securities sides of the transaction. For the securities side, will/can T2S be designated as a system under the Finality Directive or will the finality rules of each CSD be applied? In the latter situation, a real-time communication will be necessary if the finality rules of the CSD foresee that transactions settled in T2S are only final from their transcription in the books of the CSD, as is the case today in Belgium. - What information would CSD participants wish to have available from T2S (a) throughout the working day on a real-time basis; (b) at the end of the day? o (a) being able to follow up all their instructions and positions, in cash as well as securities and collateral in all details. o (b) to have complete information on matched, non-matched, cancelled, settled, not settled and postponed instructions & all the official reporting if legally acceptable. Intraday : o Cash : movements & balances reporting o Securities : matching & settlement problems, settlement confirmations, End-of-day : o Cash : movements & balances reporting o Securities: matching & settlement problems, settlement confirmations, statements Timing / Priorities - What timeframe would you consider realistic for the Eurosystem to launch TARGET2- Securities (considering the difficulties you expect will be encountered)? Banks : On the assumption that an existing IT application would be bought by the Eurosystem, could be realistic. NBB-SSS : min 5 years to start, some more years to finish completely. Euronext : Current harmonization and consolidation projects tend to demonstrate that implementing a single system based on unified practices is a rather long process. One should thus be very careful when defining a realistic deadline, taking into account the high level of complexity (including probably a series of legal changes in some jurisdictions). 10

11 - Do you see any problem in a phased implementation (e.g. certain services to start earlier than others or a phased country migration)? Banks : a phased implementation is mandatory (for all parties involved) NBB-SSS : Yes, all services have to be offered from the beginning of the system, otherwise the NBB-SSS must undertake new developments, which makes no sense. Only a phased country migration would be feasible. Euronext : The working assumption is that T2S will have to be rolled out gradually on the different markets of the Eurozone as it could not be envisaged to do a big-bang for obvious risk and financial stability reasons. According to Euronext, two approaches could be envisaged at this stage: 1. A phased migration by instrument types: fixed-income instruments, equities, warrants, funds including trackers, for all markets 2. A phased migration by markets to be compared to the migration path retained for the migration on TARGET2. The migration of the different markets on T2S could be a rather long process as a maximum of 25 markets will be impacted by this roll-out. Euronext would tend to prefer the migration path, likely to be the second scenario that could deliver immediate economies of scale for the markets. A migration by instrument types will force market participants to maintain multiple IT interfaces. From a general point of view, the roll-out should be organised in a way that minimizes the number of new or temporary interfaces. The sequencing should of course take into account the markets that are already integrated on a single platform, and re-use the assets already developed by those markets at the time of their integration. The migration plan will have to be further discussed with all the stakeholders based on a clear costs/benefits analysis. Impact on CSDs (only for CSDs to answer) - What are the incentives / disincentives for CSDs to join T2S? NBB-SSS: o o incentives: the necessary harmonisation prior to the launch of T2S will be beneficial to the market cross border settlement should be cheaper optimal collateral management for the financial institutions disincentives: loss of business the risk of not covering all remaining costs if T2S does not take over all settlement activity actually being performed by the NBB-SSS. more expensive intra-country transactions - What is the amortisation period of the settlement platform currently used by your CSD? What about the investment cycle? Has your CSD initiated further investments to improve the current platform? Have investments been made to build a future platform? By when will these investments be amortised and at what rate? 11

12 NBB-SSS: o amortisation period: 5 years (for the consultation module only) o further investments: Swift release and harmonisation, connection to TARGET2; depending on the time schedule of T2S, additional investments could be necessary in years to come (> 2010). - What would be the cost savings for CSDs in joining T2S and not having to develop a settlement platform themselves? NBB-SSS: as all the CSDs have developed settlement platforms, there could only be cost savings if no further settlement service has to be performed. - How would T2S affect the links among CSDs of the euro area? How about the links with CSDs outside the euro area. NBB-SSS: o links euro-area: depends on the model that will be chosen. o non euro-area: no impact as the NBB-SSS has no links Potential obstacles - What are the main obstacles you see for this project to materialise? Banks : Harmonisation issues, registration, tax & legal issues throughout the eurozone (eg stamp duty at CSDs), costs of the project and dependencies with ESES. NBB-SSS : harmonisation (trading, matching, legal) Euronext : A first one is the harmonization of market practices and the removal of legal and fiscal barriers. The change of market practices will require a broad consensus among the parties. Another obstacle is the assessment of the economic viability of the solution that needs to be proven for all the stakeholders as well as the assessment of the business impacts on the CSDs and other service providers. The economical analysis should take into account the collateral effects on the P&L of the CSDs and the potential dis-economies of scale resulting from a possible split of the business. - Do you see any problem in separating the platform that provides settlement services (T2S) from the custody and other services that will remain to be provided by the CSDs? Would you identify any legal obstacles in your country that would have to be removed for T2S to provide instantaneous finality? Euroclear: Splitting DVP settlement from asset-servicing and safekeeping as proposed by the ECB is highly inefficient. No other CSD in the world operates one CSD for settlement and another CSD for asset-servicing, operating on separate platforms and under separate governance. The ECB s proposal would create additional and artificial fragmentation of systems and processes and would generate cost and inefficiency for users for no obvious added-value. 12

13 NBB-SSS : CPSS IOSCO rules prescribe that each CSD should be an SSS (recommendation 7 of the CPSS-IOSCO recommendations for SSS: 95% of the transactions must settle on a DVP basis) The NBB-CSD/SSS is one integrated application: separating the settlement services from the other services means that they would have to develop a new platform for the remaining services. Euronext : Further analysis will be required based on the regulatory and legal aspects of the various markets of the Eurozone. - Do you see any internal constraints (organizational, technical or financial) which could hamper the connection of your institution to T2S? NBB-SSS: o fiscal rules of the Belgian X/N system o if T2S is not covering all settlement services and all assets served today, there is little or no financial gain for the system and T2S would only be an extra cost. - What prerequisites would you point out in terms of harmonisation? Banks: Giovannini barriers and level playing field. The harmonisation resulting from the Euroclear Single Platform must be maintained and could be considered as a starting point for European integration. NBB-SSS : ownership rights / law requirements / finality Directive o access rules o account structures o matching rules + cancellation rules o securities data base o data formats o automatic borrowing facility o corporate actions o market claims o failed instructions management Euronext believes that, whichever initiative with regard to post trade harmonization is launched at the European level, it should preserve the investments, (in time, money & know how), that were already made so far by Euronext and its partners, LCH.Clearnet and Euroclear, especially the Euroclear Settlement for Euronext-zone Securities (ESES) initiative and the Single Platform (SP) project. All the work done and all the harmonization efforts already realized should serve as basis for any new initiative in this domain. 13