Alessandro Zignani, head of post trade sales at the London Stock Exchange Group, expects volumes to rise after Monte Titoli becomes the biggest central securities depositary to go live in the initial wave of Target2-Securities, which aims to harmonize securities settlement in Europe, next year.
T2S aims to end fragmentation in Eurozone securities settlement by providing a single IT platform to settle transactions in central bank money across borders, CSDs and currencies. The service will be offered at the same price for all participating CSDs so there is no difference between domestic and cross-border transactions. So far 24 European CSDs have joined T2S covering 21 European markets, so the project will cover almost all securities currently settled in the euro area, and lead to significantly lower costs.
CSDs will connect to T2S in four waves between June 2015, when the project goes live, and February 2017.
Zignani told Markets Media: “We will be the biggest CSD to enter wave 1 of T2S in terms of asset types and settlement volumes. Everyone’s eyes will be on us but we see an opportunity to get more volumes, to extend our services to international banks and brokers and pass the benefits of early entry to our clients.”
He added that internal testing is due to begin in July, with Monte Titoli connecting to the European Central Bank in October ahead of the live date. On June 22 2015 Monte Titoli’s current settlement system will be phased out and settlement will start to be executed in T2S accounts.
Monte Titoli joined the London Stock Exchange Group when it acquired Borsa Italiana. Zignani said MT is the third largest CSD in Europe with more than €3.3trillion in assets under custody from over 2,200 issuers and 400 banks and brokers.
Market participants can connect to T2S either as a directly connected participant or an indirectly connected participant through a CSD or national central bank. A DCP has the advantage of sending and receiving instructions, queries and reports directly to T2S but needs to meet the technical requirements and pass the authorization tests set by the CSDs or their national central bank.
“At the beginning of March we received declarations from 13 financial institutions to become a Directly Connected Party in wave 1 of T2S who included three brand new clients - EuroCCP, BNY Mellon and Parel.” added Zignani.
T2S will also allow auto collateralization where the European Central Bank can anticipate funds needed for settlement and allow netting between national central bank balances e.g a long position in Germany and a short position in France, so Monte Titoli is launching a collateral management service.
Zignani said: “To complete the range of services that Monte Titoli offers, we are about to enhance our tri-party collateral management platform, X-COM to serve repo and bilateral OTC repo markets. This will happen in the second half of this year once we have completed and tested the new platform.”
As part of the move to T2S, the LSE said last July that it would launch a new CSD in Luxembourg in the first half of this year which will use the Monte Titoli systems.
Zignani said: “Clients have familiarity with the regulatory framework in Luxembourg. Through the new CSD, we will be able to offer an alternative access point to global markets, whilst leveraging the same infrastructure as MT to access T2S.”
JP Morgan has announced it will use the LSE’s new CSD in Luxembourg for settlement, custody and asset servicing services in response to the European Market Infrastructure Regulation, which requires margin and default contributions posted to a central counterparty to be held with a CSD.
Although the LSE is launching a new CSD, Zignani expects the number of CSDs to fall after T2S is completed.
“There are currently 24 CSDs covering 20 markets that will join T2S across the four waves,” added Zignani. “Following completion of the T2S project it is likely that the biggest will move up the value chain while others will remain in their domestic markets. We could also see consolidation.”
Featured image via iStock