By Johannes Luef, President and CEO of VP SECURITIES A/S
T2S OnLine - Quarterly review - No 3, Winter 2010

On 17 July 2008 the Governing Council of the ECB decided to launch the T2S programme and to provide the required resources until its completion. While the Governing Council further decided to assign the development and future operation of the system to the 4CB, the Eurosystem has a responsibility to the market to ensure the timely completion of all activities that form part of the T2S programme.

VP SECURITIES A/S (VP), previously Værdipapircentralen, the Danish CSD, provides core CSD and value-added services to issuers, investors and their intermediaries in the European capital markets.

In June 2009 the VP Board signed the Memorandum of Understanding (MoU) on TARGET2-Securities (T2S), reflecting our intention to contribute to further T2S preparations, as well as our intention to use T2S for settlement in euro and in Danish kroner with VP, and for settlement in euro with our Luxembourg-based CSD, VP LUX S.à r.l. (VP LUX).

The biggest challenge we and our customers have faced so far in our decision to commit to T2S has been the assurance of a level playing field

From VP’s perspective, the major benefits of T2S are, firstly, its potential to offer access to cheaper cross-border settlement and, secondly, better market access as a result of the link between local European capital markets. For example, it will improve the distribution channel to the Danish mortgage market and to VP’s sophisticated solutions for issuers of bonds. As a market-driven CSD, we welcome the opportunities and challenges this will introduce to the current European market infrastructure.

However, like other signatories to the MoU, our final commitment to T2S will depend on regulatory approval, as well as clarification of the functional and technical scope of T2S, the T2S project plan, the T2S fee schedule and the future governance of T2S. In addition, our final commitment also depends on our ability to continue to meet our obligation to provide a number of unique functionalities to the Danish mortgage bond market (the second largest market for covered bonds in Europe at the end of 2008, with an outstanding volume of 160% of total Danish GDP).

The major benefits of T2S are access to cheaper cross-border settlement and better market access

The biggest challenge we and our customers have faced so far in our decision to commit to T2S has been the assurance of a level playing field. For a non-euro area country with a significant
amount of euro-denominated bonds being settled, access to credit facilities, including night-time settlement and auto collateral in euro, is extremely important in terms of a level playing field. Furthermore, it is extremely important that investors have freedom of choice with regard to the place of safekeeping for their securities, and that there is clarity on the operational impact of T2S, e.g. regarding change management procedures and migration plans that may adequately support our dual-currency and dual-market settlement models, as well as our direct holding account model. In this respect, we have benefited from excellent cooperation with Danmarks Nationalbank and Banque Centrale de Luxembourg, as well as from open discussions with the T2S team concerning these challenges.

In addition to those challenges that are still under consideration, we currently regard the three main challenges as being the clarification of T2S prices, governance and account structure.

Currently, clarification of T2S prices mainly depends on the clarification of three variables: the future clearing and settlement volume, the unit prices and the total T2S costs.

As regards future clearing and settlement volume projections, unfortunately, we do not have a crystal ball to help us estimate volumes in 2013 and beyond. However, we may contribute to the projections with our local market experience from the introduction of CCP clearing of securities in the Danish market in 2009. So far, this has led to a substantial (85%) reduction in the total number of transactions for clearing and settlement in the professional market segment.

As regards unit prices, the major concern in our local markets is the assurance of a level playing field in the future. We were therefore pleased that the Governing Council recently decided to opt for a “no volume discount” solution.

As regards the T2S cost and its impact on governance, it follows from the “full cost recovery principle” that all T2S costs (development and running costs) will be charged from CSDs. Therefore, of course, we have a strong interest in T2S governance and are confident that this will be adequately addressed in the future Framework Agreement between the Eurosystem and the CSDs.

As a relatively small CSD, T2S is beneficial, as it provides cheap and easy access for issuers and investors to settle cross-border trades in Europe

As regards account structure, VP operates a direct holding account system, which is a basic and core feature of the Danish capital market infrastructure. When stating our intentions to participate in T2S in 2008 and 2009, VP also underlined that we expect to settle Danish kroner via omnibus accounts with T2S and keep the direct holding accounts on VP’s existing platform. This architecture has been chosen to ensure that VP can meet its obligations toward the mortgage credit institutes and to support local players in handling the direct holding account structure. Most recently, however, this intention has been challenged by a suggestion to introduce an obligation to use T2S for all our securities settlements against central bank assets as an access criterion. Unfortunately, this has caused some uncertainty to the current T2S preparations in our markets. We are confidently looking forward to the New Year for a clarification of all these challenges.

As a relatively small CSD, T2S is beneficial, as it provides cheap and easy access for issuers and investors to settle cross-border trades in Europe. As a dual-currency and dual-market CSD, VP Securities faces additional challenges in its preparations for T2S. So, as with all parties in the T2S project, more hard but interesting work is in the pipeline.