LCH.Clearnet group's reply - TARGET2 SECURITIES European Central Bank's consultation
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ECB Consultation on T2 Securities
Initial assumptions & questions
LCH.Clearnet group’s reply
European Central Bank’s consultation
TARGET2 SECURITIES
Initial assumptions and questions
September 2006
Version 1.3
Version 1.3 1 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
Table of contents
Introduction ............................................................................................................................3
Executive Summary ...............................................................................................................5
Scope of assets and services ............................................................................................7
Question 1 ........................................................................................................................7
Question 2 ........................................................................................................................7
Question 3 ........................................................................................................................7
Question 4 ........................................................................................................................8
Question 5 ........................................................................................................................8
Question 6 ........................................................................................................................8
Stock exchanges and CCPs...............................................................................................8
Question 7 ........................................................................................................................8
Question 8 ........................................................................................................................9
Non-€ settlement in the Euro area and € settlement outside the Euro area..................9
Question 9 & 10................................................................................................................9
Account structure ...............................................................................................................9
Question 11 ......................................................................................................................9
Question 12 ....................................................................................................................10
Question 13 ....................................................................................................................10
Corporate actions .............................................................................................................10
Question 14 ....................................................................................................................10
Question 15 ....................................................................................................................11
Communication .................................................................................................................11
Question 16 ....................................................................................................................11
Question 17 ....................................................................................................................11
Question 18 ....................................................................................................................11
Question 19 ....................................................................................................................11
Timing / Priorities..............................................................................................................12
Question 20 ....................................................................................................................12
Question 21 ....................................................................................................................12
Potential obstacles ...........................................................................................................12
Question 22 ....................................................................................................................12
Question 23 ....................................................................................................................13
Question 24 ....................................................................................................................13
Question 25 ....................................................................................................................13
Conclusions & next steps ...................................................................................................14
Version 1.3 2 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
This document is a general reply from the LCH.Clearnet Group to the European Central
Bank’s questionnaire (including initial assumptions and questions) regarding the TARGET 2
Securities project.
Introduction
LCH.Clearnet is the leading independent central counterparty (CCP) group in Europe,
serving major international exchanges and platforms, equity, exchange-traded derivatives,
energy, commodities, interbank interest rate swaps markets and the majority of the cleared
Euro-denominated and Sterling bond and repo markets. It aims to serve as a catalyst for
further CCP consolidation in Europe.
LCH.Clearnet is owned 45.1% by exchanges, 45.1% by users, with the balance being held
by Euroclear. With extensive governance rights for users and trading platforms,
LCH.Clearnet is committed to operating under strict principles of non-discrimination across
its customer base.
LCH.Clearnet aims to deliver services of the highest quality and set new industry standards
in risk management, operational efficiency, IT systems and product development and
delivery. Its business model eliminates duplication of operational and investment costs and
affords greater economies of scale.
Accessing the widest range of CCP services in the world, LCH.Clearnet users increasingly
benefit from the consolidation of this broad range of markets and instruments, improving
returns and freeing up capital for other activities.
LCH.Clearnet markets served
DTS ETCMS
SETS
Exchange Commodities
Exchange Fixed Commodities
Securities Traded Fixed Swaps &
Securities Traded Income
Income Swaps &
Derivatives Energy
Derivatives Energy
ENERGY
Belgium France Bank
Frankfurt
NL
Version 1.3 3 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
LCH.Clearnet is pleased to provide its position and contribute to the European Central Bank
consultation regarding the possible implementation of TARGET2 Securities project
Responses and suggestions provided by LCH.Clearnet in this document intend to be as
complete as possible at this stage of the analysis. Through its participation, LCH.Clearnet
wishes to provide inputs and feedback from its wide experience in the continental and UK
clearing environments.
This consultation’s answer is divided into the following sections:
- Executive Summary
- Answers to questions and comments
- Conclusion & next steps
Version 1.3 4 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
Executive Summary
LCH.Clearnet is one of the important catalysers in the post-trade market’s rationalisation
process as well as a key player in the consolidations to come. LCH.Clearnet has
demonstrated its interest in technical and operational harmonization with its continental
migration program.
The harmonization of regional Settlement security Laws and Regulations would seem to be a
sensible precursor to any additional process of harmonization. However, the assumptions
presented by the Eurosystem are considered by LCH.Clearnet as interesting proposals to
ease and optimise the STP process across European countries. Taking the complexity of the
solution into account, LCH.Clearnet as the other stakeholders, will need further
investigations and consultations to value the expected impacts and savings. LCH.Clearnet
takes the opportunity of this consultation to remind the comment on the CCP role and
functions in the post-trade value chain.
LCH.Clearnet underlines the importance of the T2 Securities tool to offering settlement on all
securities assets currently settled in Euro. Alternatively, if some securities assets remain
settled in the NCSDs, the rationalisation’s objectives and interests would not be reached, as
legacy systems should be kept. Thus, LCH.Clearnet recommends a market per market (i.e.
NCSD per NCSD) migration mode.
LCH.Clearnet pays particular attention to the role and strategy that will be adopted by the
ICSDs in the new landscape. Taking the assumption that ICSDs will continue to provide
settlement service in parallel with other services offered, LCH.Clearnet needs further
information with respect to future interactions between T2 Securities and ICSDs on
rebalancing or between central versus commercial banks’ money.
In order to define a realistic implementation plan for a common settlement tool in Europe,
the Eurosystem must take into account the investments involved in projects already
scheduled by the post-trade industry and the considerable impact to market users. As
mentioned in the assumptions, LCH.Clearnet would like to state that the resulting
rationalizations and concentration have to bring reduction of costs in the future settlement
architecture. The definition of short and long-term return targets in a cost-benefit analysis
would enable a better buying to the project by the market users.
The future common European tool should comply with the International standards and by
extension to the Giovannini recommendations. LCH.Clearnet supports the decision to
promote real time settlement at T+3 with optimization mechanisms (DVP Model 1 & FoP). In
this context, the presence of a CCP and netting effectively underlines the importance of
efficient interaction between T2 Securities and CSDs. As required by users, the solution
should provide settlement confirmation in real time and permit dynamic collateral
management.
LCH.Clearnet understands that corporate actions management will remain at the CSD
level. Messaging flows between the CCP and the CSDs/T2 Securities tool require to be
further investigated in order to maintain:
Corporate events in relation to unsettled transactions to be achieved by the CCP or
T2 Securities1,
1
LCH.Clearnet reminds that among its CCP services, LCH.Clearnet manages corporate actions on
cleared positions until actual settlement.
Version 1.3 5 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
Mutual validation via milestones and balances sent.
LCH.Clearnet does not recommend that the T2 Securities tool is directly connected to trading
platforms bypassing CSDs and CCPs filters ensuring safety and controls.
The T2 Securities tool should bring harmonization and efficiency in European settlement
processes. LCH.Clearnet would like to state that the stakeholders’ objectives should be to
maximize investment value whilst adopting the most efficient settlement tool and the
best market practices.
Version 1.3 6 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
Answers to questions & comments
In this section, LCH.Clearnet provides answers and comments on the ECB questions
including its own view on the initial assumptions proposed.
Scope of assets and services
Question 1
- 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)?
On a long-term point of view, LCH.Clearnet would prefer that all assets in Euro are settled in
a single settlement platform in order to maximise economies of scale. On a more pragmatic
approach, a progressive centralisation of settlement per market can be a step-by-step
solution for the medium term.
The alternative of a phased deployment per securities asset class would automatically
generate a split of liquidity and obliges CSDs (and users) to maintain legacy systems.
Question 2
- Would you expect T2S to cover also the settlement of Euro bonds?
It seems logical to include eurobonds in the scope of the project even if they are mainly
settled in ICSDs who are supposed to still exist as settlement platforms in parallel with T2
Securities.
Question 3
- 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)?
LCH.Clearnet believes that some optional services such as securities lending can remain
locally handled by NCSDs. On the other hand, collateral management is perceived as an
essential tool in the industry, which requires high interoperability with the settlement activity
and so T2 Securities should provide for example self-collateralisation facilities. In addition to
the self-collateralisation, LCH.Clearnet recommends that the Eurosystem permit dynamic
and automatic management of collateral by users. The need for interoperability between T2
Securities and CSDs suggests that it would be most efficient to have this function centralised
in T2 Securities. Collateral management at the NCSD level would preserve inefficiencies and
diseconomies of scale.
Finally, LCH.Clearnet wonders if dynamic collateral management tool has to be a
commercial service offered by ICSDs or a centralised tool provided by NCSD via T2
Securities?
Version 1.3 7 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
Question 4
- 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?
Settlement in real time DVP1 is the strategy adopted by the majority of the settlement
providers and LCH.Clearnet supports the high quality of such solution. LCH.Clearnet
believes that other solutions would be a step backwards from the current situation. However,
batches could be used for some equities processes in the short-term perspective and
handled in optimisation processes early in the morning or overnight.
Question 5
- Do you believe T2S should offer facilities for matching and release/blockage of instructions?
For certain securities, should T2S have a connection with another platform (e.g. trading
platforms), which would do the matching?
As they exist today at the NCSDs’ level, LCH.Clearnet is in favour of having matching tools
connected to T2 Securities either directly or through NCSDs. On a short-term basis, all the
existing national matching tools can coexist. At a medium term, T2 Securities should propose
its own matching tool in parallel with the national offers. Ideally, on a very long-term basis, it
will be optimal to have a single matching tool connected to T2 Securities. LCH.Clearnet
would not face any problems if a T2 Securities tool provided the release/blockage functions
as it permits to avoid “tirage sur la masse”. A specific attention must be paid to operations
sent by a CCP benefiting from a Power of Attorney.
LCH.Clearnet does not recommend that the Eurosystem has trading platforms directly
connected to the settlement tool itself without implementing a complete range of safety and
controls today provided by CSD and/or CCP. T2 Securities will have to develop and manage
trading specificities today filtered by CCP and CSDs platforms. Such flows will not benefit
from the netting effect provided by the CCP.
Question 6
- Should T2S offer the same opening times as TARGET2?
LCH.Clearnet welcomes moves to harmonise timings between the securities and the cash
worlds. Nevertheless, this topic must be further investigated with market players to identify
their exact needs and requirements. LCH.Clearnet’s impression is that some adjustments in
the sequencing of timings should be found at end of day periods between Target2 and T2
Securities such as for collateral management or treasury monitoring. The end of day
monitoring should comply with both cash treasurers and securities treasurers’ needs.
Stock exchanges and CCPs
Question 7
- What specific issues are relevant for CCPs as participants in CSDs which are on the T2S
platform?
At this early stage of the investigations, LCH.Clearnet would like to state a certain number of
essential functions that would be required in T2 Securities for the CCP processing:
Version 1.3 8 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
• First, the CCP needs a power of attorney to directly instruct in the settlement tool. This
authorisation can be provided locally by each CSD for the activity they cover or even
globally by the Eurosystem.
• Second, LCH.Clearnet provides both Continuous Net Settlement (CNS) and Trade Date
Netting (TDN) settlement modes. In this context, T2 Securities tool should be able to
manage both way of settlement.
• Third, CCPs, CSDs and T2 Securities (either directly or indirectly via the CSDs) should
be able to coordinate buy-ins process.
• As a CCP, LCH.Clearnet should comply with the “Zero” account principle on the
settlement platform at the end of the day, meaning that the CCP is not supposed to get
securities in its account over-night.
• LCH.Clearnet offers multi settlement service on a certain number of securities. In this
context, rebalancing is required between (I)CSDs through automatic batches several
times a day. LCH.Clearnet would require further information on the way the Eurosystem
expects to realign positions on stocks between ICSDs and the NCSDs in the T2
Securities environment.
• Finally, it will be necessary to implement an efficient settlement algorithm combining
slicing (“decoupage”), partialling, priority rules & indicators, which could be adjusted when
required. Shaping is also an alternative to ease settlement but which is controlled
upstream the settlement algorithm.
Question 8
- What specific issues are relevant for stock exchanges and trading platforms which either clear
via a CCP or directly settle in a CSD?
NA
Non-€ settlement in the Euro area and € settlement outside the Euro
area
Question 9 & 10
- 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 €)?
- What could be the solution for € denominated securities settled in non-Euro area CSDs?
As a multi-currency CCP, LCH.Clearnet already works with a number of non-euro settlement
systems, as well as offering facilities for settlement of euro-denominated securities in other
currencies. Some NCSDs connected to LCH.Clearnet SA provide Euro settlement
exclusively but have signed agreement with commercial banks to allow their customers to
settle in non-Euro.
Account structure
Question 11
- For T2S to offer cross-border settlement which of the following basic options (or which
combination of options) do you deem more feasible:
Version 1.3 9 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
(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
Ideally, LCH.Clearnet supports the solution (b) that permits participants to monitor their
settlement activities for all the assets of all NCSDs through one single account within the T2
Securities tool. On the other hand, LCH.Clearnet would need further explanations on the way
this solution works if the Corporate Events are monitored at the CSDs level.
Thus, taking into account the various constraints and questions marks listed, solutions (a)
and (c) appear as the most realistic ones.
Question 12
- 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? In countries where a direct holding structure is in place, what would be the
optimal level of aggregation?
LCH.Clearnet is neutral on this subject as it expects to offer its clearing users the possibility
to appoint upstream the finest level of settlement available at the CSD level.
Question 13
- 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?
LCH.Clearnet’s preference is to segregate settlement activities from the rest of their
customers’ central banks flows as proposed in solution (b). But the CCP would need further
details on the way the “purchasing power” will be monitored in T2 Securities as well as the
sweep facilities before confirming its position on this matter.
Corporate actions
Question 14
- 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…)? Is
there a specific period during which these functions must be performed?
Not applicable for CCPs as they should have “zero” accounts overnight. LCH.Clearnet does
not have particular timing constraints on corporate actions processing.
Version 1.3 10 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
Question 15
- Which corporate events are processed on the basis of an intra-day 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 intra-day?
LCH.Clearnet (which also apply corporate events) is not against the concept but has difficulty
to perceive the interests to apply corporate events intra-day on positions settled and to be
settled which include fails.
LCH.Clearnet needs clarifications on the way T2 Securities manages corporate events on
unsettled transactions for trades coming from ATS and/or OTC platforms if directly
connected to the European settlement tool. How does this function could be supplies without
a full harmonisation of the corporate events?
Communication
Question 16
- What are your preferences in terms of communication protocols and communication network?
As a medium to long term project and as the rest of industry, T2 Securities should comply
with the Giovannini recommendations regarding communications’ protocols which clearly
promote International Standards, meaning the ISO 15022 and 20022 norms in this domain.
Regarding communication networks, LCH.Clearnet promotes competition in this area and
would prefer to have various offers developed by several providers consistent with
international rules. So, LCH.Clearnet believes that CSDs and CCPs will naturally use
international open Standards to communicate.
Question 17
- What role should CSDs play in the routing of settlement instruction to T2S?
CSDs seems to be the natural entry point to route instructions to the T2 Securities system at
least during a transitory period. CCPs also play this routing role (for example of end of day
netted balance sent daily by the CCP to the settlement platforms). Similarly, if T2 Securities
developed its own matching tool, all the registered instructions will be directly routed to T2
Securities for settlement in addition to the CCP ones.
LCH.Clearnet’s recommendation is that this common settlement tool should be shared by all
European NCSDs without substituting them in their role and responsibilities vis-à-vis the
custodians.
Question 18
- 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 real-time
communication during the day between CSDs and T2S?
LCH.Clearnet would consider as a regression not to have real time interaction and
communication between the NCSDs accounts and the settlement tool itself.
Question 19
- 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?
Version 1.3 11 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
As main participant to CSDs and regarding settlement of instructions exclusively, the CCP
expects to receive from T2 Securities either directly or indirectly via CSDs, real time
information on the instructions sent for settlement, intra-day fails’ status (including details,
origin…) and on a daily basis, registered fails, end of day milestones, …LCH.Clearnet needs
mandatory confirmation from the CSDs to initiate or complete its own operational processing
and reporting to members.
Timing / Priorities
Question 20
- What timeframe would you consider realistic for the Eurosystem to launch TARGET2-
Securities (considering the difficulties you expect will be encountered)?
LCH.Clearnet perceives two types of obstacles to be taken into account for defining a
realistic timeframe.
• First, and apart from technical migration constraints, the T2 Securities project would
require an important harmonization for a maximum of efficiency. Maintaining national
differences as far as settlement is concerned would reduce the project to a pure IT
rationalization.
• Second, other cross-border projects are going on or are already scheduled for the
coming years in the industry. At this stage, market players and infrastructures require
more visibility on the added value expected, on quick return vis-à-vis project
investments and its compliance with international standards…
For a full buy-in to the project, it should be clarify exactly how T2 Securities would provide an
harmonized and efficient domestic settlement tool facilitating European financial activities.
Question 21
- Do you see any problem in a phased implementation (e.g. certain services to start earlier than
others or a phased country migration)?
A phased approach is the more appropriate way to implement such a complex tool on
condition that the end-to-end deployment period is not too long.
Potential obstacles
Question 22
- What are the main obstacles you see for this project to materialise?
• Each infrastructure in Europe is in a different “investment / depreciation” phase of its
own tool. Thus, these market infrastructures may have divergent interests vis-à-vis
the T2 Securities tool’s investments.
• The Eurosystem has to pay attention to the other (on-going or already scheduled)
infrastructure projects that may generate duplication and /or overlapping.
• Despite its complexity (number of CSDs involved, numerous national jurisdictions,
harmonization of existing operational processes and timing, IT migration), the T2
Securities project should provide a maximum optimization via a common tool
complying with International standards.
Version 1.3 12 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
• The implementation period length should be balanced between a short-term refund
and a phased deployment.
Question 23
- 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?
LCH.Clearnet strongly believes that such segregation requires a real time interaction
between the CSD and T2 Securities, especially if the Eurosystem wishes to combine a self-
collateralisation service with a dynamic collateralisation on stocks,
LCH.Clearnet is not aware of any legal obstacles that would prevent T2 Securities from
providing instantaneous finality. Meanwhile, solutions currently exist to get round some legal
obstacles linked to national constraints in other developments (e.g. the “local record”
developed by Euroclear).
Question 24
- Do you see any internal constraints (organizational, technical or financial), which could
hamper the connection of your institution to T2S?
The T2 Securities would represent a major development project LCH.Clearnet group, which
would have to be planned in conjunction with a number of other infrastructural enhancements
At this stage, LCH.Clearnet does not perceive internal constraints but prefers to postpone its
official answer until after the high level design of the project will be announced.
Question 25
- What prerequisites would you point out in terms of harmonisation?
At this early stage of the reflection on T2 Securities, LCH.Clearnet considers as
prerequisites:
- First, the harmonisation of settlement windows between CSDs,
- Second, the design of a common tool, which complies with International standards
and the Giovanni recommendations.
Version 1.3 13 LCH.Clearnet Group’s replyECB Consultation on T2 Securities
Initial assumptions & questions
Conclusions & next steps
LCH.Clearnet is convinced of the interest of such proposition as it is detailed in the 25
answers provided above. At this early stage of the project’s evolution, additional clarifications
on the target design of the common European tool are expected by the CCP to deeper
investigate on the impacts and opportunities of such proposal. Despite a heavy internal
projects roadmap, LCH.Clearnet looks forward to discussing the topic with the Eurosystem
and the post-trade industry players.
If your have any questions or require any further information regarding our response, please
do not hesitate to contact: either:
Pierre-Dominique Renard
Phone: 00 (33) 1 70 37 66 99
Email: pierre-dominique.renard@lchclearnet.com
Or:
Rory Cunningham
Phone: 00 (44) 207 426 7093
Email: rory.cunningham@lchclearnet.com
Version 1.3 14 LCH.Clearnet Group’s replyYou can also read
