Clearstream is to extend the range of securities eligible for settlement in the future pan-European settlement platform TARGET2-Securities (T2S) by leveraging the network of cross-border links to non T2S markets of its international central securities depository (ICSD).
As such, Clearstream will make its ICSD-issued securities (i.e. Eurobonds) and also securities issued outside Europe available via T2S, which represents a significant expansion of scope compared to the original universe of the T2S project.
Clearstream’s decision will therefore further contribute to the harmonisation of cross-border flows in Europe and beyond.
T2S is the future pan-European settlement platform that the European Central Bank (ECB) intends to launch in 2015. Its main goal is to harmonize cross-border settlement in central bank money – a process that today is handled domestically by the central securities depositories (CSDs) of the respective home markets.
So far, 24 CSDs (including German Clearstream Banking AG and Luxembourg’s LuxCSD S.A.) have committed to join T2S. Based on today’s figures, the German CSD will account for approximately 40 percent of the future T2S settlement volumes, and therefore Clearstream – both as CSD (in Germany and Luxembourg) and ICSD (global) – will use it as credible access point to T2S.
Through Clearstream’s single network approach, which combines the CSD and ICSD network capacity, T2S settlements in EUR central bank money via the German CSD could go beyond the European markets to include securities issued e.g. in Asia or Australia. This development will offer customers greater flexibility while maximising the liquidity of their securities.
Clearstream will be in a position to offer customers of all Clearstream entities (both the ICSD and the CSDs) the choice of settlement in commercial bank money (via the ICSD) and EUR central bank money (via the CSDs) for the full universe of securities.
By widening the range of securities eligible in T2S, market participants will also be able to further reap the benefits of T2S such as capital savings by pooling their cash accounts, which will help them meet Basel III requirements. Pooled cash accounts in T2S would allow participants to centralise and net off cash payment obligations associated with their settlement activity in all T2S participating markets, enabling them to realise capital savings on the back of significant liquidity efficiencies in cash settlement. Clearstream’s harmonised ICSD and CSD network approach will facilitate significant cash netting savings in both commercial bank money and EUR central bank money, in line with the needs of each individual participant.
Mark Gem, head of business management and strategy and member of the executive board of Clearstream, says: “Clearstream’s strategy for TARGET-2 Securities (T2S) aims to enable the market to achieve significant savings on the indirect costs imposed by today’s fragmented settlement landscape in Europe. Chief among these is the potential to concentrate collateral holdings by ensuring optimal collateral mobility between participants. But the liquidity costs associated with the cash side of settlement have been overlooked by many, including T2S stakeholders, until now. Today, participants are forced to settle the cash side of settlement instructions in each market separately despite the fact that we have had a single currency and a single payment system for some years. A key potential benefit of T2S that our strategy aims to unlock is to enable clients to settle from a single EUR treasury position, whether that is held in the TARGET2 payment system, with a commercial correspondent or with an ICSD.
“Clearstream will enable significant savings on the direct costs of settlement by passing on T2S fees at no margin. But the twin indirect savings that market participants will be able to realise through collateral mobility and liquidity efficiency are even more significant. That is the reason why we have decided to ensure that Eurobonds and all other products in Clearstream’s ICSD network will be eligible for settlement in T2S."