Events | Capital Markets Forum
3. The full settlement approach and on-boarding of custody activity Market participants are likely to use a mix of these approaches. There are four main elements of expenditure. The first is system costs. Strategies two and three will require upfront investment and variable costs. The predicted settlement IT costs for both scenarios averages €12.5 million; the additional custody IT costs for the full service model in scenario three will be another €15 million on top, based on accessing two markets. The second element will be running costs. For scenario two these are modelled at an annual average of €1 million, rising to over €5 million for scenario three. Although T2S should be able to drive down trading costs in Europe, depending on the way that firms respond to it they will still have to purchase services, the third element, from an external provider, for example a tax agent, even in scenario three. Spending under scenario three will of course be much lower for services than in scenario one where actually you are relying on an agent bank. The cost of liquidity will depend on the market a firm is in and overall trading volumes, making the measurement of its cost impractical for the study. Clearly if a custodian is providing intraday liquidity in a bundled service as in scenario one, liquidity provision will be included as part of that, where firms connected to T2S will have to manage their liquidity more closely; that is set against the gain of having just a single pool of liquidity. Based on these costs, we found no business case for financial intermediaries with below two million settlement orders per annum to connect with T2S directly. For firms engaging with scenario two, four million settlement transactions per year would be needed to provide a return on investment. For market participants with over €200 billion of assets under custody and managing over four million settlement orders per year, there is business case to connect directly with T2S and taking over the asset servicing function. Given the costs involved and the period to generate a return on the investment, some banks will find it hard to justify the expenditure to go beyond scenario one.
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Prabha Bob, Global Solutions Head, GCP – Capital Markets Group, at Tata Consultancy Services: Driving T2S Transformation Transformation programmes, like the dematerialisation project in Japan or NASA’s
space programme in the USA, have certain common themes: far reaching impact on the business model; long gestation period; complexity in quantification of benefits; and the use of technology as an enabler. The driving force behind such programmes is a belief that it is the right thing to do, an acknowledgement that the team work of stakeholders will put together the jigsaw puzzle and a vision to build a better future.
At TCS we have been following the developments on the T2S front right from 2007 and have had opportunities to work along with our clients. In our view the T2S adaptation programme of stakeholders – CSDs, custodians, CCPs and national central banks – needs to have a three- dimensional approach encompassing organisation, technology and programme management. The key challenges facing the stakeholders include building a flexible business model, minimising the impact on clients, enhancing the business value of the IT infrastructure, meeting the quality assurance objectives within the time frame for testing earmarked by ECB and ensuring a multi-phase rollout of an integrated settlement programme. CSDs, custodians and other stakeholders can deploy a business process and change management framework to ensure a smooth transition to the target operating model. The various dimensions of the framework include: ● Leadership alignment that will set the overall strategy for T2S adaptation
● Organisational design to support new roles and responsibilities
● Business process adaptation for alignment of existing processes and developing new processes
● Improvement opportunity assessment to enhance operational efficiency
Best Execution | Autumn 2012
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