ECB seeks friends for settlement plan

The European Central Bank (ECB) has called a top-level meeting of financial institutions for next week (18-19 December) which will examine the long-term implications of its increasingly controversial plans to launch its own securities settlement platform.

The ECB’s plans, dubbed Target 2-Securities (T2-S), would create a publicly owned business in a vital but still highly fragmented sector of Europe’s securities markets. The initiative is running into opposition from some EU member states and some of the private-sector companies already operating in the field whose businesses could be damaged by the ECB initiative. "The burden of proof that T2-S will provide greater cost savings and efficiencies than current market structures lies with the ECB," said a spokesman for Euroclear, one of the firms operating in the field.

The ECB session will lay the groundwork for what looks like a critical meeting of the ECB’s Governing Council on 18 February. Although the council meeting will not be decisive in terms of whether or not the ECB proceeds with its plans to launch a securities settlement platform, it could give the project virtually unstoppable momentum, experts say.

So concerned are the EU’s finance ministers (Ecofin) about the ECB’s failure to consult on the project, that at their meeting on 28 November they called for the financial services committee, a mix of top officials from the European Commission and the Council of Ministers, to prepare a report on the ECB’s initiative, which will be discussed by ministers at their meeting on 30 January.

The speed with which Ecofin is acting suggests that it wants to involve itself directly in the debate about Target 2-S before the February meeting of the ECB’s Governing Council. Some member states argue that it is inappropriate for a publicly financed institution to become a monopoly provider of settlement services in the eurozone. "To move from a commercially based business to a public-sector monopoly is a major step which should have been discussed more widely by the ECB," said one member state official. Others counter that many national central banks have long been involved in settlement.

On 7 November, Internal Market Commissioner Charlie McCreevy announced that major settlement providers and EU stock exchanges had signed up to a European code of conduct for clearing and settlement which would aim to integrate EU settlement infrastructure and enhance the development of a single EU financial market. Ecofin’s response was supportive but guarded.

It acknowledged that settlement of securities transactions was "a key area of financial integration…where substantial progress needs to be made". But it described the commissioner’s initiative as merely "an attempt in trying to enhance competition" and hinted at doubts about whether the voluntary code would work. It said "enforcement of the code of conduct needs to be closely monitored with a view to considering other measures, including regulatory actions, if progress is not satisfactory".

Private-sector providers of settlement services, in particular the bank-owned Euroclear and the Deutsche Börse-owned Clearstream, are watching the evolution of Target 2-S warily, with some suggesting that the ECB’s involvement as a potential competitor is a significant threat to their business.

Major banks such as Paribas and Citicorp also provide international settlement services in the EU. Observers are debating whether the ECB’s initiative puts increased pressure on the settlement industry to increase its efficiency and should be seen primarily as supportive of McCreevy’s voluntary code or as undermining the commissioner’s policy.

The meeting in Frankfurt will be hosted by ECB Executive Board Member Gertrude Tumpel-Gugerell and will examine such detailed issues as how it will connect to existing post- trade infrastructure, what it will and will not do, and how its governance will be structured to ensure that user needs are met.

The European Central Bank (ECB) has called a top-level meeting of financial institutions for next week (18-19 December) which will examine the long-term implications of its increasingly controversial plans to launch its own securities settlement platform.

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