“T2S aims to reduce cost of European cross-border settlement and facilitating competition between European CSDs. At the same time the need for investments of European CSDs and their customers is significant addition to those done by the ECB in establishing T2S.

One of the goals was to remove the “spaghetti” model of some 350 bilateral links with centralized settlement. At the same time T2S does not offer asset servicing and for participating CSDs to fully manage them it well may be that bilateral links are still needed.

In addition, perhaps the biggest challenge from T2S will be coping with a far more competitive market. Many existing organizations and systems were built for serving local issuers often in an uncompetitive world. However, because T2S introduces centralised settlement with easy movement of securities within Europe it allows global custodians have a direct and cost effective relationship with limited number, even one CSD. Cost of managing assets will significantly reduce.

Others will need to adapt but many small and medium sized CSDs in Europe will already be in survival mode. The high cost of T2S, as well as CSDR, means they’ve investing heavily but this alone will not generate new business. In many cases, revenues will actually decrease because the CSDs will have to outsource their settlement to the ECB. Even reasonable ROI will be a challenge.

The regulatory changes do offer new opportunities though. These include serving the increased need for effective collateral management, providing reduced liquidity costs through auto-collateralisation and greater demand for asset servicing also increase while standardisation will drive down operational costs and improve STP. Those that take advantage of these and other developments will be in the best position to survive and, ultimately, thrive.”

Henri Bergstrom, Head of Product Management for CSD Technology, Market Technology, Nasdaq

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