Collateral and settlement finality
EU Commission's proposal on the revision of the directives (24 April 2008)
The directives on collateral and settlement finality are the two main EU tools in the area of clearing and settlement and financial collateral. The settlement finality directive provides protections to both payment and securities settlement system in case of default of a participant. The collateral directive regulates and facilitates the cross-border use of financial collateral.
Content
For the stability of the financial markets, in the light of the recent financial turmoil, the European Commission proposed on 2008 to modify the two directives on collateral and settlement finality. The goal is ensuring the proper functioning of settlement systems.
Brussels suggests to amending the EU rules in three areas in order to bring them in line with the regulatory and market developments.
The main changes are:
• introducing an explicit protection as regards night-time settlement and linked systems;
• broadening the scope of the protection provide by the directives including credit claims eligible for the collateralisation of central bank credit operations;
• setting a number of other simplifications and clarifications of the rules.
ABI position
ABI welcome the intention of the EU Commission to update the two directives, even if some doubts persist on a few specifics and technical points.
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Target 2-Securities
In July 2006, ECB launched a project to create a single securities settlement system at the EU level, so-called TARGET 2-Securities (T2S). The new system, integrated with the TARGET2 platform, aims at creating an instrument that favors integration of national settlement systems across Europe, connected through a network of coordinated national central securities depositaries, aimed at offering a centralized settlement service for all transactions performed within the euro area.
The new system entails a gross settlement system for all those transactions in euro-denominated financial instruments; transactions regarding securities are settled using accounts held with national depositaries, while transactions in cash are settled via TARGET2 cash settlement system.
The project was launched following a feasibility study with regard to the new system, which analyzed its technical features, specifically regarding T2S’ future costs as well as the fact that national systems may participate in this project on a voluntary basis.
This study entailed an analysis of two specific papers:
- A paper containing User Requirements, i.e. a definition of the technical aspects regarding the system’s functioning, as well as user requirements;
- A paper containing an Economic Impact Analysis, i.e. methods for assessing the economic and legal impact of the new European settlement system on financial intermediaries and market infrastructures that are required to implement it.
The abovementioned papers were issued in the second half of 2007, following the implementation of the players’ and national central depositaries’ observations, i.e. the entities through which the various settlement systems will interface with the TARGET2-Securities system.
Following the approval of the User Requirements and the Economic Impact Analysis, in July 2008, ECB formally requested national depositaries to participate in the project, taking market needs and the distressed market conditions into consideration to identify sustainable solutions for launching the system. The majority of national central depositaries confirmed their participation in the project and their willingness to collaborate with ECB.
In September 2008, ECB issued an action plan regarding the second phase of the TARGET2-Securities project; it outlined progress made as well as the steps to be taken and it essentially confirmed the governance structure of the project’s implementation phase.
The operating phase of the project aims at smoothing out the differences among national clearing and settlement systems and, in accordance with the Code of Conduct for Clearing and Settlement and the provisions set out by the Giovannini Working Group, it paves the way for integration of clearing and settlement systems at an international level. The TARGET2-Securities system is expected to come into effect in 2013.
ABI’s Position
Since the launch of the TARGET2-Securities project, ABI and Italian banks have been in favor of the initiative and have strongly supported it, provided that representatives from the banking system actively participate in defining the new system’s operating features.
Specifically, ABI has taken a position in favor of creating a single European securities settlement system, since it agrees with the ECB on the fact that the lack of harmonization of clearing and settlement systems across the EU is one of the existing system’s weaknesses. Taking into account the need to maintain system costs at a sustainable level for operators, the advantages of an integrated system, in terms of system efficiency and stability, are clear.
The Association set out its opinion in the various phases of the project and the Italian banking industry has always agreed with the majority of the ECB’s operating proposals.
Nonetheless, ABI, in its capacity as representative of the Italian banking system, raised certain concerns regarding:
• The fact that players operating in the sector should participate in defining the project’s features, by proactively collaborating with the ECB in designing a system that is consistent with the players’ features;
• System costs, to achieve integration of the various national clearing and settlement systems, by maintaining a reasonable level of costs, which makes such system sustainable both for operators and market infrastructures.