On the 7th July 2006, the European Central Bank announced the launch of the T2S project. By January 2017, the hope is that the last wave of participants will go live on the system.
This is a complex project, further highlighted by the record breaking 695 page “framework agreement”, effectively the outsourcing contract that the Eurosystem (the T2S operator) requires CSDs and NCBs to sign. But, happily, the document has gone out under the signature of the new President of the ECB, thus ending the speculation at Sibos 2011 that the project would be one of the casualties of the change in the guard at the ECB.
We are at the early stages of assessing the framework agreement to understand the impact on us and our clients. However, it is worth looking at Article 27 on Governance and Article 32 on Liability.
First of all, there are six different decision making bodies in the future T2S governing structure, but the ECB Governing Council retains ultimate decision making powers. The reality is that there will be consultation but, as always, someone needs to have the final say given that consensus is unlikely at all times between the different vested interests involved in the process. The six bodies noted are the T2S board, the CSD steering group, the non-Euro currencies steering group, the Governors’ forum, the advisory group and the national user groups. There is still a lot of work on rules of procedure to be taken but this structure has good and bad. It is good that there is an ultimate decision taker in a complex environment, and, generally, the ECB in other areas (e.g. payments) has engendered a great deal of trust. But the aim of giving each constituency a voice in governance may well produce a Machiavellian Tower of Babel, especially given the cross representation of some constituencies in more than one of the decision making bodies. Few would want to operate as independent arbiter across this mass representation of the great and good of our industry and infrastructure!
Liability has been at the forefront of all discussions. This is not a genuine outsource proposition and so it was always wrong to assume the liability clauses could equate to the standard of private sector competitive arrangements. This is an infrastructure consolidation project (which has its vocal detractors and supporters) and it is unsurprising that the standard of liability assumption is going to equate to the (I)CSD market norm rather than those of lesser mortals (especially once the AIFM directive or the new UCITS regulations are enacted) such as custodian banks. And it is true to say that (I)CSDs are more known for liability avoidance than liability assumption!
Article 32 states that all parties to the agreement have liability “without limitation” for fraud or wilful misconduct. It also states that each party is liable for direct (as distinct from consequential) loss arising out of gross or ordinary negligence. But there is an ordinary negligence limit of EUR 30 million per calendar year per CSD against the Eurosystem and a total EUR 500 million cap on claims for gross negligence in any calendar year across all CSDs. There are a series of further exclusions and limitations, but the key figures are the ones noted.
In reality, it would seem as hard to prove “gross negligence” as it is to prove “wilful misconduct”. Perhaps one should consider the importance of the insurance to be as a moral indication of the duty of extreme care of the Eurosystem to ensure that the T2S platform operates effectively. The chances of pinning liability onto the operator would appear remote unless we look for extreme cases of fraud or operational deficiency of a scale and nature that we have, to date, never seen across the OECD infrastructures.
These two much debated issues are, in reality, not the key ones. Critical now is for the different (I)CSDs to produce clarity as to the changes in their core processing, connectivity with clients and legal frameworks so that the user community can decide how to structure their future European operations. There is much talk of the potential launch of new investor CSDs in Europe, questions about the logic of survival of many national CSDs, consensus that T2S will be an added spur to custodian consolidation and fee challenges despite the fact that T2S increases aggregate costs across the market over the next few years.
I have always believed that T2S will be disruptive. As, hopefully post the festive season, we start on that six hundred page plus monolith of legal ambiguity and operational complexity, which constitutes the “T2S framework agreement”, we can be sure we will have much to distract many from their core task of meeting client expectation and ensuring the resilience of their own infrastructures. But this project reshapes our industry’s little part of Europe, it will cost well over a billion Euros by fruition and it will lead to major winners and losers. Those who ignore it can be sure of the camp they will be in!
John Gubert
Chairman, Global Securities Services Executive Committee UniCredit