The combination of the new platform and new European Union law will inevitably lead to consolidation, said Jeff Tessler, the chief executive of Clearstream, Deutsche Börse's settlement arm. Settlement, or the final leg of a trade when ownership and money change hands, is now performed by a patchwork set of operators in Europe, making cross-border trading more expensive. The ECB lost patience with the industry's efforts to streamline itself and stepped in to build Target 2 Securities, a single platform that goes live next year in the euro zone. It will leave many settlement houses redundant as cross-border fees are slashed.
The introduction of the new platform coincides with a new EU law that makes it easier for settlement houses to operate across the 28-country bloc if they meet tougher standards. The combination of the new platform and new law is "revolutionary", Tessler said. "The ways in which the pipes of Europe work are all being ripped out," he said. "Like you're redoing your house and you're ripping all the pipes out, and the only pipe that's going to be left that has to be connected to other pipes is the ECB. This is revolutionary. That changes everything that goes on in all these local markets."
New settlement houses are being set up, among them one by Bank of New York Mellon in Belgium and another by the London Stock Exchange in Luxembourg. But in an interview, Tessler claimed that Clearstream is so far ahead that few rivals can catch up. Deutsche Börse's vertically integrated model of offering trading to clearing and settlement - which some industry officials say inhibits competition - is proving to be the right one, Tessler said. Euroclear, Clearstream's Brussels-based arch-rival, comes closest but lacks a clearing arm, he said. As volumes migrate to T2S, settlement houses face having to reinvent themselves.
The need for collateral - cash or top-quality government bonds - will rise sharply over coming months and years. Another set of new EU rules for derivatives requires that trades to be backed by collateral to increase safety. Clearstream won't have a clear run. Heavyweights BNY Mellon, Euroclear and others plan to exploit the market's need for collateral as well as a revenue generator.
The derivatives industry has predicted collateral shortages worth trillions of dollars, but central bankers dismissed such estimates as scaremongering to water down new rules introduced after derivatives played a core role in the financial crisis.
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