CSDs seek clarity on T2S liability

Contingency plan Liability in the event of a hiccup on new European securities settlement platform TARGET2-Securities (T2S) is back on the table, with central securities depositories (CSDs) concerned about where the responsibility will lie if something goes wrong. There are at present 24 CSDs on board the European Central Bank’s (ECB) T2S project, set to launch in June 2015, having signed the Framework Agreement, a legal document governing the relationship between the ECB and each CSD. James Cunningham, Director of External and Regulatory affairs at BNY Mellon, says although the agreement sets a liability regime, the topic was back on the agenda as a result of insurance concerns and the CSD Regulation, currently being considered by the European Commission. “The ECB has spoken to various insurance companies to cover its liabilities under the framework, but it would be very expensive. I’m guessing it’s because there is very little precedent for this kind of insurance,” he says. “This is an issue because the T2S project is meant to be self-financing. If there are a lot of insurance costs, these will be passed down to CSDs and to CSD participants one way or another.” Cunningham says although the framework would be difficult to change, the ECB has signalled it was looking at the issue and would make a set of proposals on alternatives. The topic came up at the T2S Advisory Group meeting last month, he says. “The ECB has put this topic on the table. We don’t know what the proposals will be, but they have warned us that something will come,” he says. “There are concerns that the liability regime will change and CSDs will become exposed.” The T2S Framework agreement states the Eurosystem, the ECB and other Eurozone central banks, should be liable to a CSD for a claim of a customer in connection with T2S services, resulting from the Eurosystem’s gross or ordinary negligence in performing its duties under the Agreement, while no party should be responsible to another for a failure to perform any of its obligations because of conditions beyond its control. Marc Bayle, principal adviser in the T2S project at the ECB , says the liability framework is part of the legal contract and would not change. The central bank is answering CSDs clarification requests on the matter. “First of all we hope a major problem with the system will never happen, but we might only be held liable for what we are doing as defined in the contractual framework we have established with the CSDs,” he says. “If there is something wrong, we have to look at which obligation has not been properly met and what type of compensation might be needed."

Bayle says the ECB is currently working on how to manage its liability exposure as defined in the framework. “This is an on-going process where so far we have only tendered for specialist/expert advice to help us in setting the framework for such liability coverage.” Alexandre de Schaetzen, Director, Product Management T2S at Euroclear , says a clear definition of liability for when the platform is up and running is needed. “At this stage it’s still difficult to predict precisely how potential liability issues will pan out in practice. The challenge for the ECB is also to find an insurance policy at affordable prices, mainly because of the difficulty to assess the precise exposure.”

International cooperation and global regulatory harmonization were topics that were highlighted throughout the four days. Even though the regulatory changes have been discussed for some years, panelists still noted their complexities – not least in the European Union, which has 28 markets.

De Schaetzen says the liability issues is being discussed alongside, the ECB’s Operations Managers Group (OMG)’s manual of operations procedures (MOP), which covers day-to-day T2S operations, including contingency plans in the event of a T2S disruption. Half of the principles, or modules, will be completed by April 2014, while the others have been delayed until September. Once the MOP is completed it will be submitted to the T2S board. De Schaetzen says the delay reflects the “difficult and ongoing” discussions taking place, particularly questions around what were to happen in a crisis. “That’s especially difficult when you have 24 CSDs and 17 central banks to bring together.” At the last OMG meeting, the decision making process during a crisis situation was identified as the most crucial topic. In its presentation for the T2S Advisory Group, the OMG said there is concern about the practicalities of a crisis management telephone conference with as many as 50-plus participants. In the case no consensus can be reached among crisis managers, who takes the final decision? The majority of OMG participants are of the view that the business owner should take the final decision, while the Eurosystem believes the ECB crisis manager should have that responsibility. This means CSDs will likely rely on a competitor in the case of an emergency, de Schaetzen said. “The platform is shared by all the CSDs, and it’s in everyone’s interest for it to work. However, if, for example, one CSD has not performed its processing, you want to avoid a knock-on effect on the other CSDs.” CSDs and the Eurosystem will formulate their proposals on the matter, and based on those, OMG will prepare a document for consideration this month