25 April 2011, 14:00-17:00
Eesti Pank, Tallinn

Minutes of the Meeting

Chairperson of the meeting: Kadri Martin
Secretary of the meeting: Tiina Soosalu

Meeting participants: Kadri Martin, Mihkel Nõmmela, Viive Sumberg, Innar Vainre, Tiina Soosalu (Eesti Pank); Marek Pajussaar (Financial Supervision Authority); Ahto Kink, Andres Lips, Julia Segerkrantz, Kersti Kiop, Mait Kivimets (AS Eesti Väärtpaberikeskus); Lembit Olev, Tatjana Nikitina (Ministry of Finance); Eha Rudi, Kärt Mets, Viktoria Viira (AS SEB Pank); Elo Tempel, Kristel Kasuri, Kristi Kaseväli (AS Swedbank); Anna Krasnova (AS Eesti Krediidipank); Merle Peldes (Danske Bank A/S Estonia Branch); Piret Tamm (Marfin Pank Eesti AS)

Agenda of the meeting

1. Joining the Framework Agreement on TARGET2-Securities (T2S): positive and negative aspects for the Estonian market
2. Formulation of the position of the Estonian market with respect to the T2S UDFS[1]) consultation: preliminary ideas/viewpoints
3. Further activities and events

   1. Joining the Framework Agreement on TARGET2-Securities (T2S): positive and negative aspects for the Estonian market

Kadri Martin thanked the participants who had provided input, and announced that Eesti Pank had compiled the analyses submitted by the ECSD and the banks, adding aspects from general and the point of view of Eesti Pank. EENUG decided to examine the prepared analysis step by step.

Positive aspects of joining the Framework Agreement:

1) As part of the European market, the Estonian market will benefit, in the long term, from the more efficient functioning of the European financial market and the expected increase in competition, compared to other international markets.

Kadri Martin added that the fragmentation of the European securities market, and the weaker competitive ability, compared to the US market for example, has been a topic of discussion in Europe for quite some time. The market participants enquired into the actual benefit for Estonia. The discussions revealed that we can currently only talk about the indirect effect - no one can predict whether this will bring actual capital inflow. The Estonian problem lies in the size of the market - the benefits reaped by the final investor might not be very significant.

2) Estonia's image as a more reliable euro area country, and opportunity to contribute to the creation of a more efficient market.

Kadri Martin emphasised that EENUG should focus on the achievement of the best possible solutions for Estonia. The participants deemed it necessary to make a distinction between the image of reliability and market efficiency. Eha Rudi added that, since the achievement of efficiency is questionable, it cannot be included among the positive effect on the basis of the information currently available.

3) A logical continuation of the integration of the Estonian financial market with the global financial markets is in line with Estonia's current policy

Kadri Martin added that the joining T2S would be a logical continuation of Estonia's path as a euro area country and a TARGET2 member. The market participants enquired into whether this should be included among the positive aspects and be separately brought out. Viive Sumberg pointed out that since Estonia participates in the two parts of the T2-T2S-CCBM2 triangle, the Estonian market should provide an alternative solution for efficient functioning, if it chooses not to participate in the third part of the triangle.

4) Estonia will participate in the central international solution, with the Estonian market benefiting from the harmonisation of market practices and the expansion of opportunities (TARGET2, CCBM2). Improved cross-system liquidity management and enhancement of the efficiency of collateral management offered by the central bank.

No further comments were made.

5) Investors' interest in Estonia is likely to increase. The issuers are likely to prefer T2S members in listing shares at the stock exchange.

A discussion followed, with reservations as to whether this can be considered a positive effect.

Ahto Kink: Investors are mainly interested in attractive financial instruments. We can currently say that the probability of the reduction of barriers will increase. We should also find out how much the issuers can choose between CSDs, and whether issues can be split.

Elo Tempel pointed out the difference between the rules of issuers in different countries. Lembit Olev stated that this issue is currently being harmonised within the European Union.

The participants agreed that if the Estonian market stays out of the harmonisation process, the parties involved will distance themselves from the Estonian market. The participants proposed making a distinction between the aspects related to the issuer and those related to the investor in the analysis, and between the certain and probable effects.

6) Transparency of transaction prices will increase. Execution of cross-border transactions will be technically simplified, and the price of transactions will probably drop. The number of intermediaries will decrease.

Elo Tempel: I agree that the prices will become more transparent and that the average prices in Europe will go down. Still, as the prices depend on volumes, the ECSD cannot offer a price similar to that of major service providers. With emphasis laid on the impact of the CSDs and the price, the local Estonian client might not benefit from the situation. At the same time, the behaviour of an international institutional investor is difficult to predict.

Ahto Kink: Prices are also regulated, among other things, by amendments to the law.

7) Long-term cost-cutting at the expense of replacement of the existing links with T2S. Cost-cutting at the expense of development costs.

Representatives of the ECSD stated that the ECSD will not be able to replace all links between CSDs, as the links have been set up for business reasons that the T2S might be unable to cover. No data is currently available to the ECSD regarding the cost of establishment of a link within the T2S environment. This is likely to be further regulated.

If the ECSD establishes the links in T2S, but the Latvian and Lithuanian CSDs do not join T2S, the ECSD must maintain the technical support and will be unable to cut costs. As regards Poland, there are problems with the Polish legislation; the barriers established by the regulations cannot be eliminated through accession to T2S.

The (legal, operational) costs of establishment of the link with other CSDs will also remain. T2S will not harmonise the cost of establishment of the link - these costs will be different for each CSD. We can thus only talk about the elimination of technical barriers, harmonisation and the scale-down of the technical cost element, but other components of fixed costs will remain, and the actual benefit amount is unclear. At the same time, no one can guarantee that ECSD's competitiveness on all markets.

In addition, the joining T2S could transform the ECSD from "simple" regulation environment into a more complicated one, which could boost labour costs and software expenses that, in turn, need to be covered by transaction fees. The ECSD is currently among the most cost-efficient CSDs in Europe. Still, we must keep in mind that if T2S will be upgraded stemming from local needs; these changes may prove quite costly for the market. Furthermore, the account registry and reporting functionality of the ECSD's registry and settlement system Depend must be maintained upon joining T2S. The ECSD can cut costs at the expense of development costs, as the ECSD no longer needs to develop the settlement functionality.

Negative aspects of joining the Framework Agreement:

1) It is politically complex for a member of the euro area to refrain from the project. This could damage the reputation, cause political tensions, isolation, etc.

No further comments were made.

2) Potential discrimination of different markets (direct versus indirect).

The participants admitted that the T2S provides functionality for both options. The choice of the Estonian market will depend on the price.

3) The opportunity cost for non-joining

No further comments were made.

4) The T2S is a complicated large-scale project involving much ambiguity in its initial stages. The operational risk is huge.

Kadri Martin asked those participants who had made the proposal to clarify what was meant as huge operational risks, and added that an extraordinary operational risk would not be accepted in the development of the platform, and no concessions would be made with respect to business continuity. Viive Sumberg suggested that the "operational risk" should rather be addressed as "project risk" and "migration risk". The word was replaced accordingly.

5) As the currently offered solution only provides settlement functionality, the effect of other infrastructures (clearing, register keeping) on the improvement of efficiency is questionable.

The participants admitted that the solution is incomplete. With only a part being harmonised, we cannot talk about full cost-efficiency.

Lembit Olev added that the Ministry of Finance is currently conducting an analysis of the infrastructure regulations. Kadri Martin added that a separate legal assessment is required for the layered model, but not for the all-in model.

6) No legal assessment and vision of the required legal framework/amendments is available.

The comments have been provided above.

7) In development of the system to suit the local needs the flexibility will be lost.

No further comments were made.

8) If Latvia and Lithuania do not join T2S, the Depend functionality must be maintained and the gain stemming from cross-border settlements will be lost. Latvia and Lithuania may lose interest in maintaining the T2S external link upon Estonia's decision on non-joining T2S while Latvia and Lithuania decide to join.

Andres Lips added that the T2S external link is costly for Latvia and Lithuania.

9) The joining incurs expenses which may raise the price of domestic services. Increase in the administrative burden.

The participants discussed the reasons for the increase in administrative expenses. Ahto Kink stated that the legal environment would be more complicated upon accession, compared to the current situation. The increase in the administrative burden may be due to the personnel being charged with the task of being acquainted with the complex framework.

10) The benefits are unclear. An additional fee applies for intraday settlement; night-time settlement involves other risks. The future price of settlement is unclear. The opportunity to conduct local transactions with lower costs will be lost.

The participants agreed to withdraw this clause, as it is unclear whether the effect is positive or negative.

11) The account management is expensive in case of the all-in model; the layered model involves legal risk and a greater administrative burden in addition to huge costs.

Kadri Martin raised doubts as to the validity of this clause, considering the current price list. In all likelihood, this constitutes a leftover from a previous analysis, and is no longer relevant. Based on the proposal of the ECSD, the EENUG resolved to omit this clause.

12) Financial risk for the market: the investment must be made straight away, while no revenue will be generated until 2015.

The participants resolved to paraphrase the clause - the "market" is not appropriate here. The participants discussed the imposing of fines and the parties obliged to pay the fines in a situation where the ECSD concludes the T2S Framework Agreement, but the Estonian market wishes to withdraw from the project later on. Tatjana Nikitina noted that the draft Framework Agreement prescribes for an exit management plan, with no fines applied to CSDs/market participants, if sufficient advance notice is given prior to exiting the T2S. The participants admitted that the market participants will not be reimbursed any expenses incurred on the project. Risks will be borne by all parties.

In conclusion, the parties decided:

  • to conduct a detailed supplementary analysis in order to specify the effect on the final investor, custodian banks, ECSD and Estonia in general, as the accession will have a different effect on different parties. A distinction must be made between a small investor and an international institutional investor in the analysis, as the former does not place as much importance on speed and efficiency as the latter;
  • The analysis currently emphasises the political decision and the reputation of the country, but the business considerations have been left out;
  • To map where the local client is currently investing and which countries invest in Estonia: including euro area versus rest of the world;
  • The analysis must contain an input from the Ministry of Finance (analysis of the legal environment), the ECSD (cost analysis), Eesti Pank (complementing of the overview of positive and negative effects) and custodian banks.
  • The analysis must make a distinction between certain effects and probable effects. As the project currently involves much ambiguity, it is not easy to make a decision.

Julia Segerkrantz emphasised that the problems are similar in all countries, and Estonia is certainly not in a position worse than others. At the same time, the situation has significantly improved within 12 months (with the Ministry of Finance and the Financial Supervision Authority contributing to the project), and the discussions have gained momentum after accession to the euro area. The accession decision will be made by the ECSD, but not without the support of the market.

   2. Formulation of the position of the Estonian market with respect to the T2S UDFS consultation: preliminary ideas/viewpoints

Innar Vainre gave an overview of the structure of the document and the points to be considered. The document is bulky, designed for different users. Innar pointed out that the UDFS allows choosing different models. Proposals for the consultation should be submitted to the ECSD and Eesti Pank by May 16.

   3. Further activities and events

Kadri Martin gave an overview of the upcoming events:

1) Eesti Pank forwarded all EENUG members an invitation to the "Schedule of the T2S Settlement day" seminar to be held in Frankfurt on May 13.
2) EENUG meetings are upcoming with the heads and members of the NUGs of Denmark (May 4) and Finland (May 16), with the matters of interest and questions submitted beforehand by EENUG. Ahto Kink added that EENUG should ask the Danish and Finnish colleagues about the national governance of the project and involvement of market participants. Kadri promised to submit the questions to the Danish and Finnish colleagues.
3) On 6 June 2011, Jean-Michel Godeffroy, chairman of the T2S Programme Board, will pay a visit to Estonia. The invitation and the initial agenda will be sent by Eesti Pank at the beginning of May.
4) The next EENUG meeting will be held after the meetings with the Danish and Finnish NUGs and the visit of Jean-Michel Godeffroy on June 9. A more thorough analysis of the joining/non-joining the T2S and further activities will be discussed at the meeting.


[1] User Detailed Functional Specifications