Sibos 2012 – Day 2 Report: Targeting securities and the rise of RMB

30 October 2012

The second day of the Sibos 2012 trade show in Osaka, Japan, contained a discussion about the development of the Target2Securities (T2S) European securities settlement engine and a separate panel about the rise of China’s renminbi (RMB), says Tom Groenfeldt, reporting for Bobsguide.

The slow development of the Target2Securities (T2S) European securities settlement engine was a hot topic of conversation at last year’s Sibos trade show in Toronto, Canada, after a further delay was announced to the project and the issue has not gone away in 2012. This year the slow-running project, which is intended to provide a pan-European provider and aid centralised oversight post-crash, seems to be back on track and there is a hard and fast 2015 launch date, but there are still question marks dogging the project.

A T2S panel on the second day of the Sibos show in Osaka, Japan, skirted around many of the outstanding questions, such as the impact of the T2S project on the business of existing central securities depositories (CSDs), how the bank users would fit in, the precise role of the European Central Bank (ECB) in administering it, especially when the eurozone crisis seems to be taking up most of its time, and the practicalities of how the settlement engine would work.

With the 2015 deadline just around the corner, in system development terms, the first of four planned T2S panel discussions on the second day of Sibos 2012 contained lots of optimism from the participants, but little in the way of operational details.

“We need to forget the political aspect of this project,” warned Marc Gem, a T2S panellist and member of the executive board at Clearstream Banking, Luxembourg, when reminding session attendees just how massive the T2S project is. “We have a collective mission to make it happen in a perfectly safe way [and must focus on this].”

The T2S project should be designed to mitigate risk by not migrating too many participants or products at the same time, he added, before stressing that “the important thing is project management and flexibility. It’s not a case of the ECB vs. CSDs vs. the banks. It is not politics. This is project management and we have to get it done. Finger-pointing around migration isn’t helping. We must deliver the project.”

T2S Challenges

The medium term challenge is to assess CSDs which hold collateral for monetary operations, particularly cross-border. According to Gem: “The final challenge out there is that people in the community have to reshape their buying behaviour to deliver the business case, and not forgo the potential of change because budgets are tight.”

Speaking on the same T2S panel at Sibos, Diana Dijmarescu, a managing director at JP Morgan, said that the challenge for users is to make sure they receive the information they need, especially around testing. “As users we are concerned we may be forgotten or may not have sufficient time, especially for users who are multi-market.”

JP Morgan is present in almost all European markets, of course, and has a large securities trading business that will no doubt be affected by the advent of T2S in 2015. “For many of our activities as asset manager, broker dealer, global custodian, private banker, global clearer or collateral manager, we have faced issues of fragmentation of the European market,” continued Dijmarescu. “We have been supportive of T2S from the very beginning. We are looking for increased efficiency, so we can look at Europe as a single market and better manage our liquidity and collateral across borders.”

The promise of the T2S European securities settlement engine requires firms to change, said Clearstream Banking’s Gem in the concluding part of the panel at Sibos 2012. “The whole of the market – the banks, the CSDs and the eurosystem to some extent – will have to reshape its activities to deliver on the promise of a single market or we will just get an expensive version of what we have today, and that doesn’t help anyone.”

The Rise of Renminbi

According to the panellists at a Sibos panel organised by Bank of America Merrill Lynch (BAML) during the second day of the show in Osaka, Japan, China’s money is slowly evolving into a convertible currency, which corporate treasurers and other participants in the trade finance and financial supply chain should try using. The liberalisation of the renminbi (RMB) has been a hot topic in the lead up to Sibos 2012 and at numerous previous shows, with no sign that the issue has been side lined by the withdrawal of the Chinese banks this year.

“I like to say the process has been about hurrying slowly,” explained Neil Daswani, head of client coverage at the transaction banking unit of Standard Chartered Bank. “The RMB changes are by no means opening up the floodgates; it is about period of rapid development followed by introspection, review and listening to feedback. The journey began as positioning of RMB as a trade settlement currency, and now it is moving on to a store of wealth and value.”

Some central banks in Latin America and Africa are beginning to hold RMB in their new reserves, but they aren’t replacing dollar reserves with it, he added. With the 21st century often being dubbed the Chinese one, as the 20th was the American century, you can expect this process to accelerate over the years.

Chinese exporters find important gains from accepting payment in their national currency, Daswani added. “They save seven to 10 days in the settlement cycle, or 2-3% of turnover, a big financial advantage to an exporter,” he said. “For corporate treasurers working in the region, using renminbi removes foreign exchange (FX) risk, which is usually loaded into an invoice, if rarely labelled that way.”

The Chinese government is also actively pursuing improvement in commercial relations, panellists said, although not necessarily with Japan after the furore over the Senkaku / Diaoyu islands in the East China Sea. “The Chinese government is very learning,” said panellist Ann Lin Khoo, however, executive director of global RMB clearing at JP Morgan, when discussing the rise of the currency. “They learn from the corporations. What do you want? Let the Chinese government know.”

Daswani agreed with this sentiment, explaining that in all his years of banking he had, “never come across regulators with such commercial intent as the People’s Bank of China (PBOC). “They have listened to feedback and they have acted on the feedback.”

Egidio Zarrella, a KPMG partner and fellow panellist, said clients often ask him why they should accept renminbi: “We keep saying – just try it.”

Kuresh Sarjan, managing director and head of global trade and supply chain operations for Asia at the organisers of the panel, BAML, added that: “It is a train coming your way, a global tectonic shift. Can corporate treasurers, banks or others choose to avoid it? No, you need to embrace it.” By using RMB in final settlement, treasurers can learn how it works and develop trust in it. The inevitable, but slow, development of China’s currency as a global reserve currency will also have profound impacts on worldwide finance and banking in the years ahead.

KPMG’s Zarrella did add a note of caution at the Sibos 2012 panel, however, added that she, “wouldn’t bet the farm, but you have to take the first step”.

Asked to look three years out, the panellists were cautious but predicted that RMB would move from trade settlement into settlement for services and then into investment portfolios. The experts expect that the renminbi and the euro will grow into reserve currencies co-existing with the dollar.

“Nobody is suggesting the RMB will replace the dollar,” said Daswani. “They will co-exist. In the final leg, you can always send US dollars to the home office.”

• Bobsguide is producing a daily Sibos 2012 show report all this week. Please visit our blog section to see the first day show blog and all the other preview material, blogs and opinions in the lead-up to Sibos, including our preview of the Innotribe and what JP Morgan thinks are the hot topics, among much else.

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