LONDON (Reuters) - The European Central Bank is being forced to consider raising the fees for its flagship securities platform after trading failed to reach its projected volumes, an ECB document showed.
Industry officials say the central bank is planning an increase, a step they say would undermine capital market integration that is already being threatened by Britain’s planned departure from the European Union.
Fees should be cut and not raised to attract more volume, they said. The ECB declined to comment on the future direction of fees.
Target 2 Securities (T2S) started operating in 2015 to link the patchwork of national stock and bond settlement houses, the market’s basic plumbing to exchange legal ownership of a security for cash.
The ECB intervened after the sector failed to consolidate fast enough to make Europe’s cross-border capital market compete better with the United States, where settlement is cheaper.
A ECB presentation entitled “2018 T2S pricing review” shows that 128.5 million transactions were settled on T2S in 2017, 33.3 percent below the central bank’s projection.
Actual volume fell 3.8 percent in 2017, when the last of 22 settlement houses hooked up to T2S. Volume was 15.2 percent below ECB projections in 2015 and 26.3 percent below expectations in 2016, the presentation showed.
Settlement covers the bulk of T2S income, meaning the ECB is forced to consider raising fees to cover outlays that were paid for with public funds, an industry official said.
The ECB said in its 2017 annual report for T2S it would review the basic fee in 2019 if volumes remain below projected levels, but industry officials say the projections were too removed from market reality.
The basic fee of 15 euro cents per settlement instruction - two instructions per security transaction are charged - was fixed until December 2018.
The ECB’s governing council agreed in 2010 that fees would not rise by more than 10 percent a year between 2019 and the end of the “recovery period” in September 2022 for developing and running T2S.
Volumes are not moving to T2S because of punitive accounting rules and users sticking with national settlement houses to avoid add-on fees, industry officials said.
Market participants say they have already had to implement a costly EU reform of securities markets in January. They will also have to invest in new reporting requirements for the repo and securities lending market from mid 2019.
T2S has already faced delays and cost overruns since its inception in 2008, when total development costs were put at 203 million euros, an estimate that rose to 256.4 million euros within two years.
At its annual meeting in March, the European Repo and Collateral Council (ERCC), which includes users of T2S, cast doubt on its ability to cut trading costs anytime soon.
“Considering the substantial development costs for T2S, it is thus in the current circumstances not easy to see the business case for the project,” said Michael Manna, head of fixed income financing trading for EMEA and Asia Pacific at Barclays bank, according to minutes of the meeting.
Nicola Danese, a managing director at JPMorgan, compared migrating to T2S with an upgrade from an old Nokia to a smartphone.
“The new infrastructure has a lot of potential, but in order to utilize this potential, additional features and applications need to be developed first,” Danese said.
Additional reporting by Francesco Canepa in Frankfurt, editing by Larry King