Cross-border transactions by foreign investors seeking to buy and sell Maltese-registered securities are to be made significantly easier thanks to a planned joint project of the Malta Stock Exchange and Clearstream, the post-trade arm of Deutsche Borse Group.
The project will introduce a range of services on the local market, including settlement in Central Bank money on the Clearstream platform and through the Maltese Central Securities Depository for all Maltese securities. It will also provide settlement services to Maltese investors transacting in securities not registered in Malta.
"This development will serve to deepen the market for Maltese participants, be they issuers, investors or market intermediaries," Malta Stock Exchange chief executive Mark A. Guillaumier told The Times Business.
Established under German law, Clearstream Banking AG of Frankfurt is also a licensed deposit-taking credit institution and is the recognised German Central Securities Depository. Originally formed in 1996, it later merged with Cedelbank S.A., Luxembourg, to form the current Clearstream Group.
The group, a fully-owned subsidiary of Deutsche Börse AG since 2002, includes Clearstream Banking AG of Frankfurt, Clearstream Banking S.A. of Luxembourg, Clearstream Services S.A. of Luxembourg, and a number of other holding companies and single-purpose companies.
The two main companies under the Clearstream Group are recognised as settlement systems by the European Commission in accordance with the Settlement Finality Directive. Clearstream's range of services includes international settlement, custody and administration of securities. Its core service offering is the settlement of transactions in international securities and in domestic securities traded across borders.
Mr Guillaumier explained Clearstream was one of two main entities operating in the EU as international central securities depositaries, and the MSE was looking forward to working with both. "Our cooperation with Clearstream does not preclude us in any way from using the services of Euroclear too," he pointed out.
The MSE project is in keeping with the framework of T2S (Target 2 Securities), a Eurosystem programme which seeks to constitute a major step forward in the delivery of a single integrated securities market for financial services.
"The objective of an integrated market is aimed at reinforcing the Lisbon strategy, particularly the Code of Conduct on Clearing and Settlement, and the enhancement of the harmonisation process through the dismantling of barriers," Mr Guillaumier said.
"T2S will provide a single, borderless pool of pan-European securities and a core, neutral, state-of-the-art settlement process. Market users will be able to access these assets through their national central securities depositories in a way which can accommodate national and regional differences. The project is meant to go live in 2014. The Malta CSD, together with all the CSDs in the EU, signed a Memorandum of Understanding with the Eurosystem - as represented by the European Central Bank and the national central banks - in July last year over its intention to go ahead with the project."
A framework agreement should be signed by all participants by next April.
Mr Guillaumier explained that the project itself involves the installation of a highly sophisticated engine which would settle, within an agreed, harmonised environment, securities transactions within the EU infrastructure.
"Perhaps the most important and most direct benefit of T2S will be the significant reduction envisaged in cross-border settlement fees, which are still, on average, more than 10 times higher than the fees charged for similar transactions in a domestic environment," the chief executive emphasised. "T2S will achieve this reduction in fees by processing cross-border and domestic transactions in the same way and at the same cost, replacing today's very complex methods involving processing in at least two CSDs and one or more custodian banks. Since settlement is essentially a fixed-cost business, it is clear that as transaction volumes increase, average cost per transaction declines."
Mr Guillaumier outlined other benefits of T2S, including the facilitation of the harmonisation of Europe's post-trading environment. T2S will also be a big step towards the establishment of single market for financial services, supporting the EU's Lisbon Strategy which is aimed at making the EU the most competitive economy in the world. T2S will create a "domestic" market for the settlement of European securities, directly and indirectly removing many of the current barriers to cross-border clearing and settlement. Savings are to filter down to end-users of the market, be they institutional or retail, both in terms of a reduction in costs and in settlement safety and timeframes for settlement.
"Another important feature of this system is that by fostering greater efficiency and integration of European financial markets, T2S will promote greater diversification and sharing of risk which will make the whole system more stable and less prone to systematic risk. The objective of achieving more financial stability across the EU markets has obviously become even more important, particularly in the light of the recent global financial turmoil," the chief executive added.
In Malta, several meetings have already taken place jointly organised by the Central Bank of Malta and the Malta Stock Exchange for the system's eventual users.
As the system's operating details are still being mapped out in the various working groups, Mr Guillaumier emphasised it was still early to indicate how the system operations will affect each individual intermediary. But given that the main strategic objective set out by the Eurosystem for this project is to reduce overall costs for cross-border transactions across EU jurisdictions and that the Commission's policy of removing any barriers to competition, it is clear that a scenario will arise where competitive forces in the intermediary business, even at a national level, will become even stronger than they are today.
Mr Guillaumier said the project was in line with the Stock Exchange's declared strategy to become more open to international business. The exchange was investing in what it considered "critical" areas of infrastructure to support the internationalisation drive.
"This investment, which is taking place at all stages of the value chain, namely trading, clearing and settlement and securities registration, is primarily intended to support the international strategic objectives of the Exchange. The recent MoUs that the Malta Exchange signed with the Shanghai Stock Exchange and the Cyprus Stock Exchange were also designed to enable these exchanges to work together with the Maltese Exchange on areas of common interest to explore new lines of business.
"The Exchange's cooperation project with the Clearstream Group, our active participation in the T2S Initiative, the inclusion of Malta's equity market within the FTSE's Global Equity Index Series, the MoUs concluded with other exchanges, are all evidence of the efforts undertaken by the Exchange to open the local market to foreign participation, broadening the range of services provided to market participants and increasing the depth of the market for the benefit of all market users."