France, a heavyweight in Europe, stands shoulder to shoulder with the UK and Germany in terms of the growing physical presence of asset administration and asset custody, but what challenges does it face in keeping that momentum?
Even though French asset servicing in France stands tall with the help of TARGET2-Securities (T2S) and the rapid success of blockchain technology, could it lose its European podium place?
In the midst of the Macron’s revision of the Financial Transaction Tax (FTT), through the thick fog-like uncertainty of Brexit and the challenges Brexit could pose for the Capital Markets Union (CMU), it would seem like a challenging time for France’s financial industry, being one of Europe’s staunchest financial powers.
Back in March last year, Clearstream warned the industry that Brexit posed a threat to the harmonisation effect of CMU—nerves seemed frayed.
But, France stands strong, with firms such as AxiomSL expanding its European presence to Paris, while SGSS and OFI Asset Management completed their first transactions in Paris using blockchain last year.
Paris could in fact inadvertently benefit from Brexit—capitalising headquarters in Paris, with The European Securities and Markets Authority (ESMA) already having its headquarters there.
In addition, The European Commission is to hand the ESMA more power in order to improve the effectiveness of the CMU.
La technologie
As mentioned, last year saw SGSS and OFI Asset Management complete their first transaction on Paris’ market using blockchain, while RT1 seems to be on the rise. RT1, which is an infrastructure solution for the processing of instant single euro payments area (SEPA) credit transfers at a pan-European level, was launched in November last year by EBA Clearing.
According to SSGS, the trial showed the efficient integration of new technologies within the securities services business units showing that distributed ledger technology (DLT) will improve identification of holders and reduce the associated operational workload for those making trades.
As well as this, multiple European banks, from countries such as the Netherlands, Spain, Austria and Italy, lined up for the instant payments launch in Paris-based, EBA Clearing.
Hays Littlejohn, CEO of EBA Clearing, predicted that “by the end of 2018, the participants in the system should represent 80 percent of our current STEP2 SEPA Credit Transfer (SCT) volumes”, which he said “gives a good indication of the considerable reach we expect RT1 to build up within the next 12 months”.
And to give Paris’s asset servicing sphere even more acclamation, The European Central Bank (ECB) has approved the combining of the real-time gross settlement system TARGET2 and the pan-European securities settlement platform T2S.
This is in a bid to increase the efficiency of its value payments, which according to ECB, will modernise existing systems and increase overall efficiency all across Europe, including the improvement of liquidity management procedures.
The Eurosystem Collateral Management System (ECMS) will replace the existing systems of the 19 national central banks for those functions that can be harmonised until its launch, which is expected in November 2022, with the Banque de France acting as one of the service providers for the projects.
The ECB has also tipped T2S to be the pillar of the CMU, after it was finally made operational in September of last year.
As Loanne Benigni, head of investor services relationship management and sales for France at J.P. Morgan, indicates: “The main objective of the CMU is to strengthen investments for the long term, provide new sources of funding for business, help increase options for savers and make the economy more resilient. Servicing the smaller companies and the startups assets will lead to innovations, new infrastructures and this may accelerate the transformation of the asset servicing industry in Europe.”
Back in 2015, Mario Draghi, president of the ECB, said greater integration in capital markets could make the European Union more effective in dealing with economic shocks, while also allowing more access to varied funding options.
Citing greater risk-sharing and diverse-funding sources as the two pillars of the CMU, Draghi said T2S will act as the foundation for establishment, as it will facilitate cross-border bonds and equity trading.
Also weighing in, Edouard Berthet, head of treasury, forex and money market operations at BNP Paribas Securities Services Paris, explains: “This consolidation project will bring efficiency in the way liquidity is globally managed within the eurosystem post-market infrastructure.”
The FTT? We’ll have to see...
The French president Emmanuel Macron wants to put the FTT back on the European agenda.
FTT requires taxes to be collected for regular cash market transactions in France and Italy and is charged only on the specific transactions that are designated as taxable.Back in 2014, asset managers, pension funds, banks and insurers expected to spend more on tax and regulations in 2015 as well as the following years, according to a poll by BNY Mellon at its annual Tax and Regulatory Forum.
Given that most clearing firms and instant payment systems transact, on average, thousands of transactions a day, asset servicing could be affected, but not on the same level as asset management, or securities lending.
Nonetheless, in January this year, the rate of interest increased from 0.2 percent interest to the rate of 0.3 percent, the question is could it go further in the future?
Recently, a panellist at the Association of the Luxembourg Fund Industry (ALFI) European Asset Management Conference said: “The FTT issue needs to be resolved.”
However, Benigni suggested that the FTT will bring more harmonisation.
She says: “Harmonisation usually is positive for asset servicing and helps reduce cost.” But will this harmonisation be possible in the midst of Brexit?
La grande question of ESMA and Brexit
At this year’s European Asset Management ALFI Conference, a panel, which discussed the European regulatory landscape, interviewed representatives from ESMA and the European Fund and Asset Management Association (EFAMA).
The panel discussed the implications of Brexit and how ESMA, which has its powerhouse in Paris, will be getting ready for the UK’s departure from the EU in March 2019.
During the discussion, the ESMA representative said: “We will do everything we can to get a memorandum of understanding in place with the UK.”
Despite this, ESMA and EFAMA representatives agreed that “one year is not much time”, alluding to the time left between now and March 2019 for such negotiations.
Strained political relations in the EU has also put the harmonisation efforts of Europe’s financial markets, such as the T2S settlement platform, under “severe stress”, according to a statement from Clearstream released in March, last year. In a note to clients, the Deutsche Börse subsidiary said: “Nationalistic tendencies as well as the looming Brexit are subjecting the CMU project to severe stress. Against the current political backdrop, it is key for policy makers and stakeholders to focus on the execution of capital markets union objectives.”
Although there are complications, it is clear to see that Brexit is yet to slow the growth of Paris’s asset servicing, technological innovation and ESMA’s guidance and authority across the continent.
