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Optimal CSD reshaping towards T2S

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  • Sauer, Stephan
  • Mercier, Fabien

Abstract

T2S is the single and harmonised IT platform for securities settlement in central bank money developed by the Eurosystem to promote integration in the European post-trading industry, and will go live in 2015. CSDs joining T2S are thus faced with the decision problem of determining to which degree they should reshape, that is, adapt their own IT infrastructure, human resources and business strategy to T2S. A more complete reshaping entails higher immediate fixed costs, but allows to benefit the most from the cost-reduction allowed by T2S. In this article we use a game theoretic approach to model the strategic choice of the CSDs. We then derive several results from this model. In particular, we give closed-form solutions for the degree of optimal reshaping and the optimal prices set in the unique equilibrium if the time-horizon is finite. In case of an infinite horizon we give a sufficient and necessary condition for the existence of another subgame perfect Nash equilibrium in which CSDs continually delay the decision to reshape. We argue this equilibrium is not robust and provide a condition under which a given CSD will always reshape, whatever the other CSDs JEL Classification: G10, G20, L11

Suggested Citation

  • Sauer, Stephan & Mercier, Fabien, 2013. "Optimal CSD reshaping towards T2S," Working Paper Series 1549, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131549
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    References listed on IDEAS

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    Cited by:

    1. Li, Shaofang & Marinč, Matej, 2016. "Competition in the clearing and settlement industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 40(C), pages 134-162.

    More about this item

    Keywords

    adaptation costs; Securities settlement; TARGET2-Securities (T2S);

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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