A Lens on investment costs

In a recent conference panel, the Lens was reminded of how the costs of investing have fallen over the past two decades. For example, in collective funds investors no longer pay 5% of assets as an initial fee, and then a 1% annual management charge, as some still did in the late 1990s.

In share trading, a new community of trading platforms – known as multi-lateral trading facilities – emerged to challenge the near-captive hold on institutional asset managers that traditional exchanges, such as the London Stock Exchange, originally had.

In response to new financial market directives in Europe (for example, the original MiFID in 2007), traditional clearing houses like LCH. Clearnet also found themselves competing with new entrants, for example, EuroCCP. This disruption to the market contributed to a progressive reduction in trading and clearing fees.

But one sector where prices have been slow to fall, however, is in securities settlement – where ownership of a share or a bond (for example) is transferred from seller to buyer in exchange for payment.

In 2005, the European Central Bank announced a project to centralise settlement in Europe onto a central platform known as Target2-Securities (T2S).

Many were sceptical during the consultation process, feeling this would deliver little cost benefit and no improvement to post-trade areas where operational risks were highest.

But the ECB pressed ahead with the project – at a cost of more than €250 million and 12 long years of planning, testing and project delays.

Fast forward to 2019 and settlement costs have not fallen as the ECB promised. Earlier this year, it raised settlement pricing on this system to €0.195 per transaction, significantly above the €0.13 headline fee that it originally proposed.

On explaining its price increases, the ECB says these were required because volumes on the platform are lower than anticipated – which feels somewhat like a shopkeeper blaming a customer for failing to buy enough produce.

The platform is a step towards market harmonisation in Europe. However, there is a nagging concern that the money could have been put to better use ­- and that the ECB should have listened more carefully to concerns raised during the public consultation process.