Journal of Financial Market Infrastructures

Optimal central securities depository reshaping toward TARGET2-Securities

Fabien Mercier and Stephan Sauer


TARGET2-Securities (T2S) is the single and harmonized 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. Central securities depositories (CSDs) joining T2S thus face the need to determine the degree to which 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 us to benefit the most from the cost reduction allowed by T2S. In this paper 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 the 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'strategy. We note that by adjusting the cost function and the interpretation of the reshaping parameter, the same game-theoretic framework can be used to model the decision to join or not to join T2S.