Business criteria for the selection of T2S Network Providers

Transcription

1 Business criteria for the selection of T2S Network Providers PB meeting /2010/ Item 4.2 Iain Saville Member of the T2S Programme Board T2S Advisory Group Brussels, 7-8 September

2 Disclaimer The following slides summarise the main aspects of the current considerations of the Eurosystem with respect to business criteria on the basis of which the T2S Network Providers will be selected. Although some of the issues presented can be considered fairly stable and will most likely be part of the final decision, others are less stable, and may therefore be substantially altered. Consequently, these slides should not be used by any T2S Actor or potential T2S Network Provider to make any decisions or investments with respect to connectivity in T2S. An earlier version of this presentation has been offered to the CSDs that have - together with the Eurosystem - signed the T2S Memorandum of Understanding. It is published on the ECB website in order to give all interested parties equal and simultaneous information about the status of the T2S connectivity discussions. 1

3 Overview The Criteria fall into three groups: Criteria related to the provider Criteria related to the service Criteria related to pricing 2

4 Business criteria applicable to Network Providers Financial strength Data protection policies Operational risk management Technology risk management Service management 3

5 Financial strength o a network provider that is accumulating losses or that has a lot of debt may become insolvent, or its creditors may stop it from offering services, so that T2S Actors face continuity or service problems Solution: o Require a minimum ratio for shareholders equity over own funds; o Require a minimum profitability over a number of years at consolidated parent level 4

6 Data protection policy o If network providers have no acceptable data protection policy, T2S Actors not using that network provider may not be able to protect details about transactions to which they (or their customers) are a party Solution: o To require a data protection policy that is compliant with EU legislation; o To prohibit network providers from storing data in any country with a data protection level lower than the EU. 5

7 Operational risk management o Network providers without a sound operational risk management framework may not be able to deliver a quality of service especially in relation to business continuity commensurate with the expectations of the Eurosystem and T2S Actors Solution: o Network providers shall explain which operational risk management framework they have in place, and by which independent auditor they are examined and what is the scope/regularity of such examinations 6

8 Technology risk management o A network provider that applies aging technology may find itself in a situation that certain components are suddenly not maintained any more, with a negative impact on availability o A network provider that applies not-yet-mature technology may deliver unreliable services Solution: o Network providers shall explain which methodology they use to define their technology strategy (e.g. in relation to entry and exit into and out of certain technologies or technology vendors); 7

9 Service management o Network Providers may be tempted to apply lower service management standards to less valuable customers Solution: o Network Providers will be asked to report to customers on a set of KPIs on a monthly basis o Network Providers will be asked to have quarterly service review meetings with customers, in particular if certain KPIs were not met o Network Providers will in particular be asked to discuss future capacity needs during these service review meetings 8

10 Criteria applicable to the Connectivity Services Resilient implementation by T2S Actors Disclosure of risk management information Termination conditions These would apply to the following services: - U2A - Message transmission - Transmission of files - Small, medium and high bandwidth capacity 9

11 Resilient implementation of services o a network provider without a strong support service and adequate on-boarding documentation may make it difficult for its customer to implement the T2S connectivity service in a resilient way Solution: o Network providers will be asked what technical, organisational and informational arrangements they have in place in order to facilitate a seamless implementation of the connectivity service on the T2S Actors side 10

12 Disclosure of risk management information o The Eurosystem needs ongoing assurance that network providers are compliant with all criteria; and o T2S Actors need information to make informed decisions about their T2S connectivity Solution: o Network providers will be asked to produce to the Eurosystem and users a yearly SAS70-style report; o In the case of breach, the Eurosystem (possibly at the request of T2S Actors) shall have the right to commission an investigation by a qualified auditor and require the implementation of an agreed action plan 11

13 Termination conditions o If a network provider perceives his T2S business as not profitable enough, he may be tempted to discontinue it at (too) short notice Solution: o Network providers must guarantee at least 2(?) years notice of the termination of any T2S connectivity services o Therefore, processes for possible renewal of licences will have to be undertaken well in advance of their expiry o In the case of breach of this notification period, network providers shall pay a penalty of 10% of their yearly T2S turnover for each year of breach 12

14 4. Business criteria related to pricing Publication of maximum prices Price variation by geography Price variation by size Lowest cost for the T2S community (awarding criterion) - To be understood as: End-to-end All inclusive 13

15 Publication of maximum prices o Given the implicit lock-in effect, in particular for low-volume users, network providers may be tempted to apply undue price increases once customers are acquired o And there may be inadequate competition with only 3 licences Solution: o Each network provider shall publish its maximum price for each connectivity service (U2A, A2A messages/files, bandwidth) before the award of licences o If a network provider charges higher prices during the term of the license, it will reimburse twice the amount overcharged o Network providers can charge lower prices as and when they wish 14

16 Price variation by geography o T2S Actors whose data centres are located close to one of the T2S data centres, may enjoy lower connectivity fees than remotely located CSDs because the costs of connection are lower Possible responses: o o Solution o In order to neutralise any price difference based on location of data centres, network providers should apply at most only a small price variation based on location; any such restriction would apply only to CSDs and CBs On the other hand, it could be argued that no limitation of competition is justified, since remotely located T2S Actors may enjoy other benefits (cheaper costs for labour and real estate) Within the EEA, the maximum prices defined at the point of submitting their response that Network Providers will charge to their customers for any each of the specified T2S connectivity services will be independent from the location of any T2S Actor s data centre(s). 15

17 Price variation by volume o Today, small CSDs have the same unit costs to communicate with their data centres as similar to those of big CSDs, and fear that the latter will obtain an advantage through large volume discount at the connectivity level Possible approaches: o o Solution o For CSDs, network providers could be required not to charge more than x% above their lowest price to any other CSD, whatever its volume requirements On the other hand, it could be argued that no limitation of competition is justified, since big CSDs enjoy many volume discounts for other services The maximum prices defined at the point of submitting their response that Network Providers will charge to their customers for each of the specified T2S connectivity services will be independent from any T2S Actor s transmission volumes to and/or from T2S. 16

18 Lowest cost for T2S community - calculation method Several user profiles are defined (from small to very high volume) For each user profile, their aggregate prospective usage of the different connectivity services and their numbers are estimated by T2S Network providers are asked to give their maximum fee for each of the services, as well as their one-off entry fees and any periodical fees to create a total cost of ownership Matrix multiplication of profiles and volumes gives the estimated total connectivity cost for all T2S Actors together A weakness of this methodology is that the Eurosystem has to make a lot of guesstimates. 17

19 Ongoing conditions Network Providers will be expected to comply continuously with most of the inclusion and exclusion criteria Other items are under consideration, including: Since potential Network Providers are likely to become systemically relevant by offering T2S connectivity services, and thus be overseen by competent authorities, any compliance failure in this area could ultimately lead to termination of the licence 18

20 Settling without borders 19