TARGET2-Securities, or also known by its acronym as T2S, is one of the most ambitious projects of the European Central Bank (ECB) and 17 national central banks in the euro area (which are collectively known as the “Eurosystem”).
Since 2008 under development, according to the board leading the program, the project is on time and schedule to go-live in June 2015. Scope of the project is to build and deliver a new European securities settlement engine able to offer centralized delivery-versus-payment (DvP) settlement in central bank funds across all European securities markets.
The compelling vision of the T2S project is to integrate and harmonize the currently highly fragmented securities settlement infrastructure in Europe. One of the targets of the project is to substantially reduce the costs of cross-border securities settlement within the euro area and participating non-euro countries, as well as to increase competition and choice amongst providers of post-trading services. The political vision of the project aims a decisive step forward in the creation of a single market in financial services in the European Union, fulfilling one of the goals of the Lisbon agenda. That’s one the reasons T2S was bound to build a single common infrastructure not only in order to save on IT costs, but with the positive collateral effect to eliminate national specificities in the medium term.
T2S carries an estimated price tag of EUR 420 million as initial investments, in addition to yearly running costs estimated at EUR 76 million, the financing costs of the project is EUR 65 million in interest rate. T2S should not be subsidized by the Eurosystem and its full costs will be recovered through the fees collected from the participating CSDs (Central Securities Depositories) without any profit margin.
Rethinking the Business Model
But T2S doesn’t just carry on with the existing post-trading model, but introduces a completely new concept for the roles and responsibilities between Central Banks and CSDs which breaks the trend of the previous twenty years, when central banks in Europe had progressively withdrawn from post-trading activities. In fact, T2S makes it possible for CSDs to use an efficient settlement model while allowing central banks to retain (or gain back) full control of the cash accounts they maintain for banks.
Currently, the cost of cross-border transactions in Europe is several times higher than domestic transactions. T2S will address this issue because, instead of being built as a common infrastructure to perform DvP arrangements at national level, it was conceived as an engine which would allow any securities in T2S to be directly settled against funds deposited in any central bank participating in T2S.
Therefore, once on-boarded in T2S, e.g. a German bank will be able to buy French securities using its cash account with Deutsche Bundesbank and its securities account with Clearstream Frankfurt. Today, this is technically possible, but lengthy, expensive (due to the intervention of custodian banks and CSD agents) and rather inefficient. Because T2S will process domestic and cross-border settlements within the same infrastructure, it will charge the same fees for both kinds of transactions. Regarding the Pricing a high level of transparency and simplicity is guaranteed, in line with the Code of Conduct for Clearing and Settlement.
Of course, the participation in T2S is voluntary; however the market pressure is likely to force CSDs to join T2S. Therefore, assuming that nearly all 30 European CSDs connect to T2S (more than half are scheduled in 4 waves) the economies of scale generated should support the ECB objective of lowering settlement costs.
Flexibility for non EUR-countries
Even though, T2S was initially conceived to serve the euro area, as a means of establishing a level playing field between market participants in the single currency zone. During the EU discussions held in Brussels, several non-euro representatives and civil servants noted that the benefits of T2S could also extend to European countries which have not adopted the euro. It was realized that, this could be a win-win situation: on the one hand, non-euro countries could have access to an infrastructure which offers attractive settlement services, technically and financially; and on the other hand, from a T2S perspective, the inclusion of non-euro transactions could increase settlement volumes and therefore decrease production costs per unit.
Currently, the T2S area does not cover the whole euro area because it does not include Ireland (which shares its CSD with the UK) and it comprises only one of the two Greek CSDs. But, it does cover five countries outside the euro area, where the national CSDs have decided to participate in T2S: Denmark, Hungary, Lithuania, Romania and Switzerland. Indeed, Switzerland and its CSD, SIX SIS is joining T2S in the very first wave bound to go-live June 2015. This inclusive model has a limit though, for example the time zone or the legal framework which regulates the operations of post-transaction activities.
One of the biggest changes of T2S for multi-country custodian banks is the concept of liquidity pooling. Since T2S is an integrated model, it will have both the securities accounts and the cash accounts on the same infrastructure, with securities accounts under the control of a CSD and cash accounts under the control of a NCB (National Central Bank). A multi-country custodian bank could service different securities accounts held in different CSDs in various countries via a single consolidated cash account in T2S, generating savings and enhancing operational efﬁciency, especially in terms of risk management and reporting.
With the advent of T2S, for a bank that currently settles primarily e.g. in central bank money in Euros and DKK (Danish Krone), just two cash accounts in the respective currencies would be sufficient to serve all clients in all geographies which take part in Euro and Danish Krone settlement.
The benefits for non-Euro banks are even greater, as T2S would offer them a one-stop shop for new business, providing them with central bank money settlement capabilities in their national currencies within the Euro Zone. T2S would also foster competition within the NCBs of the Euro zone. Once T2S is in place for Euro-settlements, a bank can choose any Euro zone NCB to open an account. An Italian bank could have a cash account in T2S, by opening the account in the books of the national central bank of Germany, provided it fulfills all the legal criteria.
Such liquidity pooling places are powerful tools in the hands of banks, helping them negotiating effectively with both the CSDs and the NCBs. A bank with a cash account in T2S could be linked to several Real Time Gross Settlement systems (RTGS) TARGET 2 accounts (the Euro RTGS system for cash), creating the possibility to receive liquidity from multiple liquidity providers. This would also reduce the number of settlement failures due to a lack of cash.
Bottom line, T2S will have important implications for non-European stakeholders, who will have many more alternatives when accessing European markets than today. Whether they are investors, broker-dealers or custodians, they will have more options for accessing directly or indirectly the core of the settlement process between CSDs and central banks. Even those who choose to continue to use a global custodian should benefit from T2S, because global custodians will benefit from the new settlement arrangements in Europe. In other words, T2S will deliver on its promise to “make Europe a better place to invest”.
On the Monday morning following these Migration Weekends the CSDs will be operationally settling in T2S.
The table below shows the start of each wave and the allocation of CSDs per wave.
22 June 2015
T2S Go Live
28 March 2016
12 September 2016
6 February 2017
|Bank of Greece Securities Settlement System (BOGS)||Euroclear Belgium||Clearstream Banking (Germany)||Centrálny depozitár cenných papierov SR (CDCP) (Slovakia)|
|Depozitarul Central (Romania)||Euroclear France||KELER (Hungary)||Eesti Väärtpaberikeskus (Estonia)|
|Malta Stock Exchange||Euroclear Nederland||LuxCSD (Luxembourg)||Euroclear Finland|
|Monte Titoli (Italy)||Interbolsa (Portugal)||Oesterreichische Kontrollbank (Austria)||Iberclear (Spain)|
|SIX SIS (Switzerland)|