‘Came and went’ is the market sentiment that all participants communicated following the implementation of TARGET2-Securities (T2S) in the first major market.
The deadline for the migration of Italy, delayed form June this year due to technical issues was met in the last weekend of August. “Once you get over the implementation mode and get the IT live, people are not worried about it any more,” says Tony Freeman, head of industry relations at Omgeo.
However, the new platform is having an impact on the structure of the market.
“For example, some of the smaller CSDs are talking about combining their operations because they can’t generate economies of scale where settlement is done on T2S. I think custodians and sub- custodians would like more consolidation of CSDs and they would like it [T2S] to do more – it doesn’t go far enough to harmonise the European market. Asset servicing is still very complicated because it has a lot of national specificities in corporate, fiscal and tax rules, which are wholly domestic and incompatible with each other,” says Freeman.
Another idea mooted by the industry is the expansion of T2S outside Europe.
“Given it’s a multicurrency platform it could consolidate settlement in places like Asia and Latin America but these regions lack an organisation like the ECB, whose interest it is to reduce risk in the system, to push that sharing. It needs the external impetus to happen.”
For now the interesting question seems to be whether the UK and other Eurozone markets will join T2S.
“The decision of the UK may not be irrevocable if the governance issues can be solved I don’t see why it couldn’t join,” says Freeman. “The control over sterling payments in BoE and how that oversight would work is a genuine issue given the governance council is with the ECB. It’s tricky but not impossible.”
Increasing the volume across multiple markets would be a step forward as it would mean processing at a much lower unit cost. This expansion of the platform would benefit custodians whose clients do business in those markets. Currently they are looking to make up for the settlement that is given up to T2S by providing asset services. However, T2S does not harmonise asset services, which makes it difficult because they are building services to cater to each market. “So they want to max out the number of transactions i.e. they don’t want the nuts and bolts of services in the European market but that doesn’t work because asset servicing is done on a non- harmonised basis,” says Freeman.
“A couple of the global custodians have started to consolidate their agent bank network in Europe because the process is now standardised, where one firm will do the asset servicing for several markets. Some firms are taking a very different approach – using their own branches for settlement and asset servicing. Harmonisation of these services may come but it will take a while.”
Deutsche Bank’s Graham Ray explains that the ‘came and went’ mentality of Italy’s migration compliments the decision to delay that migration until the last weekend in August. “What you saw between June and August was the flushing out of challenges and issues that it would have had had June had been the date,” he says. “Monte Titoli faced certain challenges in complying with some of the T2S framework standards that the DCPs [Directly Connected Participants] and ITPs [Indirectly Connected Participants] had to adhere to after the 31st of August. The actual migration weekend was a success.”
Ray adds that checkpoints were completed ahead of schedule so by that last Sunday evening in August there was a level of excitement and recognition that the migration weekend was a success with no real noise from anyone in the value chain around their progress. “A programme of this size will always have little glitches as you transition through the normal BAU day,” he says. “We saw some of that around incorrect standard settlement instructions that agent banks had but in all
it was a very successful BAU and we have gotten back to pre-T2S standard settlement rates in the mid-90s so generally an excellent migration and smooth transition into BAU.”
The delayed migration of a market of this size, diversity and connectively models has also allowed for any teething problems to be resolved immediately. “As participants we are regularly in dialogue and the opportunity to have a DCP forum in the T2S governance structure meant that when we moved into day one on Monday the 31st any concerns were dealt with in a positive outcome to ensure that things came and went onto the T2S platform,” says Ray.
Going forward
But the first wave is only a stepping-stone on the overall programme of T2S.
The implementation of the Spanish Market Reform, next key date (early part of 2016) and that of Wave Two and Germany in the third quarter will be the ultimate test of whether programme’s roll out is successful: “It’s a market view that the ultimate release valve will be after September next year and the steps to ensure that the first wave migration was successful are in place to continue,” says Ray.
“We obviously have seen the shortening of the community-testing of some of the markets so there’s a balance of the positive of concluding markets but also an awareness of the level of work to be performed to ensure we can achieve Wave
Two with a level of confidence to achieve the level of same level of success.
“For me T2S can do more but we have to recognise the different players in that and that the platform enables the settlement and the bringing together of cash and stock and facilitates a variety of user groups. There are challenges that need to be dealt with for the cash stream because when I look to the German market around the current settlement day cash forecasting of after 4pm there’s a lot of work that the enabler of this platform is facilitating in the cash day.
“Maybe we need to go slightly wider in our thinking. If we look at the fundamental purpose of cost efficiency, harmonisation, standardisation around functionality, to conclude on that we need more markets to come onto the platform for the benefits of auto-collateralisation, as well their respective central banks on the platform to conclude a wider coverage in the European region on that.
“For me the barrier in the next phase is to push a greater level of harmonisation and standardisation in the servicing space, which would be a real pivotal programme which would bring different players into the mix that we’ve dealt with across the initial start of T2S. It could also be that we try to grow the market coverage on the platform to increase and realise the core benefits that T2S can give not only around the asset dimension but also the liquidity dimension around netting, efficiency and settlement and the utilisation of that liquidity within the single central bank model that the platform enables participants to take or make opportunity from.”
As the market looks beyond the programme dimension, its attention will turn towards what the continued steps of T2S in Wave 4 in 2017 might be.
Analysis: The Comings and Goings of T2S
With the successful migration of the first wave of central securities depositories to the harmonised settlement platform the question now is whether the programme could do more than what it initially intended to do.
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