By Isabelle Olivier, head of Post Trade, SWIFT
The settlement harmonization that TARGET2-Securities (T2S) promised to deliver looks to be unachievable, at least in the short term. Market participants such as central securities depositories (CSDs), agent banks and clearing houses that have chosen to be directly connected actors will use ISO 20022 standards and clear market practices. However, their clients, as indirectly connected participants (ICPs), will continue to use ISO 15022 standards that are not fully harmonized.
The European Central Bank (ECB) envisaged T2S as a harmonization platform to enable CSDs to use a common technical service that would execute settlement instructions. T2S will provide delivery versus payment for securities against central bank money. CSDs will maintain their relationships with intermediaries, investors and issuers, as well as their notary and asset servicing function (such as the management of corporate actions).
Directly connected participants (DCPs) can communicate directly with T2S without using the relevant CSD or central bank as a relay or proxy to send settlement instructions, receive status advices, query data, etc. This communication will be via the ISO 20022 format for both inbound and outbound messages. Other services, such as custody and corporate actions processing, is out of the T2S scope and will still require a connection to the CSD.
ISO 20022 was chosen as the format for T2S because it covers the full settlement and is an open standard used also in cash management, such as for Target2. It is also being implemented in other securities industry initiatives such as the joint Depository Trust & Clearing Corporation (DTCC), SWIFT and XBRL initiative on corporate actions.
With the first wave of T2S migration scheduled for June 2015, the organizations that have opted to become DCPs have prioritized connectivity to the platform. This has been a complex task as they need to ensure that they understand the XML standards being used and that their systems can translate and map information from their back offices into T2S messages. Extensive testing is ongoing to ensure the transition to the new platform is successful.
In focusing on their own connectivity, many of the DCPs and CSDs have overlooked how T2S will impact their customers’ connectivity. Many of them are trying to protect their clients from the changes that are required to participate in T2S by offering to map ISO 15022 or proprietary messages into the required ISO 20022 format, but this won’t help the overall harmonization project.
The T2S platform will not send or receive any ISO 15022 messages or other proprietary formats. In order to ensure communication with users that continue to use ISO 15022, coexistence rules have been proposed by the ECB, which will enable interoperability between ISO 20022 and ISO 15022 messages within T2S. ICPs will send ISO 15022 messages to DCPs or CSDs, which will subsequently translate them into ISO 20022.
While some DCPs and some CSDs can offer ISO 20022 formats to their ICP customers, most ICPs will continue to use ISO 150222 in order to limit the impact and costs of the change to T2S settlement. However, this approach will not really limit the impact because different DCPs and CSDs use ISO 15022 in slightly different ways. This won’t help the overall harmonization objective.
The DCP Group, an industry forum that tracks the main issues for DCPs and progress made in addressing them, approached SWIFT earlier this year on the matter of the gap between ISO 20022/15022 formats. The Group wanted SWIFT to help to promote the use of ISO 15022 in a more coherent way. However, after a meeting in May, no consensus was reached on a common approach to tackle this issue.
In the meantime, SWIFT can help to train and educate ICPs about the functionalities and specifics T2S will bring to ISO 15022 formats. If ICPs understand what ISO 15022 formats should look like, they can then put pressure on the provider side to introduce more common approaches.
The migration to T2S would have been an ideal trigger for harmonization of ISO 15022 formats and massive migration towards ISO 20022, however, most institutions have focused solely on changing the minimum of the existing formats. This is somehow a lost opportunity and full harmonization on the settlement level may not be reached in the short-term.