By Harry Newman, Head of Market Initiatives, EMEA, SWIFT
The impact of T2S on those market participants that will connect directly is becoming more and more of a known quantity. For example, we know that CSDs and custodians going this route face a significant spend to adapt their back offices. As independent analyst Celent states in its recent report, The European Post-Trade Ecosystem under T2S: Dealing with Complexity, the level of investment required will vary depending on the number of markets accessed, settlement volumes, current market practices and the approach taken. But even the most cost-effective option – adapting an existing back office system using a combination of communications hub and message translators – will already cost in the region of €7 million.
For players that decide to completely revamp their back office systems, the investment will be higher still at between €12 million for the settlement function only, and it rises to as much as €27 million if custody is added on top.
The much-predicted impact of T2S (and CSD-Regulation) on the competitive landscape for market infrastructures is also starting to bite. We are already seeing banks entering the CSD space: BNY Mellon’s entry into the CSD world advanced further recently when the bank signed a framework agreement with the Eurosystem to allow it to outsource settlement to T2S.
The squeeze on CSDs from the commoditization of settlement will likely make life uncomfortable for smaller players, who stand to lose their differentiator of providing settlement in local markets – as Celent confirms. While there are “opportunities to develop additional sources of revenue”, its report states, “these opportunities mainly seem reachable to a handful of market players that have the scale and reach to reap the benefits of the future changes”.
But while we are getting more and more clarity on how T2S will impact at the level of market infrastructures and major banks, its impact on the wider marketplace – on all those players that will not connect directly but which are involved to a greater or lesser degree in the settlement process – is not so clear.
One factor here is that – as Celent points out – there are some “major discrepancies among market participants in terms of their readiness for T2S implementation” because those for which the impact is less are “still navigating the complexity of T2S”: that is, “they do not have a clear strategy regarding the future of their European post-trade infrastructure”.
While natural enough, this tendency to hang back on assessing the impact of T2S by those not intending to connect directly could prove to be unwise, since the new platform will change the way European settlements work, and this will affect them. Indeed, T2S could present opportunities for better service for these players, so investigating the impact sooner rather than later makes sense.
Detailed industry debate on the wider impact of T2S is only just starting to happen, but already some important issues are being discussed. For example, buy side firms may well be able to get better information from T2S to control risks around securities settlement. In theory, there should be a lot more data available from T2S – about how settlements are progressing, current status and more – over and above the information that is available today. To what extent will direct users of T2S make this data available to indirect participants? And what technology solutions will the providers and consumers of this information need to take advantage of it?
The sooner these questions are answered, the more beneficial the implementation of T2S will be to the market as a whole. So, although the market infrastructures and major banks are most urgently impacted by T2S, now is the time that all market participants should be tapping into sources of market expertise to help them assess the impact of the changes the new settlement platform will bring.
This will enable players of all types and sizes to establish the opportunities T2S will create, and to start planning and budgeting for the projects required to make the most of the transformation of Europe’s settlement landscape for their own business development.