Last week, Société Générale Securities Services (SGSS) said that it would connect directly to TARGET2-Securities (T2S). Hugh Palmer, T2S product manager, Financial Institutions & Brokers at SGSS explains the service provider’s strategy for the upcoming single settlement system for Europe.GC: What is your T2S strategy and how did it come about?
I was first introduced to T2S in a role at SGSS where I was looking at strategy for market infrastructure between 2004 and 2009. This was when the ECB’s URD became more detailed. I then moved to a project management role, putting in place a platform to develop retail on-line brokerage and custody tools in Eastern Europe. Following this adventure, I took an opportunity early 2011 to found and launch SGSS’ T2S program, which now comprises nine project teams. Our sales team found that clients were asking more and more about T2S so my role became increasingly a client facing one. I thus changed hats and engaged with financial institutions and brokers business development segment at SGSS and have assumed global responsibility for T2S linked business development and coordination of our client solutions.
Here we have three key messages: Firstly T2S is a factor of change; secondly, we’ve consummated a suite of solutions for clients that have a modular approach to buying those services; thirdly, there is no one size fits all. Clients will have questions about connecting to T2S themselves. We hope to partner with them in determining what they need. We bring out our in-depth knowledge of markets from our own T2S horizon business model analysis and from our wide European footprint to help those institutions build their business case by defending the elements of costs, benefits and synergies. From that we have an opportunity to help them change their business model and in executing their change strategy.
Coming back to the first point, the change will be to the existing 41 European settlement systems amongst which 23 CSDs will converge their systems onto one platform. T2S is a wave that will change the shoreline, there is not much movement yet but the wave is getting closer and awareness is rising. Financial institutions need to get on the wave, above the water so as to see where they are going. At least if you are in the movement you can steer.
GC: How does this change the way clients buy?
On point two, clients say they are looking for less complexity. They and we are managing a network of agent banks and are dealing with different procedures, cut-offs, messaging, tax rules and so on. There is more harmonization of the service they get if they work with a global instead of separate operational relationship from country to country. Clients are looking for fast and easier access and fewer intermediaries. In terms of DCPs, institutions want segregated accounts at CSD level and direct access to T2S but they don’t necessarily want to invest in xml and in the messaging pipe-work. We could provide that infrastructure.
They want to pay less / lower prices for the services they require. For the asset managers/asset owners on the buy-side they are receptive to the ECB’s justification for T2S, i.e. the costs of settlement will be lower with T2S. Clients therefore want one provider to cover settlement across the Eurozone with a trend towards the convergence of settlement costs.
We focus on a new settlement management service. With the shortening of the settlement cycles ensuring market leading settlement rates requires some innovative solutions, for example, hold and release management. We feel there’s a market for better reporting, a greater guarantee of settlement occurring on the intended date, and netting the cash leg of transactions in one account—a recent study on netting our liquidity surprised us in terms of the amount of liquidity we could economize through the pooling effect: we look to pass those benefits to our clients. We can offer to pool liquidity across markets in one single place and reduce the cost of settlement liquidity financing. We look to offer collateral management services, including the T2S client auto-collateralization mechanism, for major clients that manage liquidity hands-on resulting in less cash they have to put on our books.
The third point is facilitating connectivity, i.e. access to the T2S markets – clients could piggy back on our infrastructure and they would move from operational fixed costs to a variable cost model in doing so.
On the last point, standardization of settlement in T2S implies and increased focus on asset servicing: We are offering clients an opportunity to self-manage their settlement while we provide asset servicing only – that we call “Pure Custody” managed market by market. We have a proven track record in this field servicing a very large institution for many years in the ESES markets. With T2S we intend to geographically extend this solution so that clients can simplify their network and engage with a single provider.
GC: How will you engage with customers going forward?
On the third point, we’re not forcing clients to take up one single model. They need to make a decision based on their own stakes, strategy, requirements and economics. For those clients looking to unbundle services, we are explaining the advantages and the constraints. There are a number of things to be shared beyond the strict initial investment. We make sure each of the products mentioned above are explained to them and we also make sure that there is a long-term engagement, as the ripples following the first 4 waves of T2S will be felt in the next few years. Last but not least, the question of outsourcing could also come back on the table notably for the smaller players and those for whom running a back office is not their core business as T2S renders the industrialization of that product possible in the settlement domain, improving the overall economics for both client and supplier.