Study Highlights Agent Banks Cost Saving Role in T2S

Agent banks could play a significant cost-saving role for firms connecting to TARGET2 Securities, Europe’s incoming settlement platform, but have low levels of internal liquidity, finds Finadium.

In a recent study by Finadium titled “T2S, collateral and Liquidity: Building a Strategy for Growth”, it concluded firms that hold a large amount of high quality liquid assets (HQLA) would be best off going directly.

Going direct involves a financial intermediary contracting with an investor central securities depositary (CSD) to be the gateway to T2S, and that the institution would have a linked Central Bank cash account to support settlement. For a firm to go direct, it must have enough liquidity in T2S related accounts for settlement.

However this is not all the case, in which Finadium sees “more instances where liquidity is an internal cost” for firms.

To achieve cost savings, the answer could be in netting clients together through an agent bank before going to T2S.

“The idea is that a collection of clients with two-sided transactions will net down, leaving the agent with a lower liquidity call on T2S or from a Central Bank that the individual client on its own. The agent can then show the client their direct liquidity saving in terms of capital or securities not needed, and can make a cost comparison with the client’s cost of liquidity if direct verses the cost of liquidity charged by the agent,” the study says.

The role of agent banks, or sub-custodians, has come into question in the post T2S environment, in which global custodians will no longer need a diverse network of sub-custodians and CSD relationships in individual countries.