A TARGET 2 Securities (T2S) project board met recently for an update on system development and to consider options for cost recovery.
The project is expected to be fully operational with 23 CSDs migrated to the new system by 2018. The development of the European Central Bank-funded harmonized settlement platform for eurozone securities is on track to be completed in June. The core functions of the development, comprising the matching, the settlement engine, the validation of messages and the checking of balances are understood to be complete. The non-core functions such as the billing are 85% completed. Model by model testing is more advanced than what was planned (75% complete compared to the 70% expected by the project board meeting date), it is understood. The end to end testing – where all of the system models are tested together – is behind schedule: 28% complete compared to 30% that was expected at the end of March, it is understood. Testing with the each of the 23 CSDs that signed up to T2S will start in second part of 2014.
On the cost recovery analysis, the ECB has an 8.5 year period to recover its €1.1 billion investment in T2S. However the parameters by which this recovery period is measured have changed: settlement volumes are 17 % below the estimate at which the ECB could recover its costs. Moreover, only 23 CSDs out of Europe’s 40 CSDs are signed up to T2S. The board considered that if the volumes are 10% below or 10% up it may by contract increase or reduce the price for settlement (currently 15 cents per settlement transaction) starting from 2019 once the systems are fully in place. The board is also considering how it can increase volumes in T2S to make up the shortfall. Norway is believed to be pragmatic about the project and may join after the migration of all the other CSDs is complete and can see the project working. Similar feedback was received from Sweden, it is understood.
In addition the ECB is understood to be in discussions with Clearstream and Euroclear about moving Eurobonds settlement activity from commercial bank money to central bank money in order to bring more volumes to the T2S platform. Fund activity, which is also largely settled in commercial bank money could also be brought onto the T2S platform to increase volumes. In addition to reviewing the price, and bringing more volumes onto the platform, the project board is also considering changing the cost recovery period, from 8.5 to nine years. It is understood the decision on which option to pursue will be made at the end of 2018 based on the volumes at that time.