I. What is T2S and why does Europe need it? II. How will ...siteresources.worldbank.org/.../Resources/282044-1260476242691/T2S… · TARGET2 CENTRAL BANK ... Development phase User

1

I.  What is T2S and why does Europe need it?

II.  How will T2S work?

III.  Project organisation

IV.  T2S benefits

2

A single IT technical platform

An entirely new concept

A solution to the current fragmentation

Reversed integrated model

Multi-currency dimension

Core Neutral Borderless securities settlement Harmonised

CommoditisedDvP in CeBM

4

Market participants

Custodians

CSD A CSD B CSD C CSD x

One integrated settlement process (domestic and cross-border)�

One technical platform used by CSDs for securities settlement

dire

ct a

cces

s

5

The Eurosystem had to choose between the two possible ways of settling securities in central bank money:

•  Interfaced model Two platforms: clients’ cash accounts are held with central banks and the clients’ securities accounts are held with the CSDs

•  Integrated model One platform: both central bank cash accounts and securities accounts are held within the same platform

T2S will be based on the integrated model and ensure real-time DvP settlement in central bank money

6

Change of ownership among investors

Settlement function

Registration of issuer indebtness and investor holdings

Notary function

Custody and asset-servicing function

e.g. coupon payments, redemptions, stock splits

issuer / investor

buyer / seller

Banking function*

*only in some (I)CSDs

e.g. lending and borrowing lender / borrower

Type of intermediation

7

NBB-SSS

OeKB

Euroclear Sweden AB

Euroclear Finland Oy

Euroclear France S.A.

NEGICEF

Euroclear UK and Ireland

CIK

Cyprus Stock Exchange

Clearstream Banking Ffm

Clearstream Banking Lux

Iberclear – BME Group

HELEX BOGS

Monte Titoli S.p.A.

Malta Stock Exchange plc

SITEME INTERBOLSA

CDCP KDD

SIX SIS LTD

VP SECURITIES

EVK

CSD of Lithuania, plc

Latvian Central Depository Depozitarul Central S.A. Icelandic Securities Depository

VPS

KDPW

KELER

8

I.  What is T2S and why does Europe need it?

II.  How will T2S work?

III.  Project organisation

IV.  T2S benefits

9

TARGET2 CENTRAL BANK

MONEY VALIDATION and MATCHING

SECURITIES

OPTIMISATION of

SETTLEMENT

SETTLEMENT and

REALIGNMENT

T2S

CENTRAL BANK MONEY

CSD A

CSD B

CSD C

NCB A

NCB B NCB B ACCOUNTS

NCB A ACCOUNTS

NCB C

CENTRAL BANK MONEY

NCB A ACCOUNTS Other RTGS

TARGET2 VALIDATION and MATCHING SECURITIES

OPTIMISATION of

SETTLEMENT

SETTLEMENT and

REALIGNMENT

CENTRAL BANK MONEY SECURITIES

OPTIMISATION of

SETTLEMENT

SETTLEMENT and

REALIGNMENT

SECURITIES

OPTIMISATION of

SETTLEMENT

SETTLEMENT and

REALIGNMENT

CENTRAL BANK MONEY CENTRAL BANK

MONEY

NCB B ACCOUNTS

NCB A ACCOUNTS CSD A

CSD B

CSD C

CSD A

CSD B

CSD C

CSD A ACCOUNTS

CSD C ACCOUNTS

CSD B ACCOUNTS

NCB A

NCB B

NCB A

NCB B NCB B ACCOUNTS

NCB A ACCOUNTS

NCB C

CENTRAL BANK MONEY

NCB A ACCOUNTS Other RTGS

NCB C ACCOUNTS NCB C NCB C ACCOUNTS

Other RTGS

CENTRAL BANK MONEY

CENTRAL BANK MONEY

T2S will bring on one technical platform all securities and cash accounts to settle all securities transactions in central bank money

10

  Optimised settlement model •  CSD securities •  CeBM cash

  Real-time gross settlement (RTGS), combined with

•  Auto-collateralisation •  Continuous optimisation •  Recycling mechanisms

  In addition, T2S provides e.g. •  Matching services •  Conditional securities delivery •  Automated real-time realignment of

cross-CSD positions •  Single account repository •  Standardised interfaces •  Message subscriptions and reporting

11

18:45-19:30 19:30-03:00 03:00-05:00 05:00-18:00 18:00-18:45

Start-of-day Night-time

settlement period

Maintenance

Window ** Daytime

settlement period End-of-day period

• Change of Business Date •  Static Data Update •  Instruction Revalidation

based on SD maintenance •  Settlement Eligibility • Liquidity transfers

(preparation for the night-time settlement period, such as arrange funding in the T2S DCA)

• Liquidity Transfers • Repeat n

Cycle & sequences End of Cycle reporting Static Data Update*

Last Cycle: • Partial Settlement • Multiple Liquidity

Provider reimbursement at end of cycle

• Predefined/Standing Liquidity Transfer Orders

• End of Cycle Reports •  Statement and Reports

•  Interface services restricted

• Other services unavailable

• Continuous real time Settlement

• Liquidity transfers • Partial Settlement window •  Intraday DVP cut-off 16:00 •  Intraday FOP/BATM/

Central Bank operations cut off 18:00

* Static Data updates are accepted throughout the night-time settlement but are implemented at the end of cycle sequences if they impact the settlement process ** There are considerations to align the maintenance window to the maintenance window timeline in T2

• Release of EoD cash restrictions

• EoD intraday credit reimbursement

• EoD Liquidity Transfers (cash sweep) + forced RTGS Liquidity Transfers

• Technical bookings •  Stop settlement • Recycling and purging •  Securities Accounts

consistency check •  Statement and reports

12

•  Technical netting reduces the need for cash and securities on transactions to minimise the use of resources.

•  Partial settlement splits transactions if only limited resources remain available.

•  The additional optimisation algorithms look at all transactions in different ISINs to identify chains of transactions, empty circles, etc.

•  Auto-collateralisation creates extra liquidity for settlement via collateral on flow and on stock.

Technical Netting

Auto-collateralisation

Additional Optimisation Algorithms

(Identification of chains of transactions)

Opt

imis

atio

n Fe

atur

es

Partial settlement

13

  Auto-collateralisation should be available

•  To all participating markets

•  During the whole settlement day at zero interest

•  In repo and in pledge environments

  Substitution of auto-collateral operations

•  If securities used for auto-collateral operations are needed for a securities transaction, T2S will automatically release the securities for an equivalent amount of cash, or automatically substitute them for other securities.

  Closing of auto-collateral operations

•  Settlement banks will have the choice to close all or part of their auto-collateral operations on request.

•  Dedicate liquidity to close their auto-collateral operations.

•  All auto-collateral operations will be closed automatically at the end of day.

• Definition: An automated intraday credit operation in central bank money duly collateralised aiming at facilitating the settlement of securities-related transactions and triggered when cash is insufficient on the buyer’s side.

14

CSDs in T2S

T2S Parties

T2S

CSD in T2S

T2S Party

T2S

CSDs in T2S

T2S Parties

CSD in T2S

T2S Party

Indirect connection

Direct connection

Contractual relationship

Technical connection

15 15

•  T2S brings de facto harmonisation to settlement (single settlement procedure and schedule, ISO 20022 messages, etc.) and also indirectly fosters further harmonisation of market practices throughout Europe

•  Harmonisation progress is defined in association with T2S stakeholders and builds on market initiatives

•  The Eurosystem co-operates with other relevant EU bodies and groups, like CESAME2, to align market participants and public authorities for the implementation of harmonised standards within European local markets

T2S represents a unique opportunity to dismantle Giovannini barriers and stimulate European

harmonisation in post-trading

16

I.  What is T2S and why does Europe need it?

II.  How will T2S work?

III.  Project organisation

IV.  T2S benefits

17

18

Tariff Structure

Investment cost

Running costs

Volume estimates

Prices

PLUS TIMES

19

Preparation phase

Specification phase

Development phase

User Testing phase

Operational phase

July 2006 September 2014 July 2008 February 2010 January 2014

Go-live

20 20

July

200

6

Spec

ifica

tion

phas

e

Prep

arat

ion

phas

e

3Q 2011

UDFS Version

1.2

2Q 2013

UDFS version 2.0

Feb 2010

Publication of frozen

URD version 5.0

1Q 2012

User Handbook version 1.0

1Q 2011

UDFS Draft

version

Development phase

User Testing phase

3Q 2011

Expected signature Currency

Participation Agreement

3Q 2011

Expected Signature

Framework Agreement

4Q 2011

Announcement of chosen network providers

June 2010

Publication of final GFS version 4.0

21 21

July

200

6

Spec

ifica

tion

phas

e

Prep

arat

ion

phas

e

User Testing phase

September 2014

Go-live Migration

planned in 3 waves of CSDs

January 2014

Start of user testing

Dev

elop

men

t ph

ase

Operational phase

22

I.  What is T2S and why does Europe need it?

II.  How will T2S work?

III.  Project organisation

IV.  T2S benefits

23

T2S Benefits

CSDs T2S Custo- dians

Investors

Issuers

Benefits of T2S

24

•  access to a technologically advanced, state-of-the-art, and highly robust settlement engine

•  savings from no longer needing to invest in costly and risky IT projects to update their settlement infrastructure

•  ability to take advantage of economies of scale from pooling together settlement volume across the whole of Europe

•  new business opportunities and access to new markets for asset-servicing

25

•  significantly lower settlement fees for domestic and, in particular, cross-border transactions

•  Possibility to access all securities from potentially one CSD

•  possibility to optimise collateral and liquidity management

•  reduced back-office costs by streamlining interfaces and centralising settlement activity

•  new business opportunities and access to new markets for asset-servicing

26

•  fostering a higher level of competition in Europe’s post-trade industry

•  contributing to harmonisation of clearing and settlement in Europe, thereby promoting a Single Market for financial services

•  reducing the cost of capital for firms, thus contributing to economic growth

•  positively impacting financial stability by reducing settlement risks on cross-border transactions

•  offering easy portfolio diversification to investors

•  enabling issuers to easily reach European investors

27

Cross-border settlement as inexpensive as domestic

Reduced users´ collateral/liquidity needs

Harmonising settlement to make Europe a true Single Market

Create new opportunities for competition

Users will only need an account at one CSD to settle any transactions in securities within T2S

28

29