T2S 2010 Brochure

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T 2 S :

H A L F - W A Y T O

D E L I V E R Y

S E T T L I N G

W I T H O U T

B O R D E R S

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Photo:www.istockphoto.com

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S E T T L I N G

W I T H O U T

B O R D E R S

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CONTENTS

4

INTRODUCTION 7

WHAT IS T2S AND WHAT

ARE THE MAIN BENEFITS? 11

1. Tackling fragmentation in securities

settlement 11

2. What services will T2S offer,

and to whom? 12

3. What are the benefits and

who will benefit? 15

T2S JOURNEY:

PAST, PRESENT AND FUTURE 19

1. Where have we come from? 19

2. Where are we at the moment? 21

Governance 21

Pricing 24

CSD adaptation plans 27

Connectivity 28

3. Where are we going in the future? 29

FREQUENTLY

ASKED QUESTIONS 33

1. Is the T2S project related to the initiatives

of the European Commission? 33

2. Is the Eurosystem the right body to manage

this project? Can a public sector entity runthis critical system efficiently and without

too much bureaucracy? 33

3. How can you claim that T2S will stimulate

competition if, in practice, it becomes a

monopoly? 33

4. Why have you not set up a separate legal

entity to run this project? 34

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5. You have already announced a delay in

your planning. How can you be sure that

no further delays will occur? 34

6. Is T2S a genuine outsourcing

arrangement for CSDs? 35

7. Will CSDs lose control of their

securities accounts in T2S? 35

8. Will T2S really reduce settlement fees? 36

9. Will T2S fees be on top or

instead of the present settlement

fees charged by CSDs? 37

10. How much will it cost for market

participants to adjust to T2S? 37

11. How can we be sure that the benefits

of T2S are not retained by

intermediaries, but are passed on to

issuers and final investors? 37

12. Lack of harmonisation in the securities

market is a big issue for

Europe today. Is T2S addressing this

problem? 38

13. Does T2S not cater for national

specificities at all? 38

14. If T2S does not cater fornational specificities, does this

mean it has ignored the

specific needs of direct holding

markets? 38

15. Non-euro area central banks are

represented in the T2S Programme Board,

but not in the Governing Council

of the ECB. How can they be sure that

they will keep control of

their currency if they join T2S? 39

16. T2S is a Eurosystem project.

Why should the United Kingdom join? 40

17. Will T2S become a CSD? 40

CONCLUSION 43

5

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The TARGET2-Securities (T2S) vision which is

to crea te a domest ic borderless mark et for

securities settlement for Europe was launched

four years ago in the summer of 2006. The T2Ssettlement platform is scheduled to be user

test ed in Ja nu ar y 20 14 and op erat io ns ar e

planned to begin in September 2014. So, at the

time of publication, the project is exactly half-way

to delivering T2S. The journey so far has not

always been easy and, like all big projects, there

have been ups and downs. But it is fair to say that

a lot of progress has been made in the last four

years. There is of course still much to be done in

the coming years, not least on the development,

testing and migration of the T2S platform, and

many other tasks need completion to ensure that

we reach our destination on time. This progress

would not have been possible without the

institutions and hundreds of individuals who have

participated in this endeavour, from central

securities depositories (CSDs) to banks and

other market participants, non-euro area central

banks and, of course, the Eurosystem. We will

continue to rely on your help.

Given that we are exactly half-way through theproject, it is an opportune moment to reflect on

where we stand and to consider what we have

already achieved, as well as what remains to be

done. This i s one of the purposes of this

document. But there is another objective. At this

half-way point, there is of course stil l some

important open questions in part icular

regarding which currencies will participate in T2S,

how large the settlement volumes processed in

T2S will be, how CSDs will reshape their legacy

systems to the future T2S world, and how muchit will eventually cost to settle transactions in T2S.

These are important issues which will ultimately

determine the success of the project. Therefore,

this document also provides some reflections on

these and other crucial questions that have been

raised by the market.

Before beginning, there are a number of aspects

of the T2S project which should be highlighted.

First, it is important to emphasise that T2S is for

Europe; participation is not restricted to the 16

countries in the euro area or even to the 27

countries in the European Union. It is for Europe

as a whole. Very soon after the project got

underway, T2S was designed, and is now being

built, as a multi-currency securities settlement

platform. This view was strongly supported by

the ECOFIN Council in February 2007 when it

backed the idea of T2S on the condition that the

future system would be open to other currencies

as well as the euro. Not only is it fair that allEuropean countries should have the opportunity

to part ici pate, but also, the more CSDs and

currencies that are in T2S, the greater the

benefits for everyone. It is a win-win scenario. By

pooling more securities settlement together in

the same place, market participants will achieve

lower transaction costs and unimpeded access to

INTRODUCTION

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an even wider range of securities. It wil l be

another important step towards a truly integrated

capital market on a European scale.

Second, T2S will be a revolutionary force in

Europe's financial markets. It will fundamentally

change the way things are done in some areas

quite dramatically, in others more gradually. But it

will be a peaceful revolution. T2S does not favour

any particular business model. Both large and

small players will have the opportunity to benefit

from T2S, by expanding their client base or range

of services, by providing high-quality, customised

services to niche markets, or through increased

cooperation and consolidation with other players.

The key to success will be thinking ahead and

adapting to T2S in the best possible way. As with

the intr od uc tion of any ne w tech no lo gy

whether it be the introduction of mechanical

looms during the industrial revolution or the

computer in the mid-twentieth century it is

initially perceived, at least by some people, as a

threat. But in the end, we all know that such new

technologies, rather than reducing possibilities for

growth and development, have always increased

opportunities. The same is true for T2S. In fact, itwill be those who choose not to be a part of the

T2S revolution who will be the ones losing out.

Third, the CSDs approach to the changes is

particularly important for the success of T2S in

improving the European securities markets. Most

CSDs will utilise the new T2S infrastructure in an

efficient way and, to the largest extent possible,

reshape and decommiss ion their legacy

settlement systems. A CSD that adapts efficiently

so that T2S becomes an integral part of its ITarchitecture, rather than simply adding it as

another layer on top of its existing systems, will

be in the best position to offer high-quality

services at the lowest prices in the future T2S

world. By fully relying on T2S and minimising the

replication of data and systems, CSDs and their

users will benefit the most from T2S. Such a

route will, of course, not be easy and will require

a certain amount of initial investment by CSDs to

reshape their existing systems. But now is the

time to think long term and strategically plan this

work, and to take initiatives that will leverage the

benefits of T2S to the largest extent.

Finally, to support both CSDs in the process of

adapting their legacy systems, and market

participants in deriving the benefits, it is of course

imperative that the T2S community CSDs,

market participants, but also, most importantly,

public authorities make further progress on

harmonisation. As well as legal and fiscal barriers,

the pers istenc e of spec if ic na ti onal mark etpractices and regulations significantly hinders the

ability of CSDs to decommission old systems and

provides a justification for maintaining certain

legacy infrastructures to deal with these specific

processes. These national specificities also

prevent the market from reaching a fully

competitive level playing field for post-trading

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activities in Europe, as local players will continue

to hav e an adv ant age ove r for eign pla yer s in

terms of knowledge and technology. T2S is not

just an IT pr oj ect; it ha s a much wide rprogramme, driving forward the integration of

Europes capital markets. In the settlement world

as elsewhere, national authorities should act to

reform processes in order to reap the ful l

benefits of market opening.

With these issues in mind , the do cu ment is

structured as follows. For those who are new to

the project , the first chapter briefly desc ribes

what T2S is and what the main benefits will be.

The second chapter will then recap the main

milestones that have been reached during the

first four years of the T2S journey and what

remains to be done in the next four years. The

thi rd chapter lis ts some of the key que stions

or doubts that have been raised about T2S at

this critical stage.

Note: This paper reflects the current policies and status of

the pro jec t as of 8 Oct obe r 201 0. For dev elo pmen ts aft er

th i s da te , pl ea se al so re fe r to th e T2 S we bs it e at

www.t2s.eu

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1.Tackling fragmentation

in securities settlement

In the last decade, the European f inancia l

s e r v i c e s i nd us t r y ha s m a d e c o ns i d e r a b l eprogress in reducing costs and risk, as well

a s i n p r o m o t i n g c o m p e t i t i o n w i t h i n t h e

Single Market . But there can be no doubt

t ha t s i g n i f i c a nt fu r t he r i mp r o ve m e nt is

required, particularly in securities markets.

Progress towards a mature Single Market

h a s b e e n a c h i e v e d b y a c o m b i n a t i o n o f

market forces and action undertaken by the

p ub l i c s e c t o r . S o m e o f t h i s p ub l i c s e c t o r

a c t i o n h a s b e e n l e g i s l a t i v e i n o r d e r t o

s t i m ul a t e h a r m o n is a t i o n a c r o s s n a t i o na l

borders, and some has involved the creation

o f a c o r e i n f r a s t r u c t u r e t o s u p p o r t t h e

c o m p et i t i ve m a r k et . The Eur o s ys t e m ha s

b e e n a c t i v e i n t he p a y m e nt s i nd us t r y b y

providing a core, borderless infrastructure

f o r r e a l- t i me s e t t le m e n t i n c e n t r al b a n k

money ( i .e . TARGET2) and by support ing

t he b a nk i n g in d us t r y i n d el i v er in g p a n-

E u ro pe an p ay me nt i ns tr um en ts a nd

infrastructures (i.e. SEPA).

H o w e v e r , m u c h l e s s p r o g r e s s h a s b e e n

m a d e i n i n t e g ra t i n g n a t i o n a l s e c u r i t i e s

m a r k e t s b e c a u s e o f d i f f e r e n c e s b o t h i n

market practices and in legal, regulatory and

f i s c a l r e g i m e s . T h u s , a l t h o u g h E u r o p e i s

comparable to the United States in terms of

its economic size, its post-trading sector is

fragmented into numerous national markets.

Wh er ea s f i r ms i n th e Uni te d S ta t es c a n

operate in a s ingle, large domestic market,

in Europe they have to operate across manys m a l l e r , n a t i o n a l m a r k e t s a n d b e a r t h e

higher costs of doing so. Because of this lack

o f i n te g ra t io n , E u r o p e l a g s a l o n g w a y

behind the United States in terms of both

the vo lume of tr ansa ct io ns and the co st of

thos e tr ansact io ns .

The cost gap is particularly large for cross-

border securities settlement. The result is a

s i g ni f i c a nt c o s t b ur d e n fo r c r o s s - b o r d e r

wholesale transactions and very significant

l i m i ta t i o n s f o r r e t a il t r a n s ac t i o n s. T h e

L i sb o n a g en d a r e co g n is e d t h e n e ed t o

el iminate these gaps and to promote the

welfare of European ci t izens by achieving

fully efficient capital markets. The gap in the

tr ad ing area is being fo rc eful ly ad dres sed, in

p a rt i cu l ar b y t h e M a r ke t s i n F i na n c ia l

I n s t r u m e n t s D i r e c t i v e ( M i F I D ) , w h i c h i s

s t i m ula t i ng c o m p e t it i o n b e t w e en t r a d i ng

p la tf or ms , w h et h er t ra di ti on a l s to ck

e x ch a n ge s o r n e w m u lt i la t er a l t r ad i ngfaci l i t ies . With regard to the post-trading

s e c t o r , t he EC O F I N C o unc i l 1) concluded

th at t he co nt in uo us fr ag me nt at io n of th e

WHAT I S T2S AND WHAT ARE THE MA IN BENEFITS ?

11

1) ECOFIN Council conclusions on clearing and settlement,

Luxembourg, 9 October 2007:

http://www.consilium.europa.eu/ueDocs/cms_Data/docs/

pressData/en/ecofin/96349.pdf

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s e c t o r l e a d s t o unne c e s s a r i l y h i g h c o s t s ,

e s pe c ia l ly f o r c r o ss - bo r de r s e cu r it i es

tr an sact io ns in th e EU , wh ic h co ns ti tute s a

considerable competitive disadvantage forEuropean capital markets.

Two significant measures are already being

implemented in order to achieve progress.

First, a great deal of work is under way with

a view to harmonising practices, legislation,

regulation and tax in order to remove the

G i o v a n n i n i b a r r i e r s . I n p a r t i c u l a r , t h e

European Commiss ion is f inal i s ing a draft

proposal on market infrastructures deal ing

w i th c e n tr a l c o u nt e rp a rt i es , c l ea r in g ,

derivative contracts and trade repositories

( k no w n a s t he Eu r o p e a n Ma r k e t

Infrastructure Regulation). The Commission

i s a l so w o rk i ng o n t h e S e c u r it i es L a w

D ir ec ti ve a n d t he C en tr al S ec u ri ti es

R e g u l a t i o n w h i c h a i m t o e l i m i n a t e l e g a l

uncertaint ies especia l ly in a cross-border

c o n t e x t . S e c o n d , a l l e x c h a n g e s , c e n t r a l

counterparties and CSDs have undertaken,

under the Code of Conduct for Clearing

a n d S e tt l em e nt , t o a b id e b y v a ri o usm e a s ur e s d e s i g ne d t o s t i m ul a t e fa i r a nd

o p e n c o m p e t i t i o n. The s e i nc l ud e a c c e s s

r i g h t s , a s w e l l a s s e e k i n g t o e n s u r e t h a t

c li en t s a re o f fe re d a pp ro p ri at e a nd

tr anspar ent pr ic es fo r un bund led serv ic es in

order to put an end to cross-subsidies and

the lock ing- in of cl ient s.

N e ve r the le s s, t her e i s a c r uc i al m i ss i ng

element: core, neutral and borderless securities

s e tt l em e nt t o c r ys t al l is e t he g a ins f r o m

harmonisat ion and to provide support forcompetition between service providers in the

securities industry. T2S will foster the required

tr an sf or ma ti on in in te rm ed ia ti on be tw ee n

i s sue rs a nd i nve s to r s b y s t im ula t ing t he

development by financial market participants of

a competitive and efficient European market.

A l th o u gh t h er e h a ve b e en s u cc e ss f u l

mergers between CSDs in the past and

ther e ma y be mo re in the fu ture it seem s

that th is pr oc ess of co ns ol idat ion by merg er

is unl ikely to del iver an integrated market

infrastructure for Europe in the near future.

Accordingly, given the importance of making

progress in this area, it is necessary to find a

w a y o f e s t a b l i s h i n g a s i n g l e s e t t l e m e n t

process for the European securities market.

T2S will meet this need.

2. What services will T2S offer,

and to whom?T2S is a technical platform for core, neutral

and borderless securities settlement. T2S is

core, because it will only deal with the most

fundamental and commodit ised aspect of

the post -tra di ng busine ss : sett lement . T2 S is

n eu tr al i n t ha t i t w il l n ot f av ou r o r

d i s c r im i n a te a g a i n st s p e c if i c c o u n t r ie s ,

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m a r k e t i nfr a s t r uc t ur e s o r g r o up s . T2 S i s

b o r de r l es s , a s i t w i l l m a k e c r o s s- b o rd e r

settlement identical in terms of safety and

efficiency to domestic settlement.

T2S will provide harmonised and commoditised

delivery-versus-payment (DVP) settlement in

central bank money in euro as well as other

European currencies in virtually all securities

circulating in Europe. It is expected, in time, to

become the single provider of core securities

settlement services for CSDs.

Settlement in T2S will be very safe because

it wil l involve payment in only central bank

money.

The platform will be highly reliable, scalable

and robust. This is vital considering the huge

volumes of transactions that are settled even

Validation and matching

Optimisation

of

settlement

CSDA accounts

CSD B accounts

CSD C accounts

Securities

NCBA accounts

NCB B accounts

NCB C accounts

T2S

Settlementand

realignment

NCB A

NCB B

NCB C

CSD A

CSD B

CSD C

Figure 1. T2S A cooperative project between CSDs and central banks

Figure 1 above provides a high level overview of T2S. CSDs will keep all of their clients securities positions in T2S. Each

securities account held in T2S wil l be attributable to only one CSD. CSDs wil l maintain legal relations with their

customers, including custody and notary functions. T2S has legal relations only with CSDs, and not with banks, which

access T2S services via their chosen CSD. Similarly , T2S wil l maintain dedicated central bank money accounts

representing a banks claims in central bank money on that clients national central bank. Each account may be used to

settle transactions relating to the clients security accounts in one or more CSDs. This cash account structure will foster

efficiency improvements for clients that use more than one CSD.

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i n t o d ay s f r a g me nt ed m a r ke t s ( w i t h t w o

million settlement instructions being processed

every day), and will become more vital still as

volumes increase. Much of the growth will bein cash trading and in collateral markets, which

contribute greatly to l iquidity but are low-

margin activities. Such trades are only viable in

r i s k/ r e tur n t e r ms i f s e t tl e m ent i s t i m el y ,

reliable and inexpensive.

C S D s w i l l r e p r e s e n t t h e o n l y g a t e w a y s

t hr o ug h w h ic h ma r k e t p a r t i c i p a nt s c a n

access T2S services and it will be the CSDs

th at co nt ra ct wi th th e Eu ro sy st em fo r T2 S

services . Each CSD is invi ted to agree to

m o v e i t s s e t t l e m e nt t o T2 S a nd o f fe r i t s

clients borderless settlement of trading and

collateral operations. CSDs should be able,

o ve r t im e, t o r ed uc e t he ir i nt er na l

s e t t l e me nt - r e la t e d c o s t s s ub s t a nt ia l l y b y

r e sh a p in g a n d r e st r u ct u r in g t h e ir o w n

settlement processes.

CSDs will continue to operate, provide and

i m pr o ve e f f ic i en t a n d s a fe s e rv i ce s

particularly in relation to corporate actionsand national requirements in areas such as

registration, taxes, regulatory reporting, and

s o m e a s p e c t s o f d i r e c t ho l d i ng s b y r e t a i l

investors.

While T2 S pr ovides the core func tional ity to

m a k e s e t t l e m e n t b e t w e e n t w o C S D s a s

s imple as domest ic sett lement, access to

European securities via an individual CSD is

d e p e n d e n t o n t h a t C S D b e i n g a b l e a n d

wil l ing to accept securities issued in otherC SD s. T o u se a r ai lw ay a na lo gy , T 2S

p ro vi de s t he tr ac ks f or c ro ss -C SD

s e t tl e m en t , b u t r e q u ir e s c h a n g e s t o t h e

tr ai ns ( i. e. t he C SD s) t o m ee t t he

demands of their passengers ( i .e . user-

banks) as regards this service. While T2S is,

i n i ts el f, n ot s uf fi ci en t t o m ee t t he

passengers demands, it creates incentives

for the train companies to make the relevant

changes.

T2S will provide DVP settlement in real time

with auto-collateralisation and optimisation

procedures, irrespective of which CSD and

nat ional central bank (NCB) provides the

respective underlying securities and central

bank money accounts. To facilitate safe cross-

CSD settlement, it will provide realignment in

real time when securities issued in one CSD

are settled in another CSD. CSDs joining T2S

will thus be able to offer their clients cross-

border settlement in central bank money atthe same cost as domestic services a service

that is not avail able toda y. Thus all sett lements

in T2S become European domestic.

CSDs clients, central clearing counterparties

(CCPs) and trading platforms can choose to

have a direct technical connection to T2S.

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The parties which choose direct connectivity

will be able to input settlement instructions

d i r e c t l y i nt o T2 S a nd s up p l y a nd r e c e i v e

i n f or m at i o n r e le v an t t o p r o ce s si n g a n dstatus. Direct connectivity can make it easier

for market part ic ipants to operate direct

memberships of multiple CSDs and for CSDs

to r each a w ider set of inter na t ional

securit ies , counterparties and cl ients . The

m a rk e t p a r ti c ip a n ts l e ga l r e l at i on s h ip ,

ho w e v e r , w i l l r e m a i n w i t h t he C S D ( s ) i n

which they choose to keep their accounts,

regardless of the k ind of connect iv i ty the

participants have chosen.

A market participants decision on direct or

indirect connectivity will depend, inter alia, on

the will ingness of the CSD to offer the service,

the part icipant s technical comp etence and the

pricing of such services by the CSDs. Offering

both direct and indirect options provides

m a xi m um f l ex i bi l it y fo r f i nanc i al m a rk e t

participants, entails no significant additional

cost for T2S and may well both require and be

a driver towards harmonisation.

3. What are the benefits and who will

benefit?

One of the key benefits of T2S is that it will

deliver domestic European-wide settlement

at low cost , ref lect ing the very s igni f icant

economies of scale in this area. Once T2S is

s er vi n g a ll c o un tr i es i n E u ro pe , t h es e

e c o no m i e s o f s c a l e s ho ul d m a k e t he uni t

cost of settlement considerably lower than

th e lo we st pr ic e ch ar ge d by an y Eu ro pe an

CSD at current volumes.

The low projected unit cost applies to both

c r o ss - bo r de r a n d n a t io n a l s e tt l em e nt .

Indeed, with T2S, the settlement fee for a

transa c ti on in German se curi ti es in euro

between German participants would be the

same as the fee charged, for example, for a

tr an sa ct io n in Sp an is h se cu ri ti es se tt le d in

Swiss francs even if the seller is from France

and the buyer is from the United Kingdom.

The fee wil l be the same because, with the

T 2 S s o f t w a r e , b o t h t r a n s a c t i o n s w i l l b e

e q u a l l y e a s y t o s e t t l e f r o m a t e c h n i c a l

p e r s p ec t i v e . T 2 S e r a d ic a t e s s e t t le m e n t

b or de rs , m ak in g i t t he n ew d o me st ic

infrastructure of Europe. It is thus expected

th at sett le me nt vo lu mes wi ll incr ea se on ce

T2S goes live owing to dynamic effects. This

shi ft to borderless markets in T2S wi l l , in

tu rn , de li ve r si gn if ic an t be ne fi ts to is su er s

a n d i n v es t or s , p a rt i cu l ar l y i n s m al l er

countries. Issuers will have access to deepermarkets for raising funds and wil l not need

to co nsi de r is su in g in a di ff er en t co unt ry ,

while investors wil l be able to benefit from

portfolio diversification at lower cost.

T 2 S w i l l c r e a te a s i ng l e p o o l o f a s se t s

covering a lmost a l l the securi t ies held by

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participating CSDs exchangeable for each

other via central bank money at low cost, in

real t ime, and in a very rel iable settlement

system. Market participants wil l be able tocentral ise euro l iquidity in a s ingle central

bank cash account. Together, these features

will create new options for commercial and

i n v es t me n t b a n ks i n t e r ms o f m a n ag i n g

collateral, optimising their funding costs and

avoiding failed deliveries.

T2S will enhance competition among third-

p a r ty c o l la t er a l m a n ag e r s a n d l i q ui d i ty

providers, since it will be easier to unbundle

such services from custody provision. From

the indic ati ons giv en by mar ket par tic ipa nts,

the reduc t ion in co sts i s l ike ly t o be

substantial. This will feed through to reduced

tr adi ng sp rea ds and lo wer se rvi ce pric es ,th ere by im pro vin g wel far e. There wil l be

other dynamic effects on, and gains through,

e nha nce d c o m p et i t i on, s p e c if i c a ll y i n t he

areas of custody and securities trading.

Furthermore, T2S will stimulate competition

in the provision of settlement services. In thepast, for most securities there were hardly

any a l ternat ives to us ing the local market

CSD, direct ly or v ia a custodian or agent .

CSDs were not set up to compete with one

another, but to be the central infrastructure

within each country. By lowering the barriers

to en te rin g new ma rke ts, T2S wil l cre at e

competition between CSDs, as they seek to

be the preferred gateway to T2S.

Some CSDs may respond by enhancing theira ss et s er vi ci ng a bi li ti es b ot h f or t he ir

domestic securities and for securities which

th ey wi sh to of fe r th ei r cl ie nt s bu t ar e

domest ic to another CSD. Others may

choose to specialise in issuer services and/or

services for individual investors.

Banks providing custody will need to consider

their strategy, since their wholesale customers

in part icular (but , in t ime, a lso their retai l

c l ients) are l ike ly to wish to reduce their

number of suppliers by seeking partners with

pan-European, or at least regional, services.

The outcome of this process is very likely to be

favourable in terms of service quality and price,particularly if accompanied by real progress on

harmonisation through the Giovannini process,

u nd er t he a us pi ce s o f t he E ur op ea n

Commission.

The players who will benefit the most from

T2S will be those that embrace T2S, innovate,and use its possibilities most efficiently. The

ones to lose out wi l l be those that try to

maintain their exist ing infrastructure and

s er vi ce s w it ho u t a da pt in g t o t he n ew

environment. Although this could be the

easiest path in the short term, it will probably

lead to obsolescence in the medium and long

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1. Where have we come from?

T 2S s tar ted in J ul y 2 00 6 w he n t he

Governing Counci l of the ECB announced

that it wo ul d like to explor e, to gether withth e ma rk et , th e fe as ib il it y of de ve lo pi ng a

s ingle sett lement platform for Europe. At

th at po in t in ti me , mo re th an se ve n ye ar s

had already passed s ince monetary union

h a d b e e n s e t i n m o t i o n a n d w h i l e s o m e

steps forward had been made to integrate

f i na nc i a l m a r k e t s i n t e r m s o f t r a d i ng a nd

investment, progress had been particularly

weak in the area of securities settlement.

B e tw e en m i d- 2 00 6 a n d m i d- 2 00 7 , t h e

E ur os ys te m c ar ri ed o ut e xt en si ve

consultations with key players in the post-

tr ading busine ss CS Ds, cu stod ians , ce nt ra l

clearing houses, investment banks as wellas with public sector stakeholders, including

the Eu ro pean Co mmission and the EC OFIN

C ou n ci l. T h e f ee db ac k r ec ei ve d w as

generally very positive regarding the overall

i de a, a lt ho ug h t he re w as s ti ll m uc h

uncertainty about how i t would work. So

b ef or e d ec id in g t o g o a hea d w it h

developing T2S, the Governing Council of

t he E C B d ec id e d t h er e ha d to b e m o r e

f l es h o n t h e b o n e s . T h e T 2 S A d v is o r y

Group was therefore established, which was

m a nd a t ed t o d r a ft t he T2 S U se r

Requirements Document (URD).

T h e U R D w a s d r a f t e d w i t h s t r o n g i n p u t

f r o m a n d i n c l o s e c o o p e r a t i o n w i t h t h e

market and was submitted for two publ ic

consultations before finalisation. In addition,the Eu ro syst em co nd uc te d a co mp rehe ns iv e

cost-benefit analysis together with market

p a r t i c i p a nt s a nd c a r e fu l l y a na l y s e d l e g a l ,

te chni ca l and op erat io na l ma tter s. Ba sed on

t h is t ho r o ug h a na l y s i s a nd t he po si t i v e

feedback from banks and public authorities,

as well as the intention of CSDs to commit

to T2 S, in Ju ly 20 08 th e Go ve rning Co un ci l

o f t h e E C B d e c i d e d t o g o a h e a d w i t h

i n ve s ti n g r e so u r ce s i n d e ve l op i n g t h e

p l a t f o r m . I t a l s o d e c i d e d t o a s s i g n t h e

development and operation of T2S to the

D eu t sc h e B u nd es ba nk , t he B a nc o d e

E s p a a , t h e B a n q u e d e F r a n c e a n d t h e

Banca dItalia, jointly known as the 4CB.

The project then entered the specification

phase. One of the main object ives during

th is pe ri od wa s to co mp le te th e te ch ni ca l

documentat ion that would form the bas is

for the subsequent software development

work. The two main technical documents

were the General Functional Specifications

( G F S ) , i nc l ud i ng t he d a t a m o d e l , a nd t he

General Technical Design. In parallel, there

w e r e a ls o o t h er a c t i v i t ie s i n t h e

speci f icat ion phase to f inal i se some open

issues in the URD and to carry out further

work on some specific harmonisation topics,

T2S JOURN EY : PA ST , PRESEN T A N D FUTURE

19

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i n p a r t i c u l a r o n e n s u r i n g a h i g h l e v e l o f

s e tt l em e nt e f fi c ie n cy a n d h a r mo n i se d

processing of corporate actions on flows

After closing al l the remaining open issues,

th e UR D wa s of fi ci al ly fr oze n in Fe br uar y

2010 and these requirements are the basis

for the first release of the T2S platform. A

first draft of the GFS was ready in early 2009,

but the document needed to be regular ly

u pd at ed a nd i mp ro ve d a s t he U RD

continued to evolve. The latest version of

the GFS based on the froze n URD was

published in May 2010.

R e t u r n i n g t o t h e o t h e r a c t i v i t i e s i n t h e

s p ec i f ic a ti o n p h as e , a f i n al i m po r ta n t

w o r k s t r e a m w a s t o d e v e l o p f u r t h e r t h e

contractual re lat ions with the CSDs who

will ultimately be the legal counterparties to

the Eu ro sy stem fo r T2 S and wh o wi ll si gn a

contract to use T2S once in operation. The

Figure 2. Map of Europe showing countries where the main CSDs have

signed the Memorandum of Understanding on T2S.

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f irst step in this process was the signature

of a Memorandum of Understanding (MoU)

in July 2009. So far , 30 CSDs from across

E u ro pe h av e s ig ne d t he M o U, w h ic hincludes almost all of the CSDs in the EU as

w e l l a s t h r e e f r o m o u t s i d e t h e E U ( s e e

Figure 2). The large number of CSDs signing

th e Mo U in di ca te d th e st ro ng ma rk et an d

pol i t ical support for the T2S project . The

MoU outlined the key rights and obligations

o f t he C S D s a nd t he Eur o s y s t e m fo r t he

subsequent negotiation of the contractual

arrangements for T2S, i.e. the T2S Framework

Agreement.

2. Where are we at the moment?

T he n eg ot ia ti on o f t he F ra me wo rk

A g r e e m e nt w i t h t he C S D s s t r a d d l e s t he

s p e c i f i ca t i o n a n d d e v e l o pm e n t p h a s e s .W o r k b e g a n i n a u t u m n 2 0 0 9 w i t h t he

establishment of the CSD Contact Group,

which is composed of senior representatives

from the Eurosystem and the 30 CSDs that

h a v e s i g n e d t h e M o U . B y m i d - 2 0 1 0 t h e

ne g o t i a t i o ns w e r e r a t he r w e l l - a d v a nc e d ,

although further work on a number of key

to pi cs su ch as go ve rn an ce is st il l re qu ir ed .

In July 2010 the Governing Counci l of the

ECB took note of an interim version of the

F r a m e w o r k A g r e e m e n t , w h i c h w a s t h e n

s u b m i t t e d f o r a s s e s s m e n t b y s e c u r i t i e s

supervisors in order to determine whether

th er e wo ul d be an y re gu la to ry hu rd le s to a

CSD s igning the agreement. According to

t he c u r r e nt p l a n n i n g , n e g o t i a t i o n s w i l l

continue unti l the end of 2010, after which

t he ag r ee men t w i l l be sub mi tt e d t o th eG o v e r n i n g C o u n c i l a n d t h e n o f f e r e d t o

CSDs for signature. It is anticipated that the

signature of the Framework Agreement will

ta ke pl ac e ar ou nd summ er 20 11 .

The r e a r e s e v e r a l v e r y i m p o r t a nt p o l i c y -

related matters , in part icular , governance

and pricing, that need to be resolved before

th e CS Ds wi ll be in a po si ti on to si gn th e

Framework Agreement. Much progress on

th es e is su es ha s be en ac hi ev ed in th e la st

year and, as of autumn 2010, they are close

to being fi na li sed.

GovernanceThe fut ur e T2 S g o v e r na nc e a r r a ng e m e nt

wi l l determine how decis ions concerning

the pl atfo rm wi ll be made and ho w disput es

between the various parties will be resolved

in the remaining part of the development

phase and during operations. The four main

stakeholder groups are the Eurosystem, the

non-euro area central banks, the CSDs and

market participants more widely (users, in

particular banks or custodians, etc.). In the

proposed future governance arrangement,

each of the groups will have an appropriate

and varying degree of inf luence over T2S.

T h e a i m i s t o b a l a n c e t h e r i g h t s o f t h e

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Eurosystem as system owner and operator

w i t h t he r i g ht s o f t he C S D s w hi c h a d o p t

T 2S a nd t ho se o f t he c en tr al b an ks

(including Eurosystem central banks) whichp r ov i de t h ei r c u r re n c ie s t o T 2 S , w h i le

respect ing the needs of securi t ies market

users bearing in mind that the governance

arrangement must facilitate timely decision-

m a k i n g a n d e n s u r e a s a f e a n d e f f i c i e n t

product.

F ig u re 3 p ro vi de s a n o ve rv ie w o f t he

current proposal for the interaction of the

v a r i o us s t a k e ho l d e r g r o up s i n t he fut ur e

decision-making process.

The Governing Council of the ECB, as theowner of T2S, will retain control over matters

vital to its interests, in particular with respect

to monetary pol icy and financ ial stab ilit y, but

i t w i l l d e l e g a t e a num b e r o f m a na g e r i a l ,

te ch ni ca l an d op er at io na l ta sk s to th e T2 S

Board. The T2S Board will be composed of

representat ives from the Eurosystem, the

non-euro area central banks and independent

experts from the private sector.2)

ECB Governing Council

Executive Board

Governors`Forum

Non-euro CurrenciesSteering Group

(non-euro area NCBs having signed

Currency Participation Agreement)

T2SBoard

CSD Steering Group(CSDs having signed Framework

Agreement)

AdvisoryGroup

Informationsessions

National usergroups

Non-eurocentral banks

governors/boards

Figure 3. The proposed future T2S governance arrangement

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All central banks (within and outs ide the

euro area) will have complete control over

th eir ca sh ac co un ts . No n- euro ar ea ce nt ra l

b an ks w il l a ls o b e g iv en a ss ur an ce sc o nc e r ni ng t he i r f r e e d o m t o c o nd uc t a n

independent monetary policy and to exert

their c omp eten ces in f inancia l st abi li ty

m a tt e rs . I t i s i n te n de d t h at t h e s p ec i fi c

interests of the non-euro area central banks

wil l be represented through the Non-euro

C ur r e nc i e s S t e e r i ng G r o up w hi c h w i l l b e

c o mp o se d o f s e ni o r m a na g er s f r o m a l l

participating non-euro area central banks and

c ha i r e d b y o ne o f t he m . I f i n e x c e p t i o na l

c i rc u ms t an c es t h er e i s a d i sa g re e me n t

b e tw e en o n e o r s e ve r al n o n -e u r o a r ea

central banks and the Governing Council on

issues relevant to settlement in T2S in the

respective currency, a Governors Forum willbe convened in order to find a solution. The

right to convene a Governors Forum wi l l

c on si de ra bl y l im it t he r is k t ha t t he

Eurosystem take decisions which go against

th e in te re st s of th e no n- eu ro ar ea ce nt ra l

banks.

The CSDs will be granted full control over the

management of their customers securities

accounts in T2S. In the governance framework,

CSDs will be represented in the CSD Steering

Group and a CSD representative chosen by

the CSDs will chai r this grou p. Members of the

T2S Board and user members may participate

in the CSD Steering Group as observers. The

C SD S te er in g G ro up w il l b e m ai nl y

responsible for proposing amendments to the

functioning of securities accounts. The CSDS t ee r ing G r oup m a y ha ve d i re c t a c ce s s

to th e Go ve rning Co un ci l in exce pt io na l

circumstances.3)

The T2S Advisory Group already exists today.

It will retain its function as an advisory body to

the Eu ro sy stem . Th e gr oup is co mp osed of

about 80 representatives from the various

stakeholder groups (central banks, CSDs and

market participants) and the chairperson of the

T2S Board is (and will be) the chairperson of

the T2S Adviso ry Group. It is (and will be) the

main body through which market participants

are able to express their views on T2S. The

T2S Advisory Group also has direct access toth e Go ve rn in g Co unc il in ex ce pt io na l

circumstances.

T he d ec is io n- ma ki ng p ro ce ss w il l b e

completely transparent with the involvement

of all relevant stakeholders. Any member of

2)T his gove r nanc e ar r ange m e nt i s not a ne w one . T he

Governing Council already delegates tasks to the T2S

Programme Board, whose composition is similar to that of

the fut ure T2S Boar d.

3)T he p r e c ursor to the C SD Ste e ring G r oup in tod ay s

governance is the CSD Contact Group, composed of

CSDs and T2S Programme Board members, and chaired

by the chairman of the T2S Programme Board.

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the T2S Adviso ry Group, CSD Steering Group

or Non-euro Currencies Steering Group will

be able to make a proposal to change an

aspect of T2S. I f the proposal affects the

functioning of securities accounts, it would

fa l l und e r t he r e m i t o f t he C S D S t e e r i ng

Group. If the proposal relates to changes in

the func tio ning of non- euro cash acco unts , it

w o u l d b e i n t h e r e m i t o f t h e N o n - e u r o

C ur r e nc i e s S t e e r i ng G r o up , w hi l s t i f t he

p ro po sa l r el at es t o c ha ng es i n t he

functioning of euro cash accounts, it would

b e i n t h e r e m i t o f t h e T 2 S B o a r d . T h e

resolut ions taken by re levant governance

bodies may be subject to a review by the

T2S Board or the Governing Council, which

could object to a resolution on the basis of

specific criteria defined in advance.

As has been the case up until now, it should

b e e m p ha s i s e d t ha t t he w ho l e d e c i s i o n-

m a k i ng p r o c e s s w i l l c o nt i nue t o b e fu l l y

tr a nsp ar en t , w i th a h i gh d eg re e o f

i nv o l v e m e nt o f a l l s t a k e ho l d e r s , a nd t he

a v o i d a n c e o f u n i l a t e r a l a n d u n e x p e c t e d

decisions. The T2S Advisory Group provides

the necessa ry forum for ac countabi lit y of the

g o v e r n a n c e a r r a n g e m e n t t o t h e m a r k e t

users.

Al l documentat ion that forms the bas is of

the dec is ion-making process wi ll cont inue to

be p ubl ish ed o n t he T 2S w ebsi te

(http://www.ecb.int/paym/t2s/html/index.en.html ).

Pricing

The pricing of T2S services is a key issue to

be settled before CSDs are ready to sign a

contract with the Eurosystem. To calculate

the pr ic e li st , thre e fa ct or s ha ve to be take n

i n t o a c c o u n t: t h e e x p e ct e d s e t t le m e n t

v o lu m es , t h e c o st s o f d e ve l op i ng a n d

o p e r a t i ng T2 S , a nd t he r a ng e o f s e r v i c e s

which will be charged for.

Forecasting settlement volumes many years

into the future is a very difficult task, not least

because of the financial cris is . The present

volumes up to mid-2010 have been used as

a basis . The negative impact of new CCPs

being introduced in some markets and the

c o ns e q ue nc e s o f p o s s i b l e c ha ng e s i n t heway direct holding markets may adjust to

T2S have been taken into account. In order

to be as ob ject iv e as po ss ib le , the deci sion

was taken to use a growth forecast based

on the est imations of a l l members of the

T2S Advisory Group: approximately 5.5%

o n a v e r a g e f r o m 2 0 1 0 unt i l 2 0 2 0 . Thi s i s

m u c h l o w e r t h a n t h e 1 0 - 1 5 % h i s t o r i c a l

g r o w t h r a t e s i n t h e y e a r s p r i o r t o t h e

financial turmoil.

Although they have not yet been approved by

the Go verning Co un ci l, the Euro syst em ha s

reasonably firm estimates of the development

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and running costs of T2S. The provis ional

breakdown of costs was made transparent to

the T2S Advisory Gro up in Septemb er 201 0.

The costs incurred by the four national central

banks (4CB) developing the T2S bus iness

application are estimated at 256.4 million,

and a further 90.2 mil l ion represents the

c os ts o f th e E CB in d eve lo pin g th e

requirements, supporting the T2S Programme

Board and coordinating the relationships with

internal and external stakeholders. Running

costs stem from two sources: 50.7 million

per year incurred by the 4CB who will supply

th e IT in fr as tr uc tu re an d op er at e T2 S, an d

9.3 million per year incurred by the ECB. In

addition, the T2S Programme Board currently

e s t i m a t e s t he c o s t o f c a p i t a l t o b e 6 7 . 5

m il li on a nd h as p ro po se d t o s et u p a

contingency provision of 36 million to covercosts that are difficult to quantify at this stage

(e.g . minor changes and potentia l l iabi l i ty

claims).

The last part of the pricing equation is the

pricing structure, i .e . how many di f ferent

settlement service items will be charged for,

a nd w h at p ro po rt io n o f c o st s w il l b e

r e c o v er e d b y i n f o r m at i o n s e r v i c e s , i . e .

reports and queries. The pricing structure

h a s b e e n d i s c u s s e d w i t h t h e m a r k e t o n

m a ny o c c as i on s o v er s e ve r al y e ar s , i n

particular through the T2S Advisory Group

and the T2S Information Sessions. The main

challenge was to find a balance between the

wish of the T2S Programme Board to have a

resource-based pricing structure in order to

ensure that T2S IT resources are efficiently

u s e d , a n d t h e s t r o n g p r e f e r e n c e o f t h e

m a r k e t fo r a l e a n p r i c i ng s t r uc t ur e . A s

part of the compromise, a number of items

wil l be priced at zero at the beginning, on

the un ders tand ing that th is ca n be ch anged

a t a n y t i m e t o r e f l e c t r e s o u r c e i s s u e s i f

ne e d e d . The l i s t o f i t e m s , t o g e t he r w i t h

th ei r pri ce re la ti ve to th e DV P ch ar ge , is

shown in Figure 4. Once the headline DVP

price is known, the indicative prices of the

other items can be automatically calculated.

I n f o r m a t i o n s e r v i c e s c h a r g e s f o r d a t a

extracted from T2S in whatever fashion

represent an exception to this rule . Theyw i l l r e p r e s e n t 2 5 % o f T 2 S i n c o m e , a n d

detai led prices wi l l be determined in the

near future.

T he b ig ges t u nk no wn f ac to r i s t he

g e og r ap h ic a l s c op e o f T 2 S, i . e. w h i ch

currencies wil l take part. We estimate that

for each 100 transactions which wil l settle

in euro in 2014, there wi l l be an extra 86

t r a n sa c t i o n s i n t he c ur r en c i es o f o t he r

European countries whose main CSD has

s ign ed t he Fr ame wo rk A gr ee me nt

( 3 8 i n p o und s s t e r l i ng , 2 7 i n ( no n- e ur o )

Scandinavian currencies, 14 in Swiss francs

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a n d s e v e n i n o t h e r c u r r e n c i e s ) . O n t h i s

b a si s , t h e T 2 S P r og r am m e B o a r d w i ll

propose to the Governing Counci l to set

th e T2 S fe e fo r DV P in st ru ct io n as lo w as

15 cent if the currency coverage represents

at least 120% of the euro volume, This price

Figure 4. T2S pricing structure

SERVICE ITEMS DVP WEIGHT EXPLANATION

FACTOR

Settlement services (75% of T2S income)

Delivery versus payment 100% per instruction*

Free of payment/payment free of delivery 60% per instructi on*

Account allocation 20% per instruction*

Matching 20% per instruction*

Intra-position/intra-balance movement 40% per transaction

Auto-collateralisation service with payment bank 100% per transaction, charged to the collateral provider

Internal T2S liquidity transfer 60% per transfer

Daytime settlement process 20% surcharge per instruction*

I nt en de d s et tl em en t d ay f ai le d t ra ns ac ti on 1 00 % s ur ch ar ge p er b us in es s d ay f ai le d b ot h s id es*

**A uto- collater al isat ion ser vice with N CB 0 % per transact ion, char ge d to the collater al p rovide r

**I ns tr uct ion ma rk ed w it h to p/ hi gh p ri or it y 0 % s urc ha rg e p er i ns tr uct io n*

**Cancellation 0% per instruction*

**Settlement modification 0% per instruction*

Information services (25% of T2S income)

A2A queries and reports to be decided

U2A queries to be decided

Message subscription services to be decided

Account management services

**Securities account 0% Fee options:

a) monthly fee per ISIN in the account or

b) monthly fee per account

**Fee per cash account 0% Monthly

* Two instructions per transaction will be charged.** The price for these items wil l initial ly be set at zero, presuming that actual usage wil l be within an expected

consumption pattern. However, should there be an unexpected use of the IT system resources which adversely affects

T2S performance, charging for these items will be reconsidered. Such a review will occur at regular intervals.

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c o u l d e v e n b e l o w e r i f T 2 S c o v e r s a l l

currencies of the European Economic Area

a nd S wi tz er la n d. E v en w h en f ee s f o r

c on n ec ti vi ty , m at ch in g a nd f o r C SD

customer services are added, T2S fees wil l

be lower than the average comparable fees

l ev ie d b y C SD s t od ay f or d om es ti c

t r an sa c t io n s . T he c o s t o f se t t l i ng c r o s s-

b o r d e r t r a n s a c t io n s s h o u l d d e c r e a s e b y

about 90%.

CSD adaptation plans

C S D s t ha t ha v e s i g ne d t he T2 S Mo U a r e

ther eby co mmitte d to assess the im pact of

T2S on their national systems and practices

a nd s ub s e q ue nt l y p r e p a r e a n a d a p t a t i o n

plan. So far, the amount of progress made

varies significantly from CSD to CSD. Some

CSDs have reached an agreement with theirlocal markets on the general principles that

should guide their adaptat ion to T2S and,

b a s e d o n t h o s e p r i n c i p l e s , h a v e a l r e a d y

started discussing the technical implications

with the relevant experts in the T2S team.

Other CSDs have identi f ied a l i s t of tasks

and workstreams related to their adaptation

to T2 S but ha ve no t ye t star ted an in-d epth

analysis . The adaptation plans of individual

C SD s t ha t h av e m ad e t he se p u bl ic ly

avai lable can be found on the T2S website

(http://www.ecb.europa.eu/paym/t2s/stake

holders/csd/html/index.en.html ).

Each CSD is free to decide, in cooperation

with its market, how to accommodate T2S

in its procedures and systems. Nevertheless,

t o e nsur e a l ev el p la y ing f i e l d fo r C S Ds

using the T2S service, there are a number of

c o n d i t i o n s t h a t n e e d t o b e f u l f i l l e d . I n

particular, the participation model chosen

by a CSD must be in l ine with the cr i ter ia

established by the Governing Council of the

ECB. The post-migration operating model:

must pose no risks to other CSDs;

introduce no barr iers to eff ic ient cross-

CSD settlement in T2S;

entai l no potential free-riding behaviour

at the expense of other CSDs; and

support free and fair competition.

These are prerequisites to ensure that theCSDs individual strategies make fair use of

T2S opportunities and are not detrimental

to ot he r CS Ds or to the Euro pean fi na nc ia l

markets in general.

Overall, the information currently available

on CSDs adaptation plans shows that they

intend to adapt to T2S in compliance with all

o f t he se c on di ti on s. S om e n at io na l

specificities which may represent obstacles to

ful f i l l ing these requirements are current ly

being addressed by the T2S team with the

relevant stakeholders. The aim is to support

the se mar kets in ada pti ng to T2S as smo othly

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as possible, but without jeopardising the spirit

o f t he p ro je ct , w h ic h i s c om mi tt ed t o

neutrality and harmonisation.

The CSDs from direct holding markets , in

part icular , have a number of fundamental

d ec is io ns t o m ak e r eg ar di ng t he ir

adaptation to T2S. Significant efforts have

a l re a dy b e en i n ve s te d i n t h e t e ch n i ca l

d e s i g n o f t h e T 2 S p l a t f o r m s o t h a t i t i s

flexible enough to serve the needs of these

markets. For example, the T2S platform can

e a si l y a c ce p t m i ll i on s o f e n d -i n ve s to r

accounts i f a CSD decides to keep these

in T2S at essentially zero cost to the CSD.

There wi l l be no charge for this . The T2S

te am be li ev es th at , fr om a co st -e ff ic ie ncy

perspective, there are strong arguments in

favour of a CSD keeping a l l end- investoraccounts in T2S, as it would avoid the CSD

b e i ng fo r c e d t o m a i nt a i n t w o s e t t l e m e nt

systems in parallel.

Nevertheless , i f the CSD prefers to keep

these end- investor ac co unts outs ide T2 S in

i t s l e g a c y s y s t e m , t h i s i s o f c o u r s e a l s o

te ch nic al ly fea si bl e. At th e re qu es t of th e

direct holding market CSDs, the T2S team is

currently careful ly studying this alternative

adaptation model.

Connectivity

CSDs, NCBs and directly connected parties

will interact with the T2S platform by sending

and receiving messages via a network. The T2S

P ro gr am me B oa rd h as d ec id ed t ha t a

maximum of three network providers which

meet demanding securi ty , avai labi l i ty and

operational standards will be licensed to offer

services to T2S users. Having multiple network

providers for T2S wil l mean that users wil l

b en e fi t f r om c o mp et it io n a n d c h oi c e.

Competition is very important to guarantee

that the costs of user connect ivity are kept as

l o w a s p o s s i b l e , no t o nl y a t t he s t a r t o f

o p er at io n s, b u t a ls o o v er t im e. T h es e

additional connectivity costs are of particular

concern for the CSDs, which will be accessing

the remote T2S settl ement engine from their

reshaped infrastructure, as opposed to it being

part of their internal IT system.

In order to select the network providers, a

number of business and technical criteria are

being developed. These have already been

discussed several times with the market in

the T2S Advisory Group and the CSD Cont act

Group, as wel l as during T2S Information

Sessions and the feedback received is being

given careful considerat ion. The bus iness

criteria are intended to cover issues such as

financial strength, l iabi l ity, data protection

p o l ic y , t e chno lo g y r i sk m a nag e me nt a nd

pricing, while the technical criteria focus on

securi ty , re l iabil i ty , service performance,

service desk support and disaster recovery.

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In order to ensure that there is a significant

range of suppliers which can compete for a

licence, the set of value added services that

are required (on top of pure connectivity)

has been kept relativity small. To ensure the

avai labi l i ty of cost-effect ive connect ivi ty

solutions for the wide variety of T2S users

i n t er ms o f v ol u me r eq u ir em en t s, i t i s

envisaged that each network provider wil l

have to offer a traffic-based pricing scheme, as

well as a bandwidth-based pricing scheme.

If more than three network providers fulfil all

of the bus iness and technical cr i ter ia , i t i s

currently intended that the final selection will

be made on the bas is of which companies

provide the required services at the lowest

cost.

The formal selection process will start very

soon and will be managed by the Banca dItalia

on behalf of the Eurosystem and on the basis of

th e gu id an ce gi ve n by th e T2 S Pr og ra mm e

Bo ar d a nd a dv ic e f r om t he Euro sy st em

Procurement Coordination Office. The process

will be entirely open, objective and transparent.

It is currently planned that the process will be

formally initiated around the end of the year

with the publication of the official tender notice,

together with all relevant documentat ion. The

network providers will have several months to

submit their offers , after which t ime the

Eurosystem will make its selection. Assuming

that the selection process runs as expected, it is

planned that the l icences wil l be awarded

around mid-2011. Work wi ll then begin,

together with the network providers, to check

that they fulfil the requirements, before they are

allowed to sign contracts with the T2S users.

3. Where are we going in the future?

Key phases in the T2S Programme Plan

There are four key phases in the project

specification, development, testing and migration.

Specification phase:

Ju ly 20 08 to January 2010

The specification phase started in July 2008

a n d f i n i s he d i n J a n ua r y 2 0 1 0 w i th t h e

publication of version 5.0 of the URD. This

phase was devoted to drafting the technicald oc u me nt at io n t ha t w il l b e u se d f o r

programming the T2S software. The most

i m p o r ta n t d o c u m e n t s p r o d u c e d i n t h i s

p ha se w er e t he G en er al F un ct io na l

Specifications (GFS v4.0) and the General

Technical Design.

Development phase:

February 2010 to December 2013

The development phase started in early 2010

after the technical documentation was finalised.

During this phase, the User Detailed Functional

Specifications will be drafted, the software for

the T2S platform will be developed and tested

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by the 4CB and non-functional testing will get

unde r wa y . To w a r ds t he e nd o f t he t h i r d

quarter of 2013, the internal acceptance testing

by the whole Eurosystem wi l l begin. The

development phase will be completed, apart

from bug fixing, at the end of 2013, when the

platform will be ready for user testing.

User testing phase:

January 2014 to September 2015

At the start of 2014, T2S wil l be open for a

period of multilateral testing by all external

parties CSDs, NCBs and banks which intend

to be dire ctly connected to T2S. The test ing

activities will comprise interoperability tests,

community tests with banks and business-day

tests. Testing will be complet ed afte r the ful l

migration of the last group of CSDs, which is

expected by September 2015.

Start of operations/migration phase:

September 2014 to September 2015

T 2 S w i l l b e g in o p e r at i o n s i n S e p t em b e r

2 0 1 4 , w he n t he f i r s t g r o up o f C S D s j o i n

T2S. The migration of CSDs to T2S will take

place gradual ly over the fol lowing year, in

principle, in three migration waves.

A comprehensive planning and reporting

framework has been established to ensure that

all key stakeholders can monitor the progress of

the Eurosystem against the plan and synchronise

their own plans with the T2S plan. With regard

to internal project management information, the

T2S project team reports on a monthly basis to

the T2S Programme Board, and on a quarterly

basis to the Governing Council. With regard to

external project management information, the

Eurosystem will report on a monthly basis to the

CSDs and non-euro area central banks, and on a

quarterly basis to the T2S Advisory Group.

Coordination within markets

For a smooth adaptation to T2S, there is a

crucial need for coordination between the

Eurosystem and CSDs/NCBs, and between

the CS Ds/N CBs and their ma rk et us ers and

infrastructures . The T2S project plan wi l l

th er ef or e in di ca te th e rel ev an t da te s an d

mi lestones when CSDs/NCBs and market

p a r t i c i p a n t s n e e d t o b e p r e p a r e d f o r a

s p e c i f i c a c t i v i t y a n d / o r r e a d y t o m a k e afinancial investment (so-called synchronisation

points). The synchronisation points ensure

th at th e Eu ro sy st em , NC Bs an d CS Ds ar e

p r o g r e s s i ng a t t he s a m e p a c e d ur i ng t he

l i fecycle of the project. The precise timing

o f t h e s yn ch r on is at io n p oi nt s w il l b e

d i sc u s se d a n d a g re e d w i t h t h e m a rk e t

during the autumn of 2010.

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1. Is the T2S project related to the

initiatives of the European Commission?

We ar e wo rk in g han d in ha nd wi th th e

Commission and in particular with regard to

th ei r ob je ct iv e to bu il d an ef f ic ie nt Si ng le

Ma r k e t fo r Eur o p e . The r e i s no r i s k o f a

duplication of efforts or inconsistencies: the

Commission is working more on the legislative

side, while the Eurosystem is working mostly on

th e in fr as tr uc tu re si de . Th is tw o- pr on ge d

approach to reforming securities markets is

proving to be highly effective and synergistic.

2. Is the Eurosystem the right body to

manage this project? Can a public

sector entity run this critical system

efficiently and without too much

bureaucracy?

T2S, like any large infrastructure project, will

tr igge r tr emendo us econ om ies of sc ale. Fo r

this reason, economists would call it a natural

monopoly, s ince securi t ies sett lement i s a

mature business in which the most efficient

set-up is to reap economies of scale and to

allow the conditions to be put in place for a

c o m pe t it i ve e nv ir o nme nt i n a d de d v a lue

s e rv i ce s b a se d o n a c o m mo d it y p r o duc t :

s e tt l em e nt . A ny na t ur a l m o nop o l y, b e i t

p r iv a t e o r p ub li c s e ct o r , fa c e s t he s a me

challenges of ensuring efficiency and minimising

bureaucracy.

The a d v a nt a g e o f ha v i ng t he Eur o s y s t e m

o pe ra te s uc h a m on o po ly i s t ha t t h e

o p e r a t o r h a s n o i n c e n t i v e t o a b u s e i t s

posit ion by charging excess ive rents . We

ta ke zero prof it fr om this vent ur e; al l ga ins

are passed on to the market.

The real guarantee against the development

of excessive inefficiency and bureaucracy is

th e hig h le ve l of tr an sp ar en cy of th e T2S

project, which we intend to maintain in the

future. Market part ic ipants have had, and

will continue to have, ample opportunity to

scrutinise and challenge the management of

T2S, and to ensure that T2S remains lean.

3. How can you claim that T2S will

stimulate competition if, in practice,

it becomes a monopoly?

T2S is an infrastructure in the same way that

rai lways , motorways , e lectr ic i ty gr ids and

p a y m e nt s y s t e m s a r e i nfr a s t r uc t ur e s . A n

e f f i c ie n t s i n g le i n f r a st r u c t u re , w i t h h u g e

economies of scale, is necessary i f multiple

p r o v i d e r s a r e t o c o m p e t e t o p r o v i d e t he

related service. In the current environment,

CSDs provide this s ingle infrastructure at

the do mest ic leve l. T2 S wi ll si mply fa ct or in

t he mo s t c o m mo d it i s ed p a r t o f t h ei r

activities, settlement, at the European level,

and introduce competit ion for the rest of

the CS D busine ss .

FREQUENTLY ASKED QUEST IONS

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T h e E u r o s ys t em w i ll b e ar t h e r i s k s o f

creat ing the high-speed tracks which no

private entity would have the incentive to

f inance on i ts own, and then let the train

companies the CSDs compete among

themselv es to pr ov ide serv ices to investor s

and issuers, using these tracks.

4. Why have you not set up a

separate legal entity to run this

project?

T2S is a new and unprecedented project. In

g o i ng a he a d w i t h i m p l e m e nt i ng T2 S , t he

Eurosystem is accepting significant financial

and reputat ion r isks . This helps to explain

w hy t he E u ro sy st em h as e xp re ss ed a

preference to maintain full responsibility for

the pr ojec t.

N e ve r the l es s , w e b r o ke ne w g r o und b y

c h oo si ng a c om pl et el y n ew i nt er n al

organisational structure when creating the

T2S Programme Board. Many people are not

ful ly aware of the extent of its role. In fact,

th e T2 S Pr og ra mm e Bo ar d ha s, in pr ac ti ce ,

very similar powers to those of a Board of

Directors in a separate legal entity.

The T2S Programme Board has extensive

s en io r m an a ge me nt e xp er ti se i n t h e

p a y m e nt a nd s e c ur i t i e s s e t t l e m e nt f i e l d .

Two of the eight members are independent

(current ly two former CEOs of non-euro

area CSDs), and one member comes from a

non-euro area central bank. Furthermore, it

is foreseen that in the future: 1) CSDs wil l

b e a b le t o p r op o se c a nd i da t es f o r t h e

independent members; and 2) the number

o f m e m b e r s c o m i ng f r o m no n- e ur o a r e a

central banks will increase in relation to the

importance of non-euro settlements in T2S.

T h e r e f o r e , w e f e e l t h a t t h e b e n e f i t s o f

s e tt i ng u p a s e pa r at e l e ga l e n ti t y h a v e

a l r e a d y b e e n a c h i e v e d w i t h t h e c u r r e n t

organisational structure.

5. You have already announced a delay

in your planning. How can you be sure

that no further delays will occur?

There are typically two reasons for a project tobe delayed: uncertainties regarding the scope,

or an underestimation of the time required.

The scope of T2S was defined during the first

six months of the project (settlement only, all

types of sec ur ity, mult i-c ur renc y). It has no t

changed since then. This is very reassuring

because most IT projects which fai l , or are

substantially delayed, have serious problems of

scope creep.

The delay in our planning was caused by an

underestimation of the timing of some tasks. It

should be remembered in this respect that T2S

is a completely new concept providing a lean

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solution for over 20 markets for which there

was no possible comparison when the timetable

was first prepared in early 2008. The duration

of some tasks was underestimated. In particular,

in order to get the technical specifications right,

we needed much more feedback from the

many markets which wi l l use T2S than we

initia lly ant ic ipated. The harmonisat ion of

requirements is a time-consuming business, as it

involves compromise and, in some cases ,

proposing new market practices.

But we are now very confident that we will be

able to follow the new timetable. A parallel can

b e d r aw n w it h a not her l a rg e I T p r oj e ct

implemented by the Eurosystem: TARGET2 for

large-value payments. For TARGET2, the

Eurosystem similarly had to announce a ten-

month delay, but in the end there was only onedelay and we successfully opened the system in

N ov em be r 2 00 7. T AR GE T2 h as h ad a n

excel lent track record and has helped to

e st a bl i sh t he t e chnic a l c r ed i bi li t y o f t he

Eurosystem in the field of market

infrastructures.

6. Is T2S a genuine outsourcing

arrangement for CSDs?

Yes, it is a genuine outsourcing arrangement,

but of a unique kind. It is unique in two ways.

F irst , CSDs wi l l no longer have indiv idual

control rights, but multi lateral control of a

shared environment with a single service level.

CSDs will have to make decisions cooperatively

in T2S. CSDs recognise and accept this and

have already agreed on a double majority voting

rule, based on the number of CSDs and the

volume of settlement transactions.

Second, the building and operation of T2S is a

public task of the Eurosystem, embedded in the

EU Treaty. This is one of the very

r ar e c as es w he re t he p ri va te s ec to r i s

outsourcing tasks to a public entity. Therefore,

T2S is also a new concept in the legal f ield,

requiring new solutions. The legal nature of T2S

and the resulting need for a special type of

outsourcing arrangement has been one of the

major negotiation points in the preparation of

the T2S Fra mew ork Agr eement tha t is being

negotiated with CSDs.

7. Will CSDs lose control of their

securities accounts in T2S?

C SD s w il l k ee p f ul l c on tr ol o f, a nd f ul l

responsibi l ity for, the management of their

s ec ur it ie s a cc ou nt s. T he d ay -t o- da y

management of securities accounts (e.g. the

opening and closing of accounts) will be the

e xc lu si ve c om pe te nc e, a nd t he l eg al

responsibility, of the CSDs. It will be as if CSDs

each have their own apartment in the T2S

building . T2S wi l l not have contractual

relationships with the CSDs clients.

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C S D s w i l l a l s o p a r t i c i p a t e i n t he c ha ng e

management process concerning T2S. But a

m a j o r d i f fe r e nc e i n c o m p a r i s o n w i t h t he

current situation is that CSDs wil l have to

make decisions collectively, rather than on

their ow n.

The Eurosystem recognises the competence

a n d e x p e r t i s e o f t h e C S D s a n d w i l l , i n

p ri nc ip le , i mp le me nt t he ir r eq ue st s

c o nc e r ni ng c ha ng e s i n t he func t i o ni ng o f

s e c u r i t i e s a c c o u n t s . I t i s o n l y i n c l e a r l y defined cases (under discussion with CSDs

at present) that the Eurosystem could turn

down the CSDs proposal . I f this happens,

r e fu s al s w i ll b e v e ry e x ce p ti o na l , f u l ly

documented and transparent , and include

several levels of protection.

8. Will T2S really reduce settlement fees?

Absolutely ! With T2S, the cost of sett l ing

cross-border transact ions wi l l be reduced

by about 90%! This alone would represent a

strong element in the business case for the

p r o je c t . H o w e v e r, w e a r e c o ns c i o us t ha t

s o me u s er s h a ve l i mi t ed c r o ss - bo r de r

activity and we wish to avoid a situation in

which domestical ly oriented participants in

large countries , such as Germany, I ta ly or

th e Un it ed Ki ngd om , en d up pa yi ng mo re

with T2S than before. Our objective is sti l l

t o c ha r g e le s s t ha n 1 5 c en t p e r DV P

settlement instruction. The final price, which

will be announced next year, will depend on

the nu mber of curr enci es whic h ar e se tt led

in T2S. We estimate that a 100% increase in

tr af f ic sh ou ld re su lt in an in cr ea se in T2 S

costs of less than 15% (resulting in a lower

unit cost per transaction for the industry).

The fee we will charge is therefore volume-

s e n s i t i v e . I f T 2 S c a n s e t t l e i n t h e m a j o r

currencies of the European Economic Area

a n d i n t h e S w i s s f r a n c , t h e f e e c o u l d b e

closer to 10 cent.

On top of this headline price, there will also

b e a m a t c hi ng fe e , c o nne c t i v i t y c ha r g e s ,

i n f o r m a t i o n s e r v i c e f e e s a n d C S D f e e s

(mostly for customer helpdesk services). All

in al l , we are confident that CSD fees with

T2S wil l be lower than the average fee thatC S D s c h a r g e t o d a y . W e k n o w t h a t , a t

p r es e nt , s o me C S Ds g r an t s u bs t an t ia l

discounts to their large customers. T2S will

n o t . T h e r e fo r e , w e c a n n ot r u l e o u t t h a t

s o m e l a r g e c us t o m e r s m a y b e c ha r g e d a

l itt le more for their domestic transactions

w he n T 2S i s i n o pe ra ti on . B ut l ar ge

c u s to m er s a l so b e ne f it m o st f r o m t h e

reduction of cross-border fees. Therefore,

we maintain that with T2S, al l users should

be better off than before, some of them by

a very large margin.

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9. Will T2S fees be on top or

instead of the present settlement

fees charged by CSDs?

T 2 S w i l l f a i l i f t h e T 2 S f e e s a r e s i mp l y a

supplement to the present CSD fees, because

thi s wou ld mean tha t users wil l pay mor e for

domestic settlement. But it is clear that the

CSDs that embrace T2S and make the initial

investment to reshape their systems in order

to mini mi se any dupl ic at io n of da ta wi ll be

tho se tha t are abl e offer the bes t pri cin g tothe ir cus tom ers aft er the int rod uct ion of T2S .

It is important to keep in mind that, with T2S,

CSDs will start competing against each other.

There is a clear risk that those who do not

r e sh a pe a n d d o wn s iz e t h ei r s e tt l em e nt

infrastructure will simply drive themselves out

of the market. There is anecdotal evidence

that most CSDs are a lrea dy strate gicall y

prepared for re-shaping towards T2S.

10. How much will it cost for market

participants to adjust to T2S?

I t i s c lear that , for CSDs, adjust ing to T2S

w i l l r e q ui r e s ub s t a nt i a l i nv e s t m e nt . C S D

cl ients that decide to connect direct ly to

T2S wil l also have to invest. But we do not

expect more than 20 or 30 banks to find it

economical to do so in the short run. For all

o t he r m a rk e t p a rt i ci p an t s, l i tt l e o r n o

adaptation will be necessary, because those

part ic ipants wi l l continue to re ly on their

CSDs or on their custodian banks for the

provision of settlement services. They wil l

b e n e f it f r o m T 2 S t h r o u g h c o m p e t i ti o n

effects because the fees they pay to CSDs

or to custodians will decrease.

11. How can we be sure that the

benefits of T2S are not retained by

intermediaries, but are passed on to

issuers and final investors?

C o mp e ti t io n i s t h e a n sw e r. I n c re a si n g

c o mp e ti t io n a m on g C S Ds a n d a m on g

custodians i s the only way to ensure that

the bene fi ts of T2 S ar e pa ssed on to issuer s

a n d f i na l i nv es to rs . W e h av e a lr ea dy

u nd er li ne d t ha t T 2S w il l s ti mu la te

competition between CSDs; it is therefore

unl ikely that they wi l l retain an excess ive

part of the savings generated by T2S. The

European banking sector i s a l ready highly

competitive, and it is unlikely that custodian

banks would have any incentive not to pass

on the benefits of T2S to their customers.

M or e o v er , b y r em o v i n g na t i o n al

speci f ic i t ies , T2S wi l l further increase the

l e v e l o f c o m p e t i t i o n b e t w e e n c us t o d i a n

banks.

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12. Lack of harmonisation in the

securities market is a big issue for

Europe today. Is T2S addressing this

problem?

Yes, directly and indirectly. Directly because

w e h a v e , f r o m t h e b e g i n n i n g , c h o s e n t o

b u i l d a l e a n T 2 S w h i c h d o e s n o t t a k e

account of the nat ional speci f ici t ies which

have built up in each country over the years

an d h ave o ft en lo st th eir or ig i nal

just if icat ion.

Indirectly because market participants know

t ha t th e b e ne f i t s o f T2 S , i n t e r m s o f a

reduction in l iquidity costs and back-office

costs, will be much greater if T2S works in a

more harmonised environment; this works

to pr om ot e change .

The T2S team devotes some of its resources

to work on ha rmonisa tion, but we also need

to make use of the know led ge and exp ertise

o f o t h e r s . T h e T 2 S A d v i s o r y G r o u p h a s

been immensely useful in this respect and

d e s e r v e s t o b e p r a i s e d f o r w h a t i t h a s

already achieved.

I n t he c o m i ng m o nt hs , t he T2 S A d v i s o r y

Group wil l identify the priorities for future

w o rk o n h a r mo n is a ti o n, f r om t h e T 2 S

perspect ive, and wi l l put pressure on the

r e l e v a n t b o d i e s t o c o n c l u d e t h e i r w o r k

before T2S opens. This is a very important

i n it i at i ve w h ic h w i ll u n d ou b te d ly h a v e

i mp or ta nt b en ef i ts f o r t h e e ff ic ie nt

functioning of Europes securities markets.

13. Does T2S not cater for national

specificities at all?

N at io na l s pe ci fi ci ti es n o t o nl y c re at e

i nef f ic i enc ie s fo r fo re i gn i nve s to r s a nd

intermediaries, but, more importantly, they also

protect national markets from competition.And it is competition that T2S wants to foster.

T 2S w ill t he ref or e n ot d ev elo p a ny

functionality to cater for national specificities. If

a CSD wants to maintain a particular specificity

after T2S goes live, it will have to develop it in

i ts own systems at i ts own cost . And this

should not prevent users, domestic or cross-

border, from gaining access to those securities

without paying for these national specificities,

by using another CSD. We are confident that

th is wi ll cr ea te ec on om ic in ce nti ve s fo r

countries to keep national specificities to a

minimum.

14. If T2S does not cater for national

specificities, does this mean it has

ignored the specific needs of direct

holding markets?

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No. We do not consider direct holding to

be a national specificity, but see it rather as

one of the two modalit ies for holding final

customer accounts in Europe. Indeed, we

have made significant efforts to ensure that

T2 S i s c o m p a t i b l e w i t h t he ne e d s o f t he

direct holding markets.

We h av e n o t o n ly ma d e i t t ec hni c a l l y

feasible for direct holding market CSDs to

keep l i teral ly mi l l ions of end- investor

retail accounts in T2S, at no additional cost,b u t w e a r e a l s o i n ve s ti g at i ng h o w t h e

layered model would work, in the event

C S D s w i s h t o k e e p s u c h r e t a i l a c c o u n t s

outside T2S in their legacy systems. As long

as we are reassured about the legal aspects

of the layered model, we are very happy to

a l lo w i t i f t h e r e i s a d e ma n d f o r s u c h a

model.

15. Non-euro area central banks are

represented in the T2S Programme

Board, but not in the Governing

Council of the ECB. How can they be

sure that they will keep control of

their currency if they join T2S?

First of all, and to avoid any misunderstanding,

n o n -e u r o a r ea c e nt r al b a nk s w i ll h a ve

complete control over the management of

the ir acc ounts in T2S and the dai ly tim etable

f o r i t s u s e ( e . g . e x t e n s i o n s t o c a t e r f o r

domestic market issues). They will open and

close accounts at their discretion, they wil l

decide whether or not to grant overdrafts,

and they will decide on the related collateral

a r r a nge m e nts , e t c . The m o s t s i g n i f i c a nt

debate concerns change management. What

if T2S evolves in a direction that a non-euro

area central bank considers inappropriate?

Wit hdrawing f rom T2S wi l l al ways be

possible, but it would be a long and costly

process.

Under the current proposal, non-euro area

central banks will have the possibility to discuss

T2S issues in a specific group that they wil l

chair: the Non-euro Currencies Steering Group.

Moreover, i f one or more non-euro area

central banks consider that a change to the T2S

platform would negatively affect their monetary

policy implementation or could raise financial

s t ab i li t y c o nc e rns , t hey w o ul d ha ve t he

opportunity to discuss these concerns directly

with the Governing Counci l , and to f ind a

solution at the level of the governors.

It is envisaged that non-euro area central banks

wi l l be granted extensive r ights , and this

provides a very significant level of reassurance

that T2S wi ll not devel op in a way which is

detrimental to their interests. In going in this

direction, the Eurosystem builds on decades of

experience in central bank cooperation, both in

Europe and across the world.

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16. T2S is a Eurosystem project.

Wh y sh ou ld th e Un it ed Ki ng do m

jo in ?

This issue is not only relevant to the United

Kingdom, but to Switzerland and non-euro

area countries in Scandinavia and in central

and eastern Europe.

We cannot emphasise enough that T2S is not

a project for the euro only. T2S has been

conceived for multi-currency settlement. TheEurosystem is only the builder and operator of

the platform. As far as central bank functions

are concerned, all participating central ban