T2S Project Update - Deutsche Bank · global franchise.” At the heart of Deutsche Bank’s T2S plan-ning is the creation of a T2S hub that will be located in Frankfurt. T2S will

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It is now less than 12 months before CSDs in the first wave of migration to TARGET2-Securities begin prelimi-nary testing and commence transition of their securities settlement activity onto the T2S platform, the European

Central Bank’s centralised facility for securities settlement in central bank money. In March, the ECB Governing Council announced revisions to its original three-phase schedule for T2S migration amid concerns that 85 per cent of T2S

With T2S implementation approaching rapidly, FSR provides an update on the progress of T2S project preparations

T2S Project

Update

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volumes would be migrating within the last six months of the migration period.

On the basis of recommendations from the CSD Steering Group, the Governing Council announced that migration will now take place in four waves. This will, in the ECB’s view, result in a more balanced distribution of CSDs across the migration timeframe, thus reducing operational risk associated with the migration process (see Fig 1 on following page).

Mehdi Manaa, Head of the T2S Technical Programme Management Section at the ECB, notes that T2S testing and migration is a complex process, involving an extensive web of actors including the Eurosystem, as T2S operator, 23 CSDs and 19 central banks, along with their respective user communities. The activities of these T2S stakeholders must be coordinated across four migration waves and tested before migration. CSDs and central banks will go through five testing stages in four test envi-ronments, while supporting their communi-ties of indirectly- and directly-connected participants. The user testing phase for T2S will commence in October 2014, co-ordi-nated by the User Testing Sub-group which

will lay down a framework for all testing activities, including connectivity testing, interoperability testing and migration tests.

Clearstream Senior Vice President, Business Management & Strategy, Rob Somogyi, anticipates that the T2S initiative will fundamentally change the post-trade landscape in Europe. “To us, T2S is a huge opportunity if the authorities and the market together get things right,” he says. Clearstream views T2S as a unique op-portunity for the public and private sector to shape the future of securities services provision in Europe. In preparing for T2S, Clearstream commissioned PriceWater-houseCoopers (PwC) to conduct a study to evaluate the potential implications of T2S, including the hidden benefits to the industry. “Much beyond the expected har-monisation and cost benefits in the cross-border settlement area, PwC found out that T2S would create efficiencies around capital management, hence reducing by 11 percent the EUR 295 billion capital shortfall the OECD estimated for Eurozone banks due to Basel III requirements,” he says. (see Box on page 58)

Andrew Rand, Managing Director and Head of Direct Securities Services EMEA, Global Transaction Banking at Deutsche Bank, indicates that Deutsche Bank has a compre-hensive programme in place to manage its T2S preparations. This involves more than 40 people working across multiple project teams in a range of areas. “Significantly, the T2S project represents only one part of our overall European strategy,” he says. “Markets outside of T2S are also included in our broader strategy. A strong European foundation is vital to the health of our global franchise.”

At the heart of Deutsche Bank’s T2S plan-ning is the creation of a T2S hub that will be located in Frankfurt. T2S will establish a centralised platform for processing do-mestic and cross-border settlement across multiple EU markets. With a common settlement methodology in place, Rand indicates, it will no longer be necessary to maintain full securities processing func-tions on the ground in each market and Deutsche Bank will explore opportunities

Rob Somogyi,Senior Vice President, Business Management & Strategy, Clearstream

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to realise efficiency gains by centralising certain functions through an operations hub in Frankfurt. “We believe that T2S implementation will allow Deutsche Bank to capitalise on specialist strengths that we have as an organisation,” he says. “We are the world’s number one EUR clearer based on volume. Thus the introduction of T2S as a platform for settling EUR-denominated and some non-EUR securities places us in a good position to strengthen our status as provider of liquidity management, collateral management, asset servicing and a range of associated functions.”

Clearstream CSDs signed the Framework Agreement with the Eurosystem in May 2012. Subsequently, Clearstream’s prepara-tions have focused on meeting the syn-chronisation points outlined in the T2S programme schedule and, ultimately, in ensuring its readiness for the four-wave T2S migration from 2015. Rob Somogyi sug-gests that, in practical terms, this task has involved interpreting the technical require-ments outlined in T2S project documenta-tion and making necessary adaptations to its technology platforms, operational pro-cedures and service portfolio in advance of T2S going live. Additionally, it has involved meeting with customers to identify how

their service needs and business strategy will change with T2S implementation and to ensure that they are well briefed on the implications of the T2S project. “A more immediate milestone is that in June 2015 we will need to commence end-to-end testing,” comments Somogyi. “This demands that we have fully completed our own internal build and testing by this date. It’s an ambitious plan and all of Clearstream is mobilised around it. But things look very good at the moment and customers tell us we are ahead of the game.”

Edwin de Pauw, Director, T2S Project Management at Euroclear, believes that the current migration schedule is sensible in balancing settlement volumes across the different migration waves and reducing the migration risk associated with having Eu-rope’s high-volume CSDs migrating at the same time. There is a nine month period allocated to the first wave and six months allocated to each of the subsequent waves. This, he feels, should provide sufficient time to stabilise the environment after each set of CSDs have migrated.

There are two principal components to Euroclear’s ongoing preparations for T2S implementation. First, it is preparing for

Fig 1: T2S Migration WavesDuring its meeting on 21 March 2013, the Governing Council of the ECB approved a plan through which CSDs will migrate to T2S through four migration waves:

First wave22 June 2015

Second wave28 March 2016

Third wave12 September 2016

Fourth wave6 February 2017

Bank of Greece Securities Settlement System

(BOGS)

Euroclear Belgium Clearstream Banking (Germany)

Centrálny depozitár cenných papierov SR

(CDCP) (Slovak Republic)

Depozitarul Central (Romania)

Euroclear France KELER (Hungary)

Eesti Väärtpaberikeskus (Estonia)

Malta Stock Exchange Euroclear Nederland LuxCSD (Luxembourg) Euroclear Finland

Monte Titoli (Italy)

Interbolsa (Portugal)

Oesterreichische Kontrollbank (Austria)

Iberclear (Spain)

SIX SIS (Switzerland)

National Bank of Belgium Securities Settlement

Systems (NBB-SSS)

VP Lux (Luxembourg)

KDD – Centralna klirinško depotna družba

(Slovenia)

VP Securities (Denmark)

Lietuvos centrinis vertybinių popierių depozitoriumas

(Lithuania)

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Nadine Chakar,Head of Global Financial Institutions, BNY Mellon

the outsourcing of settlement activity to T2S by Euroclear CSDs that have signed the Framework Agreement, namely the ESES CSDs (Euroclear Belgium, Euroclear France and Euroclear Nederland) and Euroclear Finland. For Irish securities that settle in Euroclear UK & Ireland (EUI), it will be possible to settle these securities in T2S by routing these via the ESES platform. Connectivity will also be upgraded from Euroclear Bank to ensure that the ICSD can continue to link to CSDs that have out-sourced settlement to T2S.

A second priority is to adapt the value proposition across the Euroclear CSDs and Euroclear Bank in order to maximise the benefits that Euroclear can deliver to customers in a T2S environment. When T2S goes live, Euroclear customers will have a choice of three channels through which they can access T2S markets. They can do so via Euroclear Bank, thus continuing to benefit from the multi-market asset serv-icing offered by the ICSD. Second, they can access T2S markets via ESES, which will pro-vide a single entry door into T2S, enabling them to use their ESES accounts to settle securities across all CSDs linked to T2S. Or, thirdly, customers may wish to maintain di-rect links with the CSD in larger EU markets (for example in ESES markets, Germany, Italy, Spain), at least in the early days after

T2S implementation. Through this avenue, Euroclear will allow users to retain access to the issuer CSD in these specified loca-tions, while offering streamlined access via a single point of entry across other T2S markets. “In practice, we anticipate that customers may opt for a combination of these options that best suits their specific circumstances, potentially opting for direct access operated by Euroclear in some larger markets, while utilising a centralised access point via ESES for other locations or uti-lising the global ICSD solution via Euroclear Bank,” says de Pauw.

Directly connected participantsIn recent weeks, the ECB has published a list of market participants that have declared their interest to become a Directly Connected Participant (DCP) in T2S. DCPs will have the opportunity to benefit from the services offered by T2S without the need to interface with the T2S settlement platform via a CSD. Any firm interested in becoming a DCP was required to submit a non-binding declaration of interest to the T2S Programme Office by 15 October 2013.

One striking feature of this list is that it is larger than many commentators anticipated. A total of 31 companies have declared a non-binding commitment to become Di-rectly Connected Participants (DCPs) of T2S (see fig 2 on page 57). However, we should recognise that this is a non-binding declara-tion of intent and it is unlikely that all of these companies will ultimately seek DCP status. For Euroclear’s de Pauw, it seems probable that only 15-20 firms will avail of this option.

For Euroclear Bank, there are a number of obvious benefits from obtaining DCP status. It is important to be as close to the settlement system as possible. “By connecting as a DCP, this will allow us to obtain the best possible settlement deadlines for our ICSD activity,” explains de Pauw. Also, this will simplify the chal-lenge of managing upgrades to messaging formats and technology. “By harmonising settlement instructions and settlement reporting messages across T2S CSDs around a standard ISO 20022 message set, this will streamline the task of managing

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annual SWIFT releases and other mes-sage upgrades. This will be substantially more efficient than implementing changes across 20+ different communication links as we do today.” Given that Euroclear is already well advanced in establishing T2S connectivity for ESES CSDs and Euroclear Finland, de Pauw believes that this prepara-tory work will help greatly to minimise the investment when it comes to establish DCP connectivity for Euroclear Bank.

BNY Mellon has registered its intent to become a DCP and the organisation is now finalising how it will restructure its settle-ment and asset servicing strategy in order to maximise the benefits that it can deliver to clients in a post-T2S Europe. “That said, as T2S implementation approaches, we

have – through the formation of the BNY Mellon CSD – taken the opportunity to become a part of the infrastructure, rather than simply remaining a major user of infrastructure as we have been for many years,” states BNY Mellon’s Head of Global Financial Institutions, Nadine Chakar. “As noted, it is still a little early to confirm how BNY Mellon will structure its asset servicing strategy for a T2S Europe. However, we expect to adopt a hybrid strategy in which we will connect directly in some markets – we are already direct in Germany and in the Netherlands, for example – and we will con-tinue to employ a third-party sub- custodian to support asset servicing requirements in other T2S markets.”

Indeed, Tim Keaney, BNY Mellon’s CEO, has long stated that one cannot be big in Europe without being big in Germany. “Our

strategy for Germany does not centre just on self-clearing,” adds Chakar. “Instead, we are reassessing our whole interface with infrastructure – moving to a situation where we can fulfil key functions as issuer CSD and investor CSD through our own CSD entity. Undoubtedly, we are evaluating the potential to self-clear in other T2S markets. However, we do not feel any pressure to be direct in every market. As a bank, we have long made a good partner and we will con-tinue to draw on third-party service provi-sion from sub-custodian banks or infrastruc-ture entities where this makes sense for BNY Mellon and for our clients. We have a long history of establishing successful joint ventures and service partnerships and we will continue to explore ways that we can draw benefit from these partnerships.”

Harmonisation agendaLack of harmonisation in the post-trade environment continues to represent a significant obstacle to the efficient running of Europe’s financial services industry. Many of the barriers to cross-border clearing and settlement identified by the Giovannini Reports of 2001 and 2003 remain firmly in place and this lack of harmonisation, among other consequences, continues to inflate the cost and risk associated with trade settlement, particularly in a cross-border environment. The ECB proposes that the integrated infrastructure pro-vided by T2S will accelerate technical and operational harmonisation, which is an important building block in the creation of a single market for settlement services in Europe. This will complement the legal and regulatory harmonisation agenda currently pursued by EU legislators.

As T2S implementation approaches, we have – through the formation of the BNY Mellon CSD – taken

the opportunity to become a part of the infrastructure, rather than simply remaining a major user

of infrastructure as we have been for many years. It is still a little early to confirm how BNY Mellon

will structure its asset servicing strategy for a T2S Europe. However, we expect to adopt a hybrid

strategy in which we will connect directly in some markets – we are already direct in Germany and

in the Netherlands, for example – and we will continue to employ a third-party sub-custodian to

support asset servicing requirements in other T2S markets

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Significantly, the success of T2S – re-flecting an ambition to make cross-CSD settlement in central bank money easier than it is today and, consequently, to drive down the cost of the cross-border trading in securities – is contingent on efforts to drive harmonisation of market prac-tice across EU member states, including processing of corporate actions on pending matched transactions. The T2S Corporate Actions Sub-group (CASG) was established in 2008 with responsibility for compiling T2S rules for three categories of corpo-rate actions on settlement flows, notably market claims, transformations and buyer protection. The CASG has responsibility for monitoring the implementation of T2S CA standards and for clarifying or updating these as required.

Euroclear’s Edwin de Pauw believes that T2S has undoubtedly accelerated harmoni-sation across the securities settlement land-scape. Settlement lifecycle management is now more standardised across EU member states and this has contributed to improved interoperability across EU settlement infrastructure. In accordance with the CSD Regulation, securities settlement across EU markets will standardise around a T+2 set-tlement cycle from 2015. These advances also extend into the corporate actions arena. The T2S CASG has made significant advances in promoting greater consistency in the treatment of corporate actions on pending transactions, for example.

So too, T2S implementation will sup-port greater efficiency in clients’ use of

collateral. Today, many customers are constrained by collateral fragmentation across EU markets. T2S will make it easier for customers to optimise collateral across fragmented pools and to move this to where it is required, thus improving collat-eral mobility and optimisation on a Euro-pean basis. However, for many clients, col-lateral and liquidity optimisation is a global play. “Through Euroclear’s Global Collateral Highway, and through links with DTCC and other organisations, we have structures in place that will enhance the mobility of clients’ collateral on a global basis,” com-ments de Pauw.

Hugh Palmer, T2S Project Director at Société Générale Securities Services (SGSS), believes that T2S will allow SGSS to deliver a range of potential benefits to its clients. This will reinforce SGSS’ ability as a service provider to extend client access to multiple CSDs via a single point of entry. Second, SGSS will conduct a major upgrade of its custody information systems, beginning with applications closest to the market, notably its interface layer messaging ex-changes, and moving progressively up the processing value chain. The T2S interface will employ ISO 20022 standard messaging for all in-bound and out-bound commu-nication developed around a standardised XML syntax. Third, SGSS will help clients to manage their settlement liquidity require-ments more efficiently across T2S markets, bridging the fragmented pools of liquidity that are currently locked up in individual markets and managing this consolidated pool of liquidity on a centralised basis, thus

Fig 2: List of institutions that have declared their intention to become a dcp in T2S

• ABN AMRO Clearing Bank NV • Banca Aletti & C.S.p.A. • Banco Popolare – Società Cooperativa • Bankhaus Ellwanger & Geiger KG • Barclays • biw Bank für Investments und

Wertpapiere AG • BNP PARIBAS SA • BNPP Securities Services • CACEIS • Citi • Clearstream Banking SA

• Deutsche Bank • EMCF N.V. • Eurex Clearing AG • Euroclear Bank SA/NV • Hellenic Exchanges S.A. Holding,

Clearing Settlement and Registry (HELEX)

• HSBC Trinkhaus & Burkhardt AG • Iccrea Banca S.p.A. • IntesaSanpaolo • Istituto Centrale delle Banche Popolari

Italiane S.p.A.

• JP Morgan • LCH.Clearnet Ltd • LCH.Clearnet SA • National Bank of Greece SA • Natixis • Parel • SGSS S.p.A. • Société Générale S.A. • TARGOBANK AG & Co. KGaA • The Bank of New York Mellon SA/NV • Unicredit Bank Austria Vienna

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reducing clients’ funding requirements to support their central bank money settle-ment activities.

No doubt these are attractive benefits. But we should not underestimate the size of the implementation challenge required to realise these advances. SGSS will manage the transition of its settlement communication interface and full opera-tional procedures in the course of a single weekend. Hugh Palmer is confident in the extensive preparation work that SGSS has done, but a migration of this size dictates

that nothing can be taken for granted. Moreover, daily business must continue as normal throughout the 21 month T2S migration period, with no observable dip in client service and operational standards throughout the transition.

There are clearly some fears within the industry that the harmonisation benefits related to T2S may fall short in certain areas. CSDs have raised a series of con-cerns in their change requests (CRs), some of which relate to continued inconsisten-cies in legislation or market practice across

FSR began by questioning Philip Brown on Clearstream’s motivation for commissioning this study. “In evaluating how market participants are preparing for T2S, we recognise that there has been much discussion about the implementation challenges posed by T2S, the progress of testing and migration planning, and whether T2S is likely to be launched on time and on budget,” he responds. “How-ever, there has been limited analysis of how T2S will benefit the market and the potential efficiency gains this will generate. When this debate has taken place, it has largely centred around settlement costs – particularly whether the ECB’s proposed figure of €0.15 for processing a DvP instruction in T2S will be an accurate reflection of what firms will pay for settlement after T2S goes live. With this in mind, we appointed PwC to work with Clearstream in assessing the wider benefits that T2S will deliver.”

One important outcome of this study, notes PwC’s Thorsten Gommel, is to

demonstrate the potential for size-able capital savings under Basel III rules with the launch of T2S. “This link has not been made in any pre-vious piece of research that we are aware of, including the T2S Economic Impact Assessment conducted by the Eurosystem in 2008,” he says. Drawing on cross-border settle-ment data for Clearstream Banking Frankfurt (CBF) and Clearstream Banking Luxembourg (CBL) cus-tomers, the white paper concludes that through utilising a single CeBM cash account in T2S – rather than managing CeBM settlement liquidity in separate accounts on a market-by-market basis as many do today – customers may be able to reduce their average daily cash or credit requirements during peak settlement periods by approximately 15 per cent (based on analysis of Clearstream’s own figures). Extrapolating this figure to settlement volume for the euro-zone, this will translate under Basel III rules into €33 billion in Tier 1 capital savings for all euro-area banks.

FSR asked Thorsten Gommel whether market participants are making active preparations to centralise CeBM liquidity through a single cash account in T2S. “Through our qualitative interviews, we find that market participants that are ahead of the game in their T2S preparations are evaluating potential to manage settlement liquidity more efficiently through consolidating their CeBM cash relationships through a single cash account for T2S markets,” he replies. The more advanced institu-tions are in their preparations for T2S, typically the more actively they are assessing this option. One objective of this paper, Gommel says, is to raise awareness of the benefits that T2S may generate through this avenue and to assist market participants with their planning and preparations nec-essary to make this possible.

“This said, many organisations continue to treat their supply chain decisions around cash management independently from the supply chain

The €300 billion questionIn September 2013, PricewaterhouseCoopers and Clearstream released the findings of a joint study which evaluates the potential benefits that will be generated by TARGET2-Securities, including how T2S can provide relief from Basel III capital requirements. Philip Brown, Head of Client Relations Europe and the Americas and Member of the Executive Board at Clearstream, and Thorsten Gommel, Partner in PricewaterhouseCoopers’ Financial Services Consulting divi-sion in Frankfurt, talk to Bob Currie about the findings of the report

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EU member states. “Full harmonisation benefits will not emerge simply from having EU member states operating in a vaguely similar way,” indicates Deutsche Bank’s Director and Head of Market Advocacy, Global Transaction Bank, Angus Fletcher. “Rather harmonisation demands that each EU member state adopts common and con-sistent practice. Thus, it will be necessary to address a number of these outstanding change requests in order to move us more effectively towards market harmonisation. I should point out that there are a number of harmonisation efforts within the T2S gov-

ernance that have the intent to cover out of scope standardisation.”

However, Fletcher believes it important that there is an appropriate balance between addressing these CRs and implementing T2S according to the proposed migration schedule. “As future participants in T2S, we recognise the need to get the project up and running,” he says. “This has already been delayed a number of times and there is a need to establish certainty in the market that T2S settlement will be a reality from 2015.” Some CRs remain unresolved,

decisions around securities,” adds Brown. “T2S is widely viewed as a project that will reshape the securities settlement landscape in the EU, but few are thinking deeply about the effi-ciency gains this will bring to cash and liquidity management. A lot of firms still manage their cash correspondent networks independently from their se-curities network. However, upon T2S implementation firms have the motiva-tion and ability to bring these two network functions closer together. In effect, customers should recognise that liquidity management, collateral management and securities settlement will need to be considered as part of a common supply chain.”

So how quickly will this happen? “Some firms are already starting to do so, but in limited numbers” notes Brown. The industry is currently preoccupied with a wide range of regulatory changes and infrastructure projects and it is therefore under-standable that many firms are com-mitting time and resources to other priorities. “We do sense the market starting to recognise the benefits of looking at cash and securities more holistically but, through this research, we hope to raise further the profile of this largely overlooked advantage,” he says. “At Clearstream, we are for-tunate in that collateral and liquidity management are what we do on a

day-to-day basis, so the benefits were more immediately apparent to us. We are engaging closely with market participants to bring greater aware-ness in the area of capital efficiency, and to show them how they could structure themselves for maximum economic advantage.”

A second conclusion in the Clearstream-PwC report is that T2S will bring a potential shortening in the custody chain. It will facilitate CSD-to-CSD links and give potential for firms to manage their settlement activity via a single investor CSD. But how many organisations are currently thinking this way? Philip Brown believes that more and more organisations are starting to recognise the potential advantages that T2S can deliver in this area. With AIFMD becoming a reality from July 2013, Clearstream has had detailed discussions with market par-ticipants about how they will manage their liabilities under this directive more effectively. By becoming a direct CSD participant, firms will not be considered under AIFMD rules to have delegated their custody obligations to a third party sub-custodian. This, suggests Brown, is prompting banks to think about their supply-chain decision-making in a different way.T2S will facilitate links between CSDs, dictating that a firm can establish a relationship with a single investor CSD

and take advantage of the CSD-to-CSD links that this CSD has in place to streamline how they manage settle-ment and asset servicing requirements across the T2S area.

In closing, one important conclusion that derives from the Clearstream-PwC study, notes Brown, is that there is much more to T2S than initially meets the eye. Though T2S is a centralised platform for securi-ties settlement, the benefits of T2S extend well beyond lean settlement and will have an important impact on how firms manage collateral and liquidity. On a Europe-wide basis, this has potential to deliver significant balance sheet advantages – poten-tially realising a collective €33 billion capital saving that euro zone banks will be in a position to deploy for other uses.

We cannot ignore, however, that there is now limited time to get ready for T2S. “Through our conversations across the market, it is clear that some users are not well advanced in their preparations for T2S and do not have a clear understanding of the potential implications of the T2S project,” concludes Brown. “Firms need to be moving beyond simple planning discussions to concrete action as T2S implementation draws ever closer.”

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but work towards harmonisation will con-tinue during the migration phase and after T2S implementation. “We must remember the T2S requirements were effectively laid down in 2011,” he says. “However, T2S is due to go live from mid-2015. Inevitably things will have changed and will continue to change in terms of how the market operates. Thus, it is necessary to see what comes out of testing and to address any concerns that may impact the future opera-tion of T2S.”

Given that we are now well advanced in the development phase of T2S, Euroclear’s Edwin de Pauw feels similarly that it is good project management to minimise the number of change requests that receive attention at this stage. It is likely that many of the remaining CRs will receive attention at a later time after T2S has been imple-mented. However, within the T2S com-munity there is still some anxiety around the large volume of activities that will need to be completed over the T2S migration weekend. There is much to be addressed in 48 hours and sufficient contingency buffer needs to remain if any of these migration tasks do not proceed smoothly. “Any change request that will help us facing this challenge should be carefully considered,” says de Pauw.

Collateral mobilityWe have already noted that collateral fragmentation remains a significant chal-lenge for many firms with pan-European or global business activities. A firm may have disjointed collateral pools locked up in different geographical locations and across different product silos, often managed independently from each other. A range of obstacles may prevent these assets being mobilised efficiently and allocated to where they are most needed to collateralise the firm’s outstanding exposures. Ongoing work initiated by a number of European Commission-sponsored working groups has highlighted deficiencies in the settle-ment framework in Europe and continuing difficulties encountered in moving col-lateral through the EU network of CSDs and ICSDs. It is quite likely that, collateral givers and collateral takers do not hold their securities accounts in the same set-

tlement system and it may be a cumber-some process to mobilise collateral from one settlement system to another. Ignacio Terol, Head of the T2S External Stakeholder Management Section at the ECB, notes that realignment processes may need to take place all the way back to the issuer CSD for the collateral taker to be sure that its own-ership of that collateral is not in dispute. This can take time and create friction in the mobilisation of collateral. “What if during that time market prices change abruptly?,” he questions. “What if the issuer of the collateral is downgraded? The amount of collateral eventually mobilised may be less than the amount needed.”

When T2S is implemented, Terol is confi-dent that this will help individual institutions to establish a single collateral pool for all T2S markets. Any necessary realignment will take place automatically in real-time and, in most cases, on the books of the issuer CSD. Moreover, through its auto- collateralisation facility, T2S will also provide greater flex-ibility regarding how banks can access liquidity to meet their real-time settlement needs. “On balance, T2S provides a tool-kit of facilities to make collateral management easier,” states Terol. For example, if a col-lateral taker cannot re-use the collateral it receives, T2S provides the facility to block that position. A collateral giver can earmark a given position as available for different agents to mobilise, while it remains avail-able for settlement. Now that the live date of T2S is approaching, the question is how well the various players are prepared to use the T2S tool kit to their benefit.”

There can be little doubt that T2S will facilitate movement of collateral, says Clearstream’s Head of Client Relations Europe and the Americas and Member of the Executive Board, Philip Brown. Just one internal booking on T2S will be necessary in order to facilitate movement of collateral to where it needs to be in the T2S zone. The potential in this area is enormous. If a firm wishes to buy a quantity of bonds domestically in Italy, for example, and sell these in the international market, it will typically need to access finance to complete this purchase. When T2S is implemented, the buyer will typically – at least within the

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Clearstream model – have both its interna-tional and its domestic positions in a single account, leveraging T2S settlement, so it will be possible to autocollateralise across these respective positions. As a result, this need for credit is sharply reduced because trading will be taking place within the same settlement environment.

Also, T2S will simplify the challenge of moving collateral. If securities are delivered in one market and the recipient needs to deploy these as collateral in another market, it may – in cases where the markets are not harmonised (they may operate different batch processing cycles for example) – face problems in transferring these securities before the market closes. Consequently, the user may be long collateral in one market

but short in another, demanding that it borrows collateral in the latter to cover its outstanding exposures.

Importantly, when T2S is implemented, securities settlement across the respective markets will take place on a single system. Philip Brown notes that for customers holding assets with Clearstream that wish to deploy these as collateral to access cen-tral bank liquidity in another market, it will no longer be necessary to move the col-lateral in order to complete these monetary policy operations. “Utilising the ‘assessed links’* that Clearstream has in place, the client will be able to access central bank

liquidity in a range of locations while the collateral remains in custody in the local market,” explains Brown.

Deutsche Bank’s Angus Fletcher agrees that the creation of the T2S settlement engine will facilitate settlement of cross-border transactions and will enhance the efficiency of collateral management across EU loca-tions. Under current circumstances, clients may have assets stuck in local markets that are difficult to mobilise as collateral for use in other locations. T2S is likely to enhance clients’ ability to consolidate these frag-mented pools of collateral. “However, we await further clarification around the Securi-ties Law Legislation before it becomes clear how far EU member states will support har-monised securities legislation that enables

significant advances in collateral movement across national borders,” he comments.

Extending CSD capabilitiesIn July 2013, J.P. Morgan announced that its Collateral Management business has selected London Stock Exchange Group (LSEG) to provide settlement, custody and asset servicing services through a new CSD that LSEG is establishing in Luxembourg. J.P. Morgan confirmed that this develop-ment is in response to the European Market Infrastructure Regulation (EMIR), which requires margin and default contributions posted to a central counterparty (CCP) to be held, when possible, with a securities

T2S has undoubtedly accelerated harmonisation across the securities settlement landscape.

Settlement lifecycle management is now more standardised across EU member states and this has

contributed to improved interoperability across EU settlement infrastructure. In accordance with the

CSD Regulation, securities settlement across EU markets will standardise around a T+2 settlement

cycle from 2015. These advances also extend into the corporate actions arena.

* Assessed links are contractual and technical arrangements for the transfer of securities between securities settlement systems which may be used in the collateralisation of the credit operations of the Eurosystem after an assessment has been carried out against the Eurosystem’s standards to ensure that the conditions set by the Governing Council have been met.

Edwin de Pauw,Director, T2S Project Management, Euroclear

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settlement system. CCPs will be expected to comply with this requirement when they obtain authorisation under EMIR. LSEG’s new CSD is expected to be operational in the first half of 2014 and will, hencefor-ward, be in position to provide services to CCPs as they become authorised under EMIR.

Slightly prior to this in January 2013, BNY Mellon secured regulatory approval to establish its own CSD entity, the BNY Mellon CSD, which is incorporated in

Belgium as a non-bank subsidiary of BNY Mellon and will offer issuer, settlement and safekeeping services to market participants in the EU and worldwide. “The formation of the BNY Mellon CSD is front and centre of our strategy for a post-T2S Europe, providing as it does the opportunity to connect CSD-to-CSD when T2S goes live,” explains Nadine Chakar. “We are a major global player in the investment services space, with an extensive portfolio of serv-ices. In the issuer services domain we are one of the largest corporate trustees glo-bally, supporting more than 60,000 ISINS around the world. We are a major global custodian and fund administrator, sup-porting roughly 25 per cent of the world’s assets under custody or administration. And we are a leading provider of global collateral management services – indeed, we are one of the few providers worldwide to support collateral management for both equities and fixed income across the US and the Americas, Europe and the Asia-Pacific. With this expertise, we are excited by the opportunities that T2S will present to facilitate the movement and optimisation of collateral, helping customers to ensure that they have the appropriate collateral in

the right place at the right time to support their business activities and goals.”

These are interesting developments, indeed, observes Clearstream’s Rob Somogyi. The business rationale these new entrants have highlighted are access to T2S, opportuni-ties to deploy their collateral management capabilities in this future environment and, possibly, issuance services. “This is what we’ve been doing for quite some time, so we take these developments as confirma-tion of our own approach,” he says. “The

case of the London Stock Exchange Group is particularly interesting: having the trading and clearing layers as part of their value chain, the intention now is to put more emphasis on the post-trade layer, including collateral management services. We have that at Deutsche Börse Group already. So a more general observation is that, with T2S on the horizon, a number of market infrastructure groups now appear to be stepping down the integrated exchange business model route.”

There is also another model taking shape – as evidenced by the creation of the BNY Mellon CSD – driven by custodian banks entering the infrastructure space. “In the run up to T2S it is clear that the common-ality between these models is their aim to support settlement and asset servicing in line with the needs of the international col-lateral management business,” comments Clearstream’s Somogyi. “On the new CSD entrants, at Clearstream, we welcome this additional competition.” There is a general expectation around the market that the CSD layer in Europe will consolidate in coming years. But at this time of major regulatory and infrastructure change, Somogyi believes

A number of CSDs are committing significant resources to their T2S preparations but may discover

relatively quickly that their economic future in a T2S environment is far from secure. As a result,

they may be forced either to partner with another organisation or to exit the market. This poses

the question of who will pick up the tab for the investment that they have made prior to this point.

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it possible in the short term that there may be new entrants to the CSD segment. “Set-tlement interoperability is key to ensure that market participants can manage cash and securities efficiently across multiple jurisdic-tions – and we are seeing the emergence of interesting new models designed to facilitate efficient access to the liquidity and collateral that firms require to support their business activities. This points the way towards the formation of new partnerships in our sector in times ahead.”

However, Deutsche Bank’s Andrew Rand is sceptical whether we are likely to see too many further entrants to the CSD space. “CSDs have now signed the T2S Framework Agreement and commercial banking or-ganisations that wish in future to establish CSDs may be at a disadvantage to CSDs that have already been granted approval and have committed to the T2S project,” he says. “Given these constraints, it is unclear whether it makes sense to establish a new CSD entity at the current time. I do not see a spate of new CSDs coming onto the scene – rather, we expect to see CSD consolida-tion or partnerships emerging between CSDs in times ahead.”

On balance, Deutsche Bank views this consolidation process as a positive trend but one that is coming late in the day. A number of CSDs are committing significant resources to their T2S preparations but may discover relatively quickly that their economic future in a T2S environment is far from secure. As a result, they may be forced either to partner with another organisa-tion or to exit the market. This poses the question of who will pick up the tab for the investment that they have made prior

to this point. “We have all noted impacted European CSDs investing heavily in their T2S preparations, confident that they have a sound economic future in a T2S envi-ronment,” adds Deutsche Bank’s Angus Fletcher. “So too, policymakers in a number of EU member states have committed to maintaining their own national CSD, be-lieving this to be a vital component of their financial services infrastructure and not a service they would be willing or potentially able to source from elsewhere. This could therefore significantly slow down any con-solidation in this space.”

Redesigning business modelsT2S implementation also has important implications for the business strategies adopted by Europe’s sub-custodian com-munity. Settlement income may potentially contract and service providers will need to tap into new avenues for revenue genera-tion in the asset servicing space. “We agree to a degree that our revenue model may change somewhat with T2S implementa-tion,” says SGSS’ Hugh Palmer. “But we do not anticipate that this will change as fully as some observers may anticipate. A sizeable share of our revenues are associ-

ated with providing global custody, trustee services, transfer agency, fund administra-tion and valuation services to the buy-side and asset owner communities. Our capacity to generate revenue through these sources will not be affected substantially by T2S implementation. However, we do anticipate that these clients – having listened to the marketing messages advanced by the ECB – will seek to align the settlement fees that they pay for cross-border transactions with the fees their pay for domestic settlement.

The case of the London Stock Exchange Group is particularly interesting: having the trading and

clearing layers as part of their value chain, the intention now is to put more emphasis on the post-

trade layer, including collateral management services... So a more general observation is that, with

T2S on the horizon, a number of market infrastructure groups now appear to be stepping down the

integrated exchange business model route.

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We identified a similar trend when securi-ties settlement in Belgian, Dutch and French markets was centralised on Euroclear’s ESES platform in 2009.”

In servicing global custodian and brokerage customers in a T2S Europe, SGSS identi-fies two distinct categories of client: those for whom efficient, low cost processing of their settlement flow is a priority; and those for whom their primary risk and cost lies in delivering efficient asset servicing on their assets held in custody. For the first of these two groups, SGSS believes there are oppor-tunities to deliver significant benefits to the customer through a strong multi-market offer that capitalises on the efficiency gains that are inherent to T2S logic – offering DCP connectivity, being very close to the market from a settlement standpoint and taking advantage of liquidity management efficiencies (through, for example, pooling cash linked to securities accounts held at multiple CSDs across the T2S area, utilising auto-collateralisation to optimise intra-day liquidity management to support settlement for high-volume clients).

For the second of these groups – for ex-ample a global custodian with substantial assets under custody – it may be the case that T2S solves very little. Though settle-ment efficiency and settlement pricing are a consideration, the priority in finalising their purchasing strategy is typically to access best-in-class asset servicing, particularly ensuring that corporate actions instructions can be processed as close to the corporate actions deadline as possible. As a securities settlement platform, T2S is likely to deliver few immediate efficiency gains in the asset servicing domain. “However, at SGSS we view T2S implementation as the start of the story, not the end game, and we expect significant harmonisation benefits to be forthcoming through initiatives that run parallel with T2S, including the Securities Law Legislation, the CSD Regulation and ef-forts of the HSG and other industry groups focused on harmonisation initiatives,” says Pierre Colladon, Senior Advisor on Strategy and Market Infrastructures at SGSS.

Deutsche Bank’s Angus Fletcher notes that as we prepare for T2S, there is a parallel

body of regulatory reform – including AIFMD, the CSD Regulation and Securi-ties Law Legislation among others – that is nearing implementation and is likely to have an important bearing on the busi-ness models that service providers adopt for a T2S Europe. “At Deutsche Bank, we are monitoring progress of this legislation closely to identify any new business oppor-tunities these may create and any restric-tions these may impose on the products and solutions that we offer,” he says.

Proposals within the CSD Regulation to establish a common T+2 settlement cycle across EU markets represent one such example. “This will impact not only the transaction banking part of our business, but also the broker-dealer services area and the private banking side,” says Fletcher. “It is important that we address these initia-tives in a joined-up manner. Securities set-tlement in Euronext markets for example, is expected to move to T+2 settlement during October 2014 and, thus, market par-ticipants will need to have a strategy that allows them to work in a T+2 settlement environment in line with this timetable. As a German bank we are well positioned to adapt to this change, given that equity and bond settlement in CBF already follows a T+2 cycle.”

Euroclear’s de Pauw believes that it makes good sense for migration to T+2 settle-ment, in line with the CSD Regulation, to be completed prior to the first migration wave for T2S. He feels that managing these two transitions simultaneously would place too much risk on the market. Euroclear has confirmed that T+2 migration for ESES markets and for EUI will take place over the same weekend in early October 2014.

BNY Mellon has chosen to join the last migration wave to move the BNY Mellon CSD onto T2S, providing the maximum possible time to finalise preparations and also to monitor the progress of preceding migration waves. “On balance, we believe that the ECB and its task force have done an excellent job in aligning the migration waves for T2S with the migration to T+2 under the CSD Regulation,” comments Nadine Chakar. “They have also been

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Though T2S is a centralised platform for securities settlement, the benefits of T2S extend well

beyond lean settlement and will have an important impact on how firms manage collateral and

liquidity. On a Europe-wide basis, this has potential to deliver significant balance sheet advantages

– potentially realising a collective €33 billion capital saving that euro zone banks will be in a position

to deploy for other uses.

highly supportive in providing guidance to a newcomer CSD. We are confident that T2S will bring major benefits to the financial services community in Europe, delivering advances that will extend well beyond reductions in the cost of lean settlement. In encouraging harmonisation of settle-ment functions across European markets, as well as streamlining corporate actions processing and the management of collat-eral and liquidity, they are taking important steps towards addressing a number of the Giovannini barriers.”

In preparing its T2S strategy, BNY Mellon is conducting feasibility studies and en-

gaging in a detailed evaluation of how it can best meet its service needs in each market. “Whatever approach we pursue, we wish to do this the correct way, whether through self provision or through continued use of a service partner,” says Chakar. “As a nominated global strategi-cally-important financial institution (G-SIFI), it is important that we carefully evaluate the consequences of each step that we take during this restructuring process.”

Pricing and cost recoveryOnly one non-euro central bank, namely Danmarks Nationalbank, the Danish central bank, has so far committed to the T2S project. Moreover, transaction volumes have dropped off substantially from the time when the ECB first constructed its business case for T2S – Euroclear’s de Pauw points out that there is a difference of approximately 20 per cent in securities settlement volumes between the original business case for T2S and the revised busi-ness case. In light of these developments,

the ECB has been evaluating potential to bring additional settlement activity on to T2S, notably settlement for Eurobonds and investment funds.

But it is open to question how well T2S is suited for settling these instruments. De Pauw points out that while T2S may facilitate efficient cross-CSD settlement for securities issued on a CSD that has joined T2S, this process will not be as efficient for securities issued in a (I)CSD that is outside of T2S since it will rely on move-ments between accounts in that external (I)CSD. This may potentially limit the benefits that T2S can deliver for Eurobond settle-

ment. In turn, the particular nature of the settlement process for investment funds in many EU markets – where transfer agents play a central role in fund settlement – may also limit the appeal of T2S as a settle-ment domain for collective investment fund transactions.

It is clear that the €0.15 headline price for T2S settlement has raised considerable excitement in the market and Clearstream would like to see the Eurosystem stand by this commitment. The Framework Agreement specifies that if volumes do not progress as the Eurosystem hoped when it specified its pricing structure in 2010, then it may have freedom to raise prices at T2S by up to 10 per cent per annum from the end of 2018. “This dictates that over several years we could see considerable inflation in the price of T2S settlement,” says Rob Somogyi. “With this in mind, we would welcome a decision from more non-euro central banks to join the T2S project. Given the sizeable volumes of GBP- and

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CHF-denominated securities settled on a daily basis, it is in many ways unfortunate that the Bank of England and the Swiss National Bank have not signed the Currency Participation Agreement, given the sub-stantial scale effi ciencies that these could deliver to the project. On a positive note, it is encouraging that the Danmarks Nation-albank has committed to T2S and that Norges Bank, the Norwegian central bank, is monitoring the situation closely.”

It is diffi cult to predict at this stage whether new CSDs may join T2S, whether they are based inside or outside of the euro-zone, states SGSS’ Pierre Colladon. Plans for cost recovery will also be condi-tional on economic conditions prevailing in Europe and the investment climate over the next fi ve years, thus shaping settle-

ment volumes processed on T2S. “At SGSS we believe that plans to introduce the T2S platform represent a strategic decision by the Eurosystem to provide Europe with a more effi cient securities processing infra-structure. Its benefi ts cannot be evaluated purely on a return on investment terms basis for the period through to 2024. In reality, we cannot evaluate the full benefi ts of T2S until this is in place and is being used by the fi nancial services community. And, given the potential advances that may subsequently be built on top of T2S, it may be appropriate to consider a longer cost recovery period. T2S represents just one building block in broader plans to build a single European market for securities services and to make post-trade services safer and more effi cient. 2024 represents a relatively early landmark in our journey towards this objective.”

An ongoing concern on the part of some market participants is that they still do not have suffi cient clarity around the price models that CSDs will employ when T2S goes live. Rob Somogyi points out that Clearstream is an exception, however, in-sofar as Clearstream Banking Frankfurt is the only CSD so far to have published its pricing model for when T2S goes live, and LuxCSD has also agreed to charge T2S fees at cost to its clients. “Clearstream is committed to providing T2S settlement at the lowest pos-sible price and will pass the ECB settlement fee to customers without adding any margin or additional settlement fee at the CSD,” says Somogyi. “The smart fee model we have developed has been widely welcomed by the German market, but the whole ques-tion around ‘T2S cost’, so adaption cost and fees, continues to be fundamental to

them. Hence it is even more important to show customers the upsides of their T2S investments. By passing all effi ciency gains generated by T2S on to our customers, we are optimistic at Clearstream that this will encourage settlement volumes to grow, thus enabling cross-border and domestic settle-ment costs to be held as low as possible.”

By releasing details of its pricing model in December 2012, Clearstream’s inten-tion has been to provide transparency to customers around post-T2S pricing. “With 40 per cent of T2S settlement volumes processed through CBF, we believe this is important in helping market participants to fi nalise their business strategies for a T2S Europe,” states Somogyi. “In doing so, we have confi rmed that settlement fees in German and Luxembourg markets will remain among the lowest in Europe.”

Only one non-euro central bank, namely the Danish central bank, has so far committed to the

T2S project. Moreover, transaction volumes have dropped off substantially from the time when

the ECB first constructed its business case for T2S. In light of these developments, the ECB has

been evaluating potential to bring additional settlement activity on to T2S, notably settlement for

Eurobonds and investment funds.