T2S the journey to harmonisation
TS2 - the journey to harmonisation | 02
Market participants will be hugely affected by T2S
and it will force many to review their business models and services as they look to adapt to the
T2S The journey to harmonisation
Europes post-trading landscape is about to experience a dramatic
change following the introduction of Target 2 Securities (T2S).
The aim of T2S is to reform the industry by providing a single pan-
European platform for securities settlements in European Central
Bank (ECB) money.
The provision of post-trading services within Europe has remained
highly fragmented along national lines. This lack of integration has led
to high costs for cross-border settlement transactions. The introduction
of T2S will begin the process of establishing a truly integrated capital
market across Europe, harmonising post-trading settlement activities by
removing cross-border barriers and inefficiencies. T2S will reduce the
costs and risks commonly associated with post-trade settlements and
encourage greater competition within the industry.
Market participants will be hugely affected by T2S and it will force many
to review their business models and services as they look to adapt to
the new environment. In anticipation of these reforms, the International
Capital Markets Association (ICMA) and GFT launched a joint survey in
the summer of 2014. The survey commissioned by the European Repo
Council (ERC), looked at industry readiness and attitudes towards Target
2 Securities. In particular, the survey analysed the level of awareness
and understanding which market participants have regarding T2S; and
the depth of practical engagement and understanding they have of the
consequences on their individual firms.
The results from the survey have allowed the European Repo Council
to guide and shape its approach to the provision of T2S information,
and provide additional advice and training to its members. Opinions
were canvassed from a cross section of the industry. This included both
sellside and buyside firms, custodians, central banks and CCPs. The
surveys respondents represented a broad range of business functions,
such as front, middle and back office; collateral and technology.
The emergence of T2S
T2S will go live in June 2015 and has been developed by the European
Central Bank (ECB) in response to the challenge of improving
settlement processes across Europe. It is now over ten years since the
introduction of the euro and despite the creation of a single currency
area across 19 countries, it is widely acknowledged that Europes
post-trade landscape has remained fragmented along national lines.
The consequence of this has been a great deal of complexity and
inefficiency built in to the process of making cross border settlements.
TS2 - the journey to harmonisation | 03
T2S is a major initiative which aims to radically change the post-trading
settlement industry by removing many of these inefficiencies. The
respondents in our survey reveal a clear understanding of this, with
over 80% believing it will have a significant impact on their organisation.
The ECB had identified 15 specific barriers which exist between different
EU countries that contribute to the complexity and inefficiency of cross-
border settlements. These barriers relate to tax, legal and technical
jurisdictions and are known as the Giovannini barriers. These barriers were
named after the group of financial market experts who came together in
1996 to advise the European Commission on financial market issues, and
became known as the Giovannini Group. The group focussed its attention
on identifying inefficiencies within EU financial markets. They were tasked
with proposing practical solutions to improve market integration, and as
part of two reports; the group identified the 15 barriers that prevent efficient
EU cross-border clearing and settlement. T2S has been introduced to
reduce these barriers.
The majority of respondents confirmed they had begun initiatives in
preparation for T2S, indicating an awareness and understanding of
the impact it will have on many organisations. With T2S being a new
technology platform, it is understandable that many respondents believe it
will actually bring additional operational and technology costs that need to
be accounted for. We found that participants are strongly aware that T2S
will be a driver in reducing settlement times, costs and credit risk.
How great an impact will T2S have on your organisation? Please provide a rating between 1 (low) and 10 (high)
More than 80% of respondents felt that T2S will have a significant impact on their organisation (an impactor of >5). One surprising and concerning message is that the types of firms that saw T2S being of less impact included custodians and central banks.
TS2 - the journey to harmonisation | 04
It will assist in improving collateralisation practices and increase liquidity
levels across the industry all of which will help in complying with
increased regulatory demands which impact collateral management.
Central Securities Depositories (CSDs) and International Central Securities
Depositories (ICSDs) will experience the biggest impact from T2S and our
findings echo this opinion. T2S will increase competition and will force
these participants to re-evaluate the services they provide and their overall
The challenge facing T2S is whether the proposed benefits can be
maximised, while at the same time attempts are made to overcome the
barriers that have traditionally prevented efficient cross-border securities
settlements. Questions remain unanswered; our findings reveal that further
clarification is needed on how the transactions of repo trades will be settled,
as T2S does not currently recognise the linked transactions of a repo trade.
Initial findings of our research
Our survey results were published in December 2014. As expected,
the primary location for our respondents came from inside the Eurozone
(67%) with another (18%) from non-Eurozone European markets.
The majority of respondents confirmed they had begun initiatives in
preparation for T2S, indicating an awareness and understanding of
the impact it will have on many organisations. With T2S being a large
technology platform, it is understandable that many respondents believe
it will bring additional operational and technology costs to account for.
The challenge facing T2S is whether the
proposed benefits can be maximised, while at
the same time attempts are made to overcome the barriers that have
traditionally prevented efficient cross-border
My organisation is fully aware of the operational implications of T2S
Over 75% of respondents agreed or strongly agreed that they were aware of the implications of T2S.
Doing nothing in preparation for T2S is a viable option for my organisation
Less than 20% of respondents believe that doing nothing was a viable option.
TS2 - the journey to harmonisation | 05
The challenges remain - Connecting to T2S
The introduction of T2S will not only affect settlement processes across
Europe, it will impact on the operational technology used by all participants
in the European securities market. There are two options available for
connecting to the T2S platform: direct or indirect. The majority of participants
from our survey intend to connect to T2S indirectly. This is to be expected, as
direct connectivity will require high levels of capital investment and resources
for those institutions choosing this option, although they will then be able to
send instructions directly to T2S. In addition to the high investment costs,
Directly Connected Participants (DCPs) will require technical development
work and extensive testing programmes to be undertaken.
Participants that decide to connect indirectly will send their settlement
messages to a CSD or (DCPs) that will be responsible for managing
connectivity to the T2S platform. Many CSDs and custodians who
will connect directly are currently in the process of updating and
developing their platforms and systems to support future connection
to T2S. Although investment costs may be lower for participants
connecting indirectly, they will still be required to make major
operational and technology changes. This will particularly apply to
back office systems, in order for them to work with T2S. This may
present firms with an ideal opportunity to update their existing
technology but we believe there will be a wait and see approach
as the four migration waves are introduced.
Our survey asked respondents if they intended to review their
decision to connect indirectly within the next two years; 60% said they
had no plans to do so. However, this may change should there be any
amendments made to T2S in the future, requiring additional spending
on technology. Direct connection in future may eventually prove to be
a better option for many firms.
Although investment costs may be lower for participants connecting indirectly, they will still
be required to make major operational and
TS2 - the journey to harmonisation | 06
One of the primary objectives of T2S is to improve collateral
management and increase liquidity levels across the industry. Over 75%
of respondents agreed that T2S will improve collateral pooling, increase
liquidity across the industry and create greater triparty interoperability.
The management of collateral is now under close scrutiny from
the regulators. Since the financial crisis of 2008, firms have faced
an endless series of regulations to comply with. In this regulatory
environment which we believe has now become the new normal for
industry participants, there are even greater demands for collateral
holdings to be of a higher quality and quantity than ever before.
Regulatory initiatives such as Basel III have pushed many institutions
into reassessing their collateral management and optimisation practices
and their coverage of liquidity.
Moving collateral across borders is a costly and complicated exercise -
T2S allows custodians to centralise their collateral assets into a single
pool in order to maximise their use and simplify the transfer process.
By bringing together over 20 CSDs in Europe, T2S is able to integrate
onto one platform all the securities accounts of a custodian bank.
T2S migration waves
First wave Second wave Third wave 12 September 2016 Fourth wave 6 February 2017 22 June 2015 28 March 2016 Bank of Greece Euroclear Clearstream Banking (Germany) Centrlnydepozitrcennchpapierov Securities Belgium SR (CDCP) (Slovak Republic) Settlement System (BOGS)
Depozitarul Euroclear KELER (Hungary) EestiVrtpaberikeskus (Estonia) Central (Romania) France
Malta Stock Euroclear LuxCSD (Luxembourg) Euroclear Finland Exchange Nederland
Monte Titoli (Italy) Interbolsa OesterreichischeKontrollbank Iberclear (Spain) (Portugal) (Austria)
SIX SIS National Bank VP Lux (Luxembourg) KDD Centralnaklirinkodepotnadruba (Switzerland) of Belgium (Slovenia) Securities Settlement Systems (NBB-SSS)
VP Securities (Denmark) Lietuvoscentrinisvertybinipopieridepozitoriumas (Lithuania)
BNY Mellon CSD
Over 75% of respondents agreed that T2S will
improve collateral pooling, increase liquidity
across the industry and create greater triparty
TS2 - the journey to harmonisation | 07
The aim is that custodians will no longer need to keep oversized
buffers of collateral in many locations because securities will no longer
be locked in local markets. By reducing the need for multiple funding
accounts, it will enable collateral managers to have a more holistic
view on where collateral is held, all of which provides an opportunity
to consolidate collateral pools for settlement, securities financing and
other triparty activities.
T2S will allow the settling of transactions to take place on a reduced
number of settlement systems, ideally ensuring that participants
experience the benefits of increased netting efficiency. Settlement
credit lines should be reduced and participants should see a reduction
in collateral and leverage ratio requirements.
However, in practice this may prove more difficult to achieve than at
first thought. Netting is often completed at a legal level and therefore
constitutes a Giovannini barrier. It will be very difficult for T2S to help
reduce the national differences that exist in the legal treatment of
bilateral netting for financial transactions. There are also further barriers
to take into account relating to domestic tax regulations and the
collection of transaction taxes.
Many of the Giovannini barriers will not be eliminated immediately. It
remains to be seen whether T2S will help counterparties refine their
netting agreements with custodians and clearers. It is questionable
whether T2S alone will be enough to reduce all 15 barriers. It is more
likely that to remove every barrier will require further legislation being
passed by individual countries within the European Union.
One area of post-trade settlements that potentially requires further
development is that of repo trade transactions, the tracking of which
could pose a further challenge for T2S. In our survey, we asked
respondents if they believed T2S should be modified specifically for
repo transactions, but there was no overall consensus of opinion on
whether it should be. This question has been raised as T2S does not
recognise the on and off leg of a repo trade. The onus will therefore
lie with CSDs / ICSDs / participants to recognise when the transaction
is part of a repo trade in order to link the individual transactions. The
responsibility to settle the transaction will therefore fall with these
institutions, which will include processing of manufactured payments
and the issuing of coupons.
T2S will allow the setting of transactions to take
place on a reduced number of settlement
systems, ideally ensuring tha participants experience
the benefits of increased netting efficiency.
TS2 - the journey to harmonisation | 08
We believe there is scope for further development in the processing of
repo trades in T2S. The settlement of repo trades could be improved
if the platform is developed to track the beneficial owners of coupons/
redemptions. This would ensure that payments reach the owner on
the specified payment date. The beneficial owner should also receive
corporate action notifications, immediately removing any risk to them
of not receiving their rights to elect.
We recommend that T2S should be developed further so that it has the
functionality to act as a repository for repo trade data. It would provide
greater transparency to those parties seeking more information on
trades. The tracking of repo transactions could also be improved with
the introduction of a common repo ID. This would link on and off legs
to ensure all firms can explicitly track closure of multi-leg trades. Finally,
T2S should be developed to provide a central interest calculation
facility to reduce the risk of exceptions between parties on multi-leg
trades at off-leg settlement, thereby reducing failed trades.
Further policy discussions and consultations will invariably take
place, but it is important that a single harmonised approach
is developed which ensures a consistent treatment of repo
transactions across all markets.
T2S is a bold and ambitious project that has taken almost 10 years to
develop and implement. The first of four migration waves to T2S will
take place on 22nd June 2015, followed by two further waves in 2016
and a fourth and final wave in 2017. T2S is another significant step
towards greater European financial integration and is seen by the ECB
as an essential piece of reform. There is little doubt that the potential
exists for T2S to radically alter the European securities landscape. This
transformation will affect all market participants and we will see greater
harmonisation, with the reduction of inefficiencies and settlement costs.
Our survey results reveal industry participants who appear well
prepared and confident in dealing with the changes T2S will bring.
They anticipate significant benefits, particularly around the
management of collateral and the increase in settlement efficiency.
Despite the positive views expressed, it is important to recognise that
the introduction of T2S is only the start of the journey in transforming
Europes securities settlement market. Challenges will remain and at
least half of the 15 Giovannini barriers will not be removed by T2S alone.
The benefits of T2S will also take time to emerge as each migration
wave is introduced.
T2S should be developed to provide a central
interest calculation facility to reduce the risk of
exceptions between parties on multi-leg trades at off-
leg settlement, thereby reducing failed trades.
TS2 - the journey to harmonisation | 09
If we attempt to predict how the market may look in the near future,
we can confidently say that T2S will force many participants to
assess and adapt their existing business models. T2S will introduce
greater competition to the market and this will naturally create
winners and losers.
Those participants who are likely to gain the most from T2S will be
the International Central Securities Depositories (ICSDs). With multiple
platforms and operating across a number of different countries, they will
be in an ideal position to take full advantage of T2S.
Those smaller CSDs that have traditionally operated exclusively in local
markets will find the new environment more challenging, reviewing
their business models and tailoring their services to accommodate
the changes brought about by T2S. Some CSDs will have to accept
that they will experience a loss in revenue from settlement services,
while others will be encouraged to diversify their business models and
services they provide. There will be some CSDs that will not survive the
introduction of T2S and will be forced to consolidate by joining forces
with other CSDs.
T2S is another significant step towards greater
European financial integration and is seen by
the ECB as an essential piece of reform.
T2S Modified for repo transcations i.e. Should repo transactions be recognised in T2S?
No clear opinion on whether T2S should be modified for repo with the exception of custodians who were clearly not in favour.
TS2 - the journey to harmonisation | 10
Custodians will also need to evaluate their business models in response
to T2S. Regional custodians will gain a major advantage from T2S
by becoming pan-European operators. These firms will be able to
rationalise their settlement activities by connecting directly to T2S; in
doing so they can partially bypass CSDs. Opportunities will be available
to expand beyond their current markets by offering new settlement,
asset and custody services.
It is unlikely we will see these changes immediately. The fourth and
final migration wave to T2S will not be implemented until February 2017
and it will be some time after this last wave when we will see how the
market operates as a whole.
We expect the first wave of migration in June 2015 to be a cautious
affair and in some respects it can viewed as a test phase. The impact
of T2S will be more significant in 2016 with the introduction of larger
markets to the platform; we will then be better placed to evaluate
the initial success of T2S in its aim of reducing existing barriers in
During the next couple of years we will see a number of CSDs/ICSDs/
custodians continue with their testing programmes, strategy reviews
and service provisions in preparation for the migrationto T2S. With such
a large and ambitious project, nobody can predict the final outcome,
but we can expect new challenges to emerge along the way. However,
there will also be new opportunities for many market participants as
we enter what is certain to be an exciting new era in Europes capital
markets on its journey to harmonisation.
The impact of T2S will be more significant in
2016 with the introduction of larger markets to the
TS2 - the journey to harmonisation | 11
ECB European Central Bank
T2S Target 2 Securities
ICMA International Capital Markets Association
ERC European Repo Council
ICSD International Central Securities Depositories
CSD Central Securities Depositories
DCP Directly Connected Participant
Giovannini barriers 15 specific barriers identified by the ECB which exist between different EU countries that contribute to the complexity and inefficiency of cross-border settlements.
TS2 - the journey to harmonisation | 12
Emily joined GFT Technologies AG in June 2012, bringing with her over 18 years of experience across Securities Financing, Prime Brokerage, Equities, Fixed Income and Structured Trades. She joined from Knight Capital Europe, where she worked for 18 months as Head of London Operations. Prior to her role at Knight Capital Europe, Cates spent eight years at Dresdner Kleinwort, most recently holding the position of Global Head of Client and Cross-Products Services. She also spent six years at Credit Suisse, where she held the post of Vice President Strategic Change Management and Prime Banking.
Nick brings over thirty years of experience in investment banking and capital markets, working in prominent roles across front, middle and back office functions. Prior to joining GFT, Nick spent 32 years at Credit Suisse where he worked in liquidity management, collateral optimisation and business re-engineering roles. Nick has also been instrumental in creating Target Operating Models for tier 1 banks and consulting banks with their migration and entity rationalisation programmes.
Specialising in business architecture and process re-engineering, he has extensive experience of creating processes that incorporate efficiencies within workflows that enhance profitability, whilst also assisting clients with their regulatory obligations.
Emily Cates Nick Nicholls
GFT is one of the worlds leading solutions providers in the finance sector offering consulting, implementation and maintenance for a broad range of IT applications.
Combining technological expertise and seamless project management with a deep understanding of the financial industry, GFT is a reliable partner for well-known companies all around the globe.
Headquartered in Germany, GFT has stood for technological expertise, innovative strength and outstanding quality for over 25 years.
This report is supplied in good faith, based on information made available to GFT at the date of submission. It contains confidential information that must not be disclosed to third parties. Please note that GFT does not warrant the correctness or completion of the information contained. The client is solely responsible for the usage of the information and any decisions based upon it.