Philip Brown on T2S

Philip Brown is a member of the ClearstreamExecutive Board and Global Head of ClientRelations. He moved to his current position fromClearstream’s London office in 2008 where hewas general manager. Philip joined the companyin July 2005 after spending seven years at TheBank of New York, latterly as managing directorand head of European Sales; two years atMorgan Stanley International; and seven years atBarclays plc. He holds a degree in banking,insurance and finance from University CollegeNorth Wales, Bangor.

ABSTRACT

Despite the increased level of attention theTARGET2-Securities (T2S) system is receiv-ing from market participants, many still believethat T2S is just a settlement system, a piece ofsoftware that will not deliver product capabilitiesfundamentally different from those availabletoday. It is indeed true that T2S is just a settle-ment platform, but it is the only platform thatallows domestic settlement and cross-border set-tlement to be effected in exactly the same way.Several of the features of the platform do notexist today in a number of incumbent centralsecurities depository (CSD) platforms (eg auto-collateralisation, partial settlement, netting andcomplex algorithms to maximise the number oftrades which may be settled given the availablecash). In addition, T2S will alter the post-tradelandscape on a permanent and positive basis,principally as an enabler for new products andservices, but also by dramatically changing the

context within which existing products andservices are delivered. Market participants mustchallenge their existing operating models andleverage T2S in the deployment of their prod-ucts, in pursuit of their wider business goals. Thelevel of practical and technical project adaptationcurrently being undertaken varies greatly byclient segment. Research discussed in this papersuggests that many are still trying to understandsome of the wider implications, beyond cross-border settlement efficiency, and are yet tomobilise the necessary resources to maximise theopportunities T2S will enable. It is a pressingissue as the platform will be launched in phasesbetween 2015 and 2017. Major IT develop-ments will have to be carried out in 2014 to beready for the first wave, leaving only one budgetcycle between now and then for approval offunding for necessary adaptation.

Keywords: liquidity, collateral, funding,settlement, capital, asset security, CSDs

INTRODUCTIONIn 1995, when many European Union(EU) countries were preparing for theintroduction of the euro, the Council of theEuropean Monetary Institute (EMI)decided that all EU national central banksshould be connected to a central euro pay-ments service by 1999. The TARGETsystem linked the existing national real-time gross settlement (RTGS) systems and

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TARGET2-Securities: A platform for solvingsome of the key structural issues raised bythe financial crisis and its aftermath

Philip BrownReceived (in revised form): 18th October, 2013Clearstream Banking, 42 Avenue J. F. Kennedy, L-1855 Luxembourg;Tel: +352 2 43-3 24 25; E-mail: [email protected]

Philip Brown

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became operational in January 1999, fol-lowing the euro’s successful implementa-tion. It soon became apparent thatTARGET participants needed an opti-mised and more harmonised service and, inOctober 2002, the Governing Council ofthe European Central Bank (ECB) decidedon the next-generation TARGET system:TARGET2. TARGET2 is now the largestRTGS system in the world, with the ECBconfirming the following figures for 2012:1

• daily average of 354,185 payments, rep-resenting e2,477bn;

• 999 direct participants, 3,386 indirectand 13,313 correspondents; and

• average transaction value of e7.1m.

T2S was first announced by the Eurosystemin 2006, seven years after the introductionof the euro. It advances the notion ofTarget2 on the basis that, despite the intro-duction of a single currency across 17countries and the associated reduction inexchange-rate uncertainty, the Europeanpost-trade landscape had remained highlyfragmented from country to country.

‘Whilst regulations such as MiFID aimto bring interoperability to the pre-trade space, the post-trade arena contin-ues to languish in silo fashion, addingunnecessary costs at a time when finan-cial houses large and small are strug-gling to make ends meet.’2

Cross-border settlement in particular isexpensive and complicated, involvingmultiple intermediaries in the custodychain. The cost of cross-border transac-tions in the EU is said to be ten timeshigher than domestic equity transactions.3

Settlement has been a de facto nationalmonopoly with little or no competitionamong European providers. To date, cen-tral securities depositories (CSDs) haveoperated along national lines, providing

settlement and services according tomarket-specific practices. There is alsoincreased competitive pressure from theUSA, with its highly centralised clearingand settlement infrastructure provided bythe CSD, Depository Trust & ClearingCorporation (DTCC) — single language,single currency and single legal framework— in the European market. As the world’slargest market economy, it will remainsuccessful in capturing new issuance flows.The end-to-end synthetic cost per trade inEurope, the Middle East and Africa(EMEA) is estimated to be four timesmore expensive than in America for cashequities and twice as expensive for cashfixed income.4 Fragmented markets withcomplicated infrastructure and patchworkIT solutions have a very real detrimentalimpact on the cost per trade.

Investors have found it difficult to con-solidate asset pools, as the assets exist in avariety of different locations and areaccessed via different chains of custodians,sub-custodians and CSDs. This fragmenta-tion further complicates collateralmanage ment, making meeting one’s col-lateral obligations both cumbersome and adrag on investment performance. The lackof harmonisation on a legal, technical orfiscal level is not only bad from a cost per-spective, but it also results in a higher levelof risk for participants. These national bar-riers — a defining characteristic of theexisting market infrastructure — are apractical impediment to remote access tonational clearing and settlement systems.In late 2001, the European Commission’sConsultation on Clearing and Settlement— an expert group led by AlbertoGiovannini — identified and listed 15 bar-riers to efficient cross-border clearing andsettlement.5 The creation of a standardisedframework for settlement on the T2S plat-form addresses six of the 15 Giovanninibarriers and is also widely expected tohave downstream positive effects on fur-

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ther pan-European harmonisation forincome, corporate actions and tax.

Although the T2S concept was firstproposed in 2006, prior to the collapse ofLehman Brothers, Bernard Madoff fundsand the housing bubble, it nonetheless willdovetail with the regulatory response tothe wider financial crisis — CapitalRequirements Directive (CRD) IV 2013,Alternative Investment Fund ManagersDirective (AIFMD) 2013, EuropeanMarket Infrastructure Regulation (EMIR)2012, CSD Regulation (CSDR) (stillunder EU consideration) etc — with theaim of protecting the market from futuresystemic risk and providing much-neededmarket stability.

T2S AS A PLATFORMThe benefit T2S will bring for Europeancross-border settlement is widely acceptedbut it is less widely acknowledged that T2Scould bring many more tangible benefitsfor providers (and their customers) if theyare able to flesh it out with additional serv-ices. One could make the comparisonbetween T2S and smartphones, where T2Sis comparable to the basic handset and theadditional services that really add value andthereby optimise the user experience arethe Apps. The commoditisation of settle-ment will encourage CSDs to move up thevalue chain and deliver new services. Todaythere is no provider which could become apan-European sub-custodian, nor couldany CSD act as the European CSD.Anybody aspiring to do so will need tocooperate with other market participants inorder to prioritise the complementary busi-ness opportunities they will be able to offer,in addition to their existing service suite,and determine which should be self-manu-factured and which would be betterachieved through smart partnerships.6 If theearlier analogy is extended further, onecould say that participating CSDs are the

App developers and, while they are in com-petition with one another, there is alsospace for collaboration and partnershipdeals. With the de-coupling of settlementand asset services, the supply chain dynam-ics will change and become more open,bringing the potential for greater competi-tion and customer choice. The lack of asingle comprehensive product and theabsence of an integrated pan-Europeantrade processing and asset servicing plat-form mean that, for customers, it is impor-tant to understand which sub-products canbe combined as part of an overall suite tofeasibly add the most value.

COLLATERAL MANAGEMENTOver the last five years, the importance ofcollateral management has grown expo-nentially throughout the financial sectorand will continue to do so with furtherregulation. The 2011 Accenture ‘CollateralManagement’ study commissioned byClearstream claimed that the total assets ofthe global banking system are estimated tobe worth e70trn, yet the total value ofsecurities being used as collateral is esti-mated to be approximately e10trn; thus, agreat deal of collateral is not beingmobilised.

‘This suggests there is further potentialfor growth in monetising unused assetsthrough improved collateral manage-ment.’7

In the study it was estimated that collateralfragmentation will cost companies aboute4bn annually. This estimate is seen to beconservative as it was made before theenforcement of the oncoming regulatorychanges, which are expected to increase thedemand for quality collateral and also theneed to manage collateral more efficiently.At the time, the main concern was withmeeting the demands of balance sheets

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under the weight of the regulatory agenda.Now it is considered strategically impera-tive to have access to quality collateral.

One of the causes of ineffectual collat-eral management is the inherent discon-nection between CSDs regulated alongnational lines to support international busi-ness. CSDs, by their nature, are nationalentities, which is not a problem for theircore CSD functions, but can be for effi-cient collateral management. The pan-European fragmentation of the CSDinfrastructure due to national barriersmeans that the movement of cross-bordercollateral to where it is required has beenexpensive (both operationally and in termsof market charges) and a largely manual —ie slow — process. As a result, financialinstitutions have been unable to managetheir collateral effectively, thus creating asituation of excessive collateral in areaswhere it is not required or a lack of collat-eral in an area where it is required. If amarket participant does not use a specialistcollateral management provider, theythemselves will need to move collateralfrom one place to another (and cross-border) much more often than before. Ifthe participant is using a collateralmanage ment provider then they may findtheir assets effectively immobilised in thenetwork of their service provider, whowill manage them through book entrymovements on their books and records.

For domestic CSDs to truly act asEuropean entities, it is important for allT2S-participating CSDs to interconnectwith each other in order to maximisecounterparty reach. It is this aspect thatelevates T2S from being a settlement plat-form to a mechanism actively promoting amore harmonised European post-tradeinfrastructure, facilitating seamless inter -operability between CSDs. This mecha-nism enables individual CSDs tointerconnect through a series of bilaterallinks which have been assessed for

Eurosystem credit operations. This viewshould be shared by all entities looking toprovide a comprehensive T2S solution.

The link assessment could significantlyincrease the workload for the ECB in termsof processing — CSDs to CSDs within T2Smeans roughly 270 links — but will beessential in delivering a secure frameworkfor T2S and maximising its potential. InSeptember 2013, the ECB published a newframework for the assessment of CSDs andCSD links to determine their eligibility foruse in Eurosystem credit operations. Today,each bilateral link is assessed separately. Withthe new approach, the local regulator’soversight standards cover four of the ninestandards which usually would be assessedby the ECB/Eurosystem. Adherence withthe local regulatory standard will conferfirst-level compliance with theECB/Eurosystem and only the second layerthen needs to be assessed. The new frame-work simplifies the former user assessmentprocess and avoids duplication in the con-duct of oversight and user assessmentsagainst similar standards and requirements.8

One expects that this will result in linkassessments being undertaken more quickly.

This assessment will become one of themost important aspects of a service provideras global custodians are measured and com-pared on the number of markets around theworld which they can access. CSDs in T2Salso will be measured by their networkreach. Another driver for optimising themovement of collateral from one CSD toanother will be the number and breadth ofinstruments which can be settled in T2S.Some CSDs consider this to be of vitalimportance and are planning to make eligi-ble their entire settlement volume, givingtheir customers the opportunity to consol-idate all of their assets whether they arefrom T2S markets or not. This will facilitatea much bigger pool of securities availablefor collateral realignment on one singletechnical platform. Clearstream, for exam-

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ple, plans to make international debt securi-ties (‘Eurobonds’) eligible for settlement inT2S. If the issuer has chosen the NewGlobal Note (NGN) legal and holdingstructure, the holder also may use the secu-rity as eligible collateral for Eurosystemmonetary policy, assuming it meets theother requirements (as opposed to ClassicalGlobal Notes (CGNs) which are not per-mitted at all).

T2S will standardise cross-border set-tlement: harmonised settlement process-ing cycles and standards will facilitatemore seamless cross-border movement ofassets. Consequently, much of the labourand cost will be removed from theprocess of moving securities acrossEuropean borders between the 24 partic-ipating CSDs in real time. Moving secu-rities which can be used as collateralbecomes a lot easier, a lot cheaper andthey can be mobilised to markets wherethey are needed, thereby eliminating thefragmentation that characterises themarket today. This also will help partici-pants to meet new collateral requirementsas set out under EMIR.

Banks are faced with a dual challenge interms of collateral demand: because ofEMIR and the Dodd–Frank Act 2010they must collateralise their over-the-counter (OTC) derivative activity, while,in order to fund their activity, they eitherneed to go to their central bank (whichwill ask for collateral) or they will need toperform repurchase agreement (repo) withother banks or buy-side firms which haveexcess liquidity. To perform repo, banksmust have repo-able assets. The 2013 T2Sstudy written by PricewaterhouseCoopersand Clearstream illustrates this point, asshown in Figure 1.

Case studyIn response to the additional collateralrequirements under EMIR andDodd–Frank, banks increasingly are look-ing to mobilise assets and to increase accessto buy-side liquidity to diversify theirfunding sources. Buy-side institutions, inturn, are looking to leverage the collateralreceived from banks to re-use and covercentral counterparty (CCP)/third-partymargin obligations. In some cases, this may

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Figure 1 Newcollateral streamsarising through theintroduction of theEuropean MarketInfrastructureRegulation (EMIR)2012 andDodd–Frank 2010

CCP, central counterparty; CSD, central securities depository; ICSD, international central securitiesdepository; T2S, TARGET2-SecuritiesSource: PricewaterhouseCoopers (PwC) ‘The 300-Billion-Euro Question: Survey on the Benefits ofTarget2-Securities’, PwC, Frankfurt.


need to be supplemented with a collateraltransformation trade to meet the collateraleligibility criteria of the third party. Inter-CSD settlement of a chain of collateralmovements can be settled in a matter ofminutes in a world with T2S.9

REDUCED LIQUIDITY CONSUMPTIONOne of the most underrated benefits of T2Sis the ability to significantly reduce liquidityconsumption for settlement purposes. T2Senables financial institutions to reorganisetheir euro settlement funding arrange-ments. Currently, a combination of propri-etary home accounts, RTGS main accountsand sub-accounts, often accessed through anetwork of cash correspondent banks, areused by investors to make euro paymentslinked to settlement obligations. If a bank isa direct member of a CSD then today itmust reserve overnight cash for each secu-rities market where it has settlement activ-ity. This means that the reserved cashliquidity is blocked overnight, locking itfrom being accessed to cover other simulta-neous market shortages. With T2S, investorshave the option of selecting differentarrangements for their dedicated cashaccounts (DCAs): operating one singleDCA, multiple DCAs or outsourcing com-pletely by appointing a third-party paymentbank. If T2S users opt to use a paymentbank, there are further considerations withregards to collateral. T2S offers only pay-ment banks a central bank credit mecha-nism to support settlement. Mostly, this isextended for free by national central banks inexchange for ECB eligible collateral. As thisfacility is offered to payment banks only, thechoice of payment bank becomes impor-tant or vital if an investor wishes to mobiliseECB-eligible collateral that is held outsideT2S. Put simply, not all payment banks willhave sophisticated enough collateral man-agement systems to mobilise collateralregardless of whether it is held within T2S

or outside it. This is part of a broader newperspective on credit attached to T2S. T2S,and the principle of ‘settlement netting’ thatunderpins its activity, enables market partic-ipants to be less reliant on the credit facili-ties offered by their custodians.Traditionally, credit has been used by custo-dians as a competitive service and is nor-mally bundled with custody or transactionfees or, less commonly, priced on a stand-alone basis. Going forward, settlement viaT2S will lead to reduced credit consump-tion and an unbundling of credit-relatedcharges.

For custodians themselves, there can beanother benefit. Global custodians withouthighly efficient cash projection enginesoften leave idle cash at their sub-custodianas a ‘buffer’, or because they did not accu-rately project all of the activity takingplace on a given day. As an asset, this mustbe included in their risk-weighted assess-ments. T2S should significantly reduce theamount of idle cash balances. Similarly, forcustomers, in the current interest-rateenvironment, the cost of maintaining suchbuffers is relatively low, but at higher inter-est rates in the future this could increasesignificantly. There is also opportunity costto consider, as having cash pooled in oneplace will enable customers to do morebusiness with the same resources.Providers that can offer customers sophis-ticated products may generate higherreturns in supporting repo activity, forexample, than a provider with no value-added services having to rely heavily onnet interest income. These are significantdevelopments for market participants andimportant considerations when assessingthe overall ‘cost’ of T2S. The pooledaccount will enable T2S participants tomanage and net all settlement-related cashmovements in one single account. Insteadof having to provide funding for a transac-tion while waiting for cash from anotherto settle, both transactions now can be

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processed in the same settlement cycle,reducing the need for liquidity.

CAPITAL REQUIREMENTS SAVINGSIn September 2013, the European BankingAuthority (EBA) published its fourthreport of the Basel III monitoring exerciseon the European banking system.10 Thisexercise, run in parallel with one conductedby the Basel Committee on BankingSupervision (BCBS) at the global level,allowed the gathering of aggregate resultson capital, risk-weighted assets (RWAs), liq-uidity and leverage ratios for banks in theEU. Compared to the previous exercise,based on 30th June, 2012 data, the reportestimates a decrease in the capital shortfallof e29.1bn (equivalent to 29.3 per cent), ieEuropean banks have made significantprogress in boosting their capital positionsand thus strengthening the overall resilienceof the EU banking system as a result of theEBA recapitalisation exercise. There is aconsensus over the growing need to con-solidate pools of collateral and manage theexisting ones efficiently.

Clearstream’s study with PwC com-prised a series of internal research studiessupported by in-depth focus interviewswith a number of market participants anda quantitative estimate of the possibleeffects of Basel III rules on participants ifthese rules are expanded to cover non-committed intraday credit facilities offeredby custodians.11 According to PwC part-ner, Thorsten Gommel:

‘We don’t disagree that most of thecredit extended for settlement purposesintraday doesn’t count when it comesto calculating capital adequacy ratios,but we see a significant risk this willchange under Basel III when banks willhave to prove their funding is solid.’12

To quantify the capital savings potential,

Clearstream analysed the liquidity savings itcould make itself (15 per cent) via a pooledcash account, based on millions of cross-border settlements in Germany, France, theNetherlands, Belgium and Italy. It thentransposed this to the broader settlementvolumes in the eurozone. The study indi-cates that the amount banks could save rep-resents 11 per cent, or e33bn, of thee295bn capital shortfall the Organisationfor Economic Co-operation andDevelopment (OECD) estimated using2011 year-end positions.13 Harmonisationof settlement cycles in T2S is expected toincrease the netting potential even furtherand will reduce the margin requirements atCCPs by one-third.14

ASSET SERVICESWith a backdrop of settlement commoditi-sation, increased competition and marketconsolidation, the operating model for assetservices becomes critical for CSDs. For his-torical reasons, a number of CSDs offerbasic asset services for their domesticmarket, perfectly adequate within the con-text in which they were being provided, forexample, with participants having longaccepted that bilateral relationships withissuers/issuers agents and intermediation byagent banks were a necessary fact of life.Indeed, many local specificities are besthandled by the domestic CSD who hasclose relations with the relevant marketbodies and long-standing history, andunderstanding of domestic market nuances.

However, while this may be true forIssuer CSDs, there are only a limitednumber of CSDs who can credibly oper-ate in the international space as InvestorCSD. Asset servicing for non-domesticsecurities is a specialist, high-cost businessbased on economies of scale. Issuer CSDswho, even today, have gaps like tax serv-ices, proxy voting and even mainstreamcorporate action processing, will find it

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virtually impossible to build a credible in-house capability before T2S goes live.Those lacking these services may look topartnerships to help them complete theirasset services product offering post-T2S.

In a number of recent interviews,Clearstream validated with customers thatasset servicing remains one of the mostimportant concerns, because T2S does notsupport asset servicing but it will fundamen-tally change the traditional relationshipbetween settlement and asset services. Inprocessing terms, today asset servicing andsettlement are inextricably linked at thepoint of manufacturing but the possible sep-aration of transaction flow, with the intro-duction of T2S, will have a direct impact onbusiness. It is something that everyone in theindustry should now be addressing duringdiscussions with their provider.

Clearstream have taken the opportunityto streamline the end-to-end asset servicesflow and create additional value for cus-tomers through local market partnerships.The local partnership model will redefineroles and responsibilities betweenClearstream and their local partner, the keyagent banks in their respective markets. Inremoving some of the duplication in theend-to-end process, a number of benefitscan be passed onto the customer including:

• improvement of deadlines;• Increased proximity to market, timeli-

ness of notifications;• local expertise and market advocacy; • reduced operational risk, as double pro-

cessing is avoided.

It is widely forecast that T2S will act as acatalyst for harmonisation in the assetservices space, though it is expected to belimited to transaction management in theshort to mid-term. Different legal, tax andmarket regimes will, however, need to beaddressed before progress will materialisebeyond market claims and buyer protec-

tion. Deloitte Luxembourg offer the fol-lowing prediction:

‘The ECB and regulators still have asignificant amount of work ahead ofthem to meet this objective in thecoming years. It is widely recognisedthat asset servicing is a complex areawith important differences in marketpractices, both across financial instru-ments and market players. Hence wecan legitimately assume that the fullharmonisation process of asset servicingwill take many years and will probablynot occur before 2020.’15

Given the complexity and risk inherent inthe asset services space, and the difficultiesin achieving harmonisation as identifiedabove, customers will need to criticallyanalyse and find their own tipping pointfor the trade-off between the benefits ofconsolidation and their servicing needs.

AIFMD AND DEPOSITARY BANK RISKNaturally, global custodians also are takingthis opportunity to review whether theirexisting network model makes sense in apost-T2S world. Post Lehman/Madoffasset protection within their custody chainhas become a critical factor. What LehmanBrothers taught us was that, even if assetscould be recovered, customers had no ideahow long it would take. Customers nowwant to know that they can access theirassets at all times. Today, the interoperabil-ity between CSDs is inefficient: it is neces-sary to open accounts with each issuerCSD, of which there are more than 30.Practically, the cost of doing this is toohigh and would require significant opera-tional support to maintain. There isincreased market demand for direct CSDholdings. Customers want to have assets inan account in their own name — operated

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or not by an agent bank — to remove therisk (and the requirement to allocate capi-tal against that risk). AIFMD and theUndertakings for Collective Investment inTransferable Securities (UCITS) V direc-tive also are driving factors for a rethink.AIFMD reverses the burden of proof ontothe custodian in the event of the loss of anasset — ie they have to prove they werenot negligent — and full legal responsibil-ity and liability for securities held by analternative investment fund falls on thedesignated depositary bank. PwC sees thisas a significant risk ‘since the equity capitalof custodians is usually very small com-pared to the sum of assets they hold undercustody’.16 In order to assess the amountof capital necessary to be allocated tocover this liability, one must evaluate thepotential loss. This is problematic since thisis tail-end risk — an extremely rare occur-rence of a potentially large loss.

The narrow exemptions permittedunder AIFMD are no longer possibleunder UCITS V; however, if assets are heldwith a securities settlement system (SSS)then, under the terms of AIFMD, this isnot considered ‘delegation’. Therefore,custodians can reduce their liability expo-sure in T2S markets by centralising safe-keeping of assets across fewer CSDs,leveraging the CSD to CSD links thatsome CSDs intend to implement.Custodians are looking at different accessmodels to achieve AIFMD relief, whichincludes the setting up of their own CSDs,or partnering with an existing CSD.Understanding the impact of thesechanges to CSDs and their operational sit-uation is critical in order for a customer toknow what questions to ask.

• ‘As an institution, will your T2S accesspoint allow you to connect to as manyother CSDs as you need?’

• ‘Will these links be assessed forEurosystem collateral eligibility?’

• ‘Is your future partner able to invest intheir services to provide a service suffi-ciently flexible and scalable to yourneeds?’

ISSUANCEIssuance plays a particularly interesting rolewithin the context of T2S as it affordsCSDs — which, it should be remembered,will lose their traditional settlement activity— the opportunity to become a consoli-dated point of issuance for Europe. A serv-ice provider which can offer apan-European distribution model, accom-panied by the right service levels and accessto market intelligence, may be able toattract more than just government paper,traditionally issued in the local market forobvious reasons. In a post-T2S world adomestic issuer will be able to have a singleglobal issue deposited with a domestic CSDand distribute it through T2S to investors inany other T2S jurisdiction while continu-ing to benefit from central bank primarymarket funding. This will resonate globallywith issuers wishing to raise debt from theEuropean capital markets. CSDR will fur-ther reinforce this type of concept anddovetails with T2S to provide issuers with agenuine choice of CSD based on competi-tive factors. Custody follows issuance.Having an integrated platform with issuersand investors in the same place will bringlower costs. Those CSDs which can bringtogether state-of-the-art issuer services andinvestor services could become the firstchoice pan-European service provider toissuers and investors alike.

CONCLUSIONClearstream customers estimate that theyare spending approximately 70 per cent oftheir budget on keeping up with the reg-ulatory tsunami and are asking themselves:‘How will I be able to sustain myself and

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generate margins in the future?’17 Thesame regulations also are forcing financialinstitutions to revisit their business models.Should customers focus on scale forgrowth, flexibility to add products andservices or just primarily on reducingoperating costs? When people try to makea T2S business case today, savings fromcross-border settlement costs are still thecentral justification. There is a preoccupa-tion with the settlement cost question:‘Will it or won’t it be 15 cents?’ The settle-ment cost versus build or adaptation costcomparison does not look favourable, butthis is like buying a 32Gb smartphone justto make telephone calls. T2S creates aunique base from which to deliver theservices to meet those regulatory chal-lenges; it is inherently linked to thesequestions and should be at the core of cus-tomers’ strategies for defining a new oper-ating model to meet theirregulatory-driven business modeldemands. It can be a platform, a genuineopportunity for solving some of the keystructural issues raised by the financialcrisis and its aftermath.

AddendumSince this paper was written, the EUchanged the wording of a paragraph in therecent draft version of UCITS V, appar-ently resulting from their concern over theinterpretation of the same section inAIFM directive. Clearstream remainshighly engaged with regulatory bodies atNational and European level in order toclarify the implications for both UCITS Vand AIFMD and take this forward.

REFERENCES

(1) See: http://www.ecb.europa.eu/paym/t2/html/index.en.html, (accessed 25thSeptember, 2013).

(2) Cognizant, (2012) ‘Target2-SecuritiesPlatform: Implications for the Post-TradeArena’.

(3) European Central Bank (2011) ‘SettlingWithout Borders’, November.

(4) In discussion with Jared Moon,McKinsey & Company, September 2013.

(5) The Giovannini Group (2001) ‘Crossborder clearing and settlementarrangements in the European Union’,‘First Giovannini Report’, November,available at: http://ec.europa.eu/internal_market/financialmarkets/docs/clearing/first_giovannini_report_en.pdf,(accessed 25th September, 2013).

(6) Brown, P. (2012) ‘Smart partnering: Thenext evolution in the post-trade space’,Journal of Securities Operations & Custody,Vol. 5, No. 2, pp. 98–109.

(7) Accenture (2011) ‘CollateralManagement: Unlocking the Potential inCollateral’.

(8) See: http://www.ecb.europa.eu/pub/pdf/other/frameworkfortheassessmentofsecuritiessettlementsystems201309en.pdf?8cc2d9d99dc95b97862fa4c5f23a9577,(accessed 25th September, 2013).

(9) PricewaterhouseCoopers (PwC) ‘The300-Billion-Euro Question: Survey onthe Benefits of Target2-Securities’, PwC.

(10) See: http://www.eba.europa.eu/-/eba-publishes-results-of-the-basel-iii-monitoring-exercise-as-of-end-2012,(accessed 25th September, 2013).

(11) This helped to inform PwC, ref. 9.(12) http://www.globalcustody.net/news/

SIBOS_2013__Is_T2S_European_Savior_or_Windowdressing_for_Basel_III__4798, (accessed 25th September, 2013).

(13) See: http://www.oecd.org/finance/financial-markets/Deleveraging%20Traditional%20versus%20Capital%20Markets%20Banking.pdf (p. 22) (accessed2th September, 2013).

(14) In discussion with Paul Bodart, memberof T2S Board, October, 2013.

(15) Deloitte Luxembourg and Associationdes Banques et Banquiers, Luxembourg(2012) ‘T2S and regulatory frameworkare shaping a new post-trade world’Association des Banques et Banquiers.

(16) PwC, ref. 9 above.(17) Clearstream, ‘Shaping the Future’

workshops and PwC, ref. 9 above.

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Philip Brown on T2S

Economy & Finance

Philip Brown on T2S