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Read this report to learn the implications of TARGET2-Securities (T2S) on the European clearing and settlement industry—and key things that organizations should consider for a post-T2S strategy.
IntroductionIn an effort to eliminate the “Giovanni Barriers”—tax, legal and other considerations feeding the continued fragmentation of the European clearing and settlement landscape—the European Union has launched several initiatives in support of the Lisbon Agenda, intended to make the European Union more competitive. One of the most important initiatives is TARGET2-Securities (T2S), a program that is designed to reduce inefficiencies in the post-trade area.
The concept of T2S is the development of a pan-European securities settlement platform that provides commoditized delivery versus payment (DVP) settlement services in central bank money to all members who join on a single processing platform. T2S, which is core, neutral and borderless, aims at harmonizing settlement processes, including the reduction of cross-border settlement costs. The T2S platform will be available for all Central Securities Depositories (CSDs) that sign the T2S Framework Agreement. It is expected to create a level playing field among CSDs, and thus foster competition and increase cross-border settlement efficiency.
The integrated model for T2S entails the outsourcing of securities accounts from the CSDs and of cash accounts from the National Central Banks (NCBs) to T2S. This will enable real-time DVP settlement in central bank money for all in-scope transactions. It is evident, despite clear progress on the solution requirements of T2S that the deployment of such an integrated European settlement platform will not happen overnight. To connect to T2S, the Eurosystem (ECB and NCBs of the eurozone) as well as the participating CSDs, NCBs, custodians and investment banks need to make substantial investments.
Aside from the required investments to connect to T2S, Accenture believes market players should look at T2S as a catalyst to rethink business models and define a long-term strategy to remain competitive in a post-T2S world. Organizations need to assess the long-term viability of their business offerings, mainly around settlement, custody, cash and collateral management services, as well as customer reporting in the context of the implications of T2S. Finally, market players need to re-evaluate their current client pricing model, taking into account the increased competition, investments and potential reshaping of their businesses resulting from the implementation of T2S.
To date, some of the key European CSDs have confirmed they intend to join T2S (Clearstream Banking AG, Iberclear and Monte Titoli),1 thereby affirming it will go ahead, even if with further delays; the creation of a critical mass on T2S will be central to its success.
Major Implications of T2STo assess major implications we explore five key questions we believe one needs to ask now, in 2012, at this “half-way mark” of the program to determine where things stand with regard to engagements made at the launch of the concept in 2006—and to deliver some thoughts which markets players might take into consideration while preparing for T2S themselves.
Conclusion: Making The T2S Initiative a RealityThe T2S initiative presents a grand vision of unifying the fragmented securities markets in Europe, an exciting opportunity to foster healthy competition and increased efficiencies. There are notable challenges in achieving this ambitious goal; this is reflected in the two delays disclosed since its announcement in 2006 as well as the doubling of development costs since the first development cost estimate was published.
There remain substantial differences over the issues of pricing, governance, service level agreements, contract termination, liabilities regime and other matters. There are also differences of opinion as to whether the T2S testing and migration windows are sufficient. While these issues are to be expected in such a landmark initiative, they will still take time to resolve.
While the ECB faces significant hurdles in implementing T2S, the potential benefits are also significant. Europe has seen rationalization up the value chain with the successful merger of exchanges and Central Counterparties, nevertheless a flurry of CSDs remain dominant in the marketplace. A successful T2S launch will reconfigure this landscape, resulting in streamlined settlement processes, increased competition and lower costs for most players.
In order to make the most of T2S, it is critical to understand in detail the opportunities as well as the challenges it will present for banks, NCBs, custodians and CSDs. Banks, custodians and even CSDs need to reevaluate their current local market settlement links and rethink their service offering in order to leverage new liquidity pooling opportunities.
At the same time they need to assess the strategic, operational and technology impacts that T2S will present for them for settlements on markets in or outside of T2S with the right balance of skepticism and—at the same time—the right level of readiness!
Sources1. http://www.ecb.int/paym/t2s/about/t2sonline/html/t2s_qr_12_who.en.html2. http://www.ecb.int/paym/t2s/about/t2sonline/html/t2s_qr_12_who.en.html3. http://www.ecb.int/paym/t2s/pricing/proposal/html/index.en.html
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