T2S: time to seize the day

Robert Almanas is managing director, international services, at SIX Securities Services

Target2-Securities, the initiative to harmonise settlement for cross-border bonds and equities trading in Europe, is finally becoming a reality. Following numerous delays, tangible steps have been taken by regulators and CSDs to ensure that the go-live date of June 2015 will be met. Most CSDs have now made clear how they intend to connect to the settlement engine, writes Robert Almanas.

The international CSDs – SIX Securities Services, Euroclear and Clearstream – and numerous domestic CSDs have said that they will connect to T2S through Swift’s Value Added Network solution.

An additional key to the success of T2S will be the CSD Regulation, which is currently under review by the European Council and European Parliament. While T2S is a technology initiative aimed at transforming settlement in Europe, CSDR imposes regulatory reform on the CSDs themselves. This will affect market participants by allowing issuers of financial instruments to choose where they want to settle, harmonising settlement period to a T+2 (2 day) settlement cycle, and imposing fines on CSDs for failed trades, amongst many other significant measures.

The time has now come for banks, broker-dealers and even funds to start preparing for these sweeping changes to securities settlement in Europe. T2S will give market participants more choice in terms of providers of settlement services as in many jurisdictions they will no longer be bound to domestic CSDs. In the short term we are likely to see new CSDs emerge but over time the costs of initial development and high ongoing expenses for CSDs limited to a domestic market will eventually force consolidation.

Institutions along all steps of the value chain should pay close attention to costs. At Sibos this year SIX Securities Services conducted a survey of major European financial institutions on T2S. 63% of respondents said that they believe T2S will increase the costs of settlement services in Europe in the short term. Some CSDs have already embedded a T2S implementation tax into their pricing structures, costs which will inevitably get passed on from custodians on to their clients. Others have pledged to invest in T2S as a strategic initiative.

End users of settlement services also need to think beyond explicit settlement fees and about the total cost of ownership of T2S. The implementation and operation of T2S could lead to more work, such as in the overhaul of internal systems, training to learn how to interact with the new settlement platform or additional effort in back office.

At the same time, T2S presents exciting opportunities for new business models and operational efficiencies. For example, the centralised settlement platform will lead to an increase in information flow from CSDs and custodians to their clients. For institutions that are willing to invest, this could enable them to optimise their risk management and liquidity management processes.

Perhaps the most interesting opportunity from T2S lies in collateral management. All respondents in our T2S survey said that the reforms will help them improve their collateral management capabilities. The question now is by how much. While T2S is no silver bullet to collateral management, it will certainly help to eliminate some of the inefficiencies which lie in having to transfer securities across systems. Institutions should look to virtualise collateral pools, effectively mobilising what high quality collateral already exists.

Finally, in theory there should be greater efficiencies in cash management, reporting, the pooling of securities and so on, from a common settlement platform. There are limitations to these benefits of course. T2S is a settlement platform only and securities will eventually have to be returned to fragmented infrastructures across Europe. Some of the sources of costs and risks such as lack of harmonisation of tax processing and corporate actions processing have yet to be addressed.

To prepare for the overhaul to settlement in Europe, financial institutions need to face up to T2S and work closely with their settlement service providers to ensure that they maximise the business benefits.  It’s time to seize the opportunities presented by the T2S initiative.