After months of T2S preparation with clients and the central securities depositaries (CSDs), BNP Paribas Securities Services has participated in rigorous testing with other leading market players to ensure a smooth migration weekend. The largest CSD in Wave 4 (W4) – Clearstream Banking Frankfurt (CBF) – already implemented changes in their system to ease the migration effort. These changes included, for example, adaptations to cash tolerances, naming conventions and SWIFT format requirements went live prior to W4.
The "proof of the pudding"
One of the key arguments for T2S is streamlining local and cross-border settlement processes. The German and Austrian markets have significant cross-border settlement volumes and therefore a successful W4 will be the “proof of the pudding.”
We expect to see an increasing number of CSD links, which will allow the activation of auto-collateralisation (‘autocoll’) on additional securities, such as German and Austrian government bonds. The centralised cash account for central bank money may become the means to concentrate cash liquidity for all markets with one Central Bank. However, CBF has yet to implement the full T2S auto-collateralisation process and other further enhancements to realise the full benefits of T2S.
Market testing was key in preparing for W4
It is fair to say that W4 is benefitting from the experience of the earlier waves. At BNP Paribas, we enjoy a direct connection to T2S – established since Wave 1 – for all our settlement volumes. However, this is not to say that there were no teething problems.
Testing and general preparation went well, with the exception of the critical migration tests in July and December 2016. There were doubts whether T2S could handle the migration and process of twice the volume with no impact on punctuality or performance. BNP Paribas, along with a community of other German players, encouraged the European Central Bank (ECB) and CBF to perform additional stress testing and to adopt the same communication standards used by the CSDs in previous migration waves.
The German T2S National User Group (NUG) also came to an agreement for fixing the Point of No Return. In addition, further software enhancements led to increased T2S stability. This additional performance testing proved to be successful and gave sufficient comfort to go ahead with the market migration.
Are we there yet?
Wave 4 is not the end of the T2S project. Wave 5 may be smaller in volume but is higher in complexity.
On a wider note, we are still far from full harmonisation in the European post-trade environment. Some CSDs are yet to implement all the functionalities and work to common settlement and corporate actions standards. CBF, for example, does not credit all income proceeds to the T2S dedicated cash account (DCA) and still applies the current logic in crediting the Target2 account instead. Oesterreichische Kontrollbank AG (OeKB) disregards both the cum/ex and opt/out indicators. And many market players have not yet implemented their optimal business model to best meet their own or their clients' needs.
Ultimately, T2S is part of the wave of changes across Europe. We have yet to see how Brexit and key regulatory changes (such as central securities depositary regulation) will impact European post-trade activity. A joint initiative by the European Commission, the ECB, European Securities and Markets Authority (ESMA), and the industry (represented by the European Post Trade Forum) will continue to address the remaining barriers to harmonisation and full efficiency. The journey to a more efficient European post-trading landscape continues!