T2S was launched in 2008 to create a single European securities settlement engine that eliminated differences between domestic and cross-border settlement by providing centralised delivery-versus-payment (DvP) settlement in central bank money across all European securities markets. The project’s goal, notes the ECB, “is to integrate and harmonise the highly fragmented securities settlement infrastructure in Europe. It aims to reduce the costs of cross-border securities settlement and increase competition and choice among providers of post-trading services in Europe. It is therefore a critical step forward in the creation of a true single market for financial services in the EU.”2
Have these ambitions been achieved?
How successful has T2S been thus far?
T2S is a huge EUR 1bn-plus project that brings together over 20 CSDs from disparate markets across the continent. That it has been completed is itself a major achievement. The platform is proving reliable and scalable. And it is feature-rich, with functionality including hold & release, linkage, partialisation and auto-collateralisation.
The true test though is whether T2S can deliver the three key benefits set out by the ECB: i) deepening market integration; ii) cost reduction; and iii) improved bank collateral and liquidity management.
The biggest success to date is around market integration. The platform has harmonised settlement processing, making it more efficient and paving the way for a rationalisation of operations and technical platforms.
T2S is also driving harmonisation in a number of legal, regulatory and operational areas. In particular, the Central Securities Depositories Regulation (CSDR) provides a set of common requirements for EU CSDs, and harmonises aspects of the settlement cycle and settlement discipline. In addition, corporate actions standards have been at least partially implemented in all markets thanks to the T2S project decisive impetus.
Is T2S delivering the hoped-for cost savings?
Cost reduction success is more mixed. Lowering settlement costs – especially for cross-border transactions, which previously could be 10 times more expensive than domestic ones – was seen as crucial to spurring capital market development, cross-border investment and aiding European economic growth. With T2S, securities can now be transferred from one CSD to another more easily, and close to a domestic cost. However, cross-border transactions account for less than 0.5% of overall settlement volumes in T2S.
By contrast, domestic settlement and safekeeping costs have yet to come down. In some cases they have even increased. According to the CSDs, this is largely because they have not been able to fully decommission their legacy settlement platforms, and so remain burdened by significant fixed costs.
Greater progress has been achieved in liquidity and collateral optimisation. For instance, BNP Paribas Securities Services previously had to maintain four euro cash accounts with the central banks of the main euro markets to fund our clients’ settlement activity. With T2S, we have now pooled more than 90% of the cash activity linked to settlement in a single dedicated cash account. The resulting netting effect, along with the T2S auto-collateralisation facility, has significantly reduced the amount of additional cash or collateral we need to bring to the system.
What next steps are required for T2S to achieve its potential?
While the migration waves have been broadly successful, there is more work to do.
Regarding harmonisation, challenges remain, such as achieving full compliance with the T2S corporate actions standards or the registration process for registered shares.
That post-trade costs have not fallen is a particular disappointment for our clients, especially given issuance and transaction volumes in Europe remain predominantly domestic. In part, these stubborn cost structures reflect the fact that, despite long-running efforts to remove the Giovannini barriers, Europe’s “spaghetti infrastructure” still exists. T2S has helped simplify a layer. However, it has not removed those layers or parties – and their associated costs – from the post-trade transaction chain.
Improving the efficiency of cross-border collateral management for banks is another area. Bringing European debt issuance and more tri-party collateral management within the T2S sphere, rather than going through the ICSDs, could be a way to enable banks to better leverage the platform’s capabilities.
Another way to leverage T2S would be to foster fund share settlement, especially cross-border, through this platform – but projects in this area have so far failed to materialise.
But perhaps one of the main areas that has been overlooked is that the benefits of having a unique infrastructure such as T2S can be maximised only if participants have themselves made the necessary evolutions of their operating model, which can take different directions: rationalisation/uniformisation of the back-office platforms across T2S markets, automation, leveraging new digital technologies, pooling of liquidity, consolidation of providers. This then requires firms to undertake a comprehensive strategic analysis, to determine either to make the necessary investments to modernise their internal operating models and platform, or outsource those activities to a dedicated third-party provider.
Glossary: T2S key features
- Auto-collateralisation: ability to obtain from the National Central Bank an intraday cash facility in exchange of eligible collateral purchased or held in the securities accounts
- Hold & release: ability to exclude (hold) an instruction from the settlement process until it is explicitly released (release)
- Linkage: ability to link settlement instructions to settle together or according to a defined sequence
- Partialisation: ability to authorise T2S to settle only a fraction of the original quantity or amount when full settlement is not possible due to lack of securities or cash
1 Finland remains outside T2S, but no date for its migration has been announced yet.
2 About T2S, European Central Bank, http://www.ecb.europa.eu/paym/t2s/about/html/index.en.html