Live and learn: the T2S feedback loop
T2S is one of the most significant infrastructure projects undertaken by the Eurosystem in the last decade. Considering its size and complexity, a phased implementation – as opposed to moving all the markets at the same time – is proving to be the right way to go. There may be drawbacks, such as overall cost and longer implementation time and it means that some markets have the advantage of being active earlier, and reaping the benefits of T2S before the others.
However, from a change management perspective a phased migration is simpler. The Eurosystem is able to monitor a select number of CSDs as they prepare for the migration rather than having to oversee every participating CSD. Of course, carrying out the project in waves means that already-migrated markets have the time to overcome any issues that arise – paving the way for the successive markets and allowing them to anticipate problems before going live.
On the basis of our experience with the preparation and T2S roll-out in Italy and the other wave 1 markets, BNP Paribas Securities Services performed internal analysis and research into how the overall market handled the migration, and what improvements can be made for future waves. Even prior to the first wave, we have been contributing to industry initiatives to establish best practices. We were involved in the Association for Financial Markets in Europe (AFME) initiative to review the T2S migration in Italy and identify clear action points, and to define recommendations for the use of the new settlement system. These collaborative efforts resulted in the publication of two documents: “T2S Wave 1 – Review and Request for Action Following Migration of Italian Market to T2S” and “AFME Recommendations for Target2-Securities Settlement”.
The first paper incorporates feedback from the International Capital Market Association (ICMA), and aims to provide all relevant stakeholders – from market infrastructures and direct users of the platform to the buy and sell side firms – a description of the main issues faced during the Italian market migration, as well as an action plan.
AFME and ICMA highlight that the Italian migration to T2S was well managed. The document does, however, mention certain areas in which there is room for improvement. We fully share this position and we believe that, going forward, there are three key areas that require a strong focus.
For any major infrastructure project, preparation is crucial; T2S is no exception. Successful Migration Weekend Dress Rehearsals (MWDR), as well as a complete front-to-back testing of the T2S functionalities, is key to ensuring a safe and smooth transition. Furthermore, detailed testing of the market-specific processes with the local CSD is important, since any issues or delays after migration can have a domino effect on the overall settlement results.
In keeping with the issue of preparation, market participants experienced matching issues in the first few days of operations on the new platform due to the poor management of SSIs. Although the problem was quickly resolved, we believe that the issue can be prevented in future waves. The relevant information, in particular Party 1 and Party 2 BIC codes, should be provided in a timely manner and communicated to all parties involved, including the buy side community.
There were delays in settling fixed income trades in the Italian market after migration. Firstly, the auto-collateralisation process did not function properly for the CCP and they had to pump liquidity into the system in order to settle transactions. Secondly, because of lack of partial settlement on the morning of settlement date, a large number of fixed income trades required an extra period of time in order to settle, thereby causing a shortage of settlement liquidity. A possible way of preventing this from occurring in the future would be to maintain the partial settlement windows introduced in T2S to ensure that as many trades as possible are eligible for partial settlement. Maintaining the newly introduced partial settlement windows would require an agreement among all CSDs and a harmonised structure across all participating markets. Although this harmonisation may be difficult to achieve, it is in line with the wider objectives of the T2S project.
The second document, “AFME Recommendations for Target2-Securities Settlement” outlines principles and recommendations that should be taken into account for future migrations, while also acting as a cross-market user-guide for all stakeholders, including those that are less familiar with back-office processes, to understand the critical points of attention and how to use the main T2S functionalities.
It is interesting to note that this document further underlines, but also provides more precise recommendations ontwo key critical items covered in the previous paper. Firstly, and no surprise there: sufficient preparation is essential. The article specifically mentions that at least one month before the migration date, service providers should inform their clients of the requirements for mandatory T2S functionality. Secondly, the paper recommends that industry participants share SSIs well before the migration so that reference data changes can be made.
With wave 2 successfully integrated at the end of March 2016, the project continues to go ahead smoothly, while allowing for participants to observe, reflect, and improve on past mistakes. BNP Paribas will continue to work closely with clients and market participants across all markets to prepare for each of the coming migration waves and ensure that they benefit as much as possible from T2S. Stay tuned for our next webinars and thought leadership via the T2S corner.