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The final wave
The final wave

The final wave


On 18 September 2017, the full T2S migration (with the exception of Finland for which no date has been announced yet) was finally completed thanks to the fifth migration wave, which brought the Spanish CSD and the Baltics into the game. This wave brings to T2S the remaining 15% of volumes that were settling outside the pan-European platform. With volumes lower than the previous wave, the stakes may seem limited but this final wave was much higher in complexity

After months of T2S preparations with clients and central securities depositaries (CSDs), BNP Paribas Securities Services has participated in all market workshops and steering groups, and conducted rigorous testing with other leading market players to ensure a smooth migration weekend. The largest CSD involved, the Spanish CSD Iberclear, together with its participants, have successfully completed this migration, which started with the changes brought to the market back in 2016 with the Spanish Market Reform (SMR). 

A long way home

The journey started back in 2010, when the Spanish regulator Comisión Nacional del Mercado de Valores (CNMV) published the public consultation paper for the SMR that went live last year, introducing profound changes in the market rules and organisation in preparation for T2S. The reform aimed to take the first steps towards European harmonisation with changes in registration management, adoption of new corporate action standards according to the Corporate Actions Joint Working Group (CAJWG), migration to a T+2 settlement cycle, and the introduction of some of the T2S settlement functionalities like  partial settlement and hold and release.

With the market reform, BME group also introduced their local central counterparty (CCP) for the equities segment that, together with the existing pan-European CCPs, had to adapt their clearing processes to the new registration management regime.

T2S: a further step towards standardisation

Important changes had already been introduced with the SMR. This meant that the implementation of T2S required deeper adaptations for fixed income activities than for equities. CADE, Iberclear’s fixed income platform has been decommissioned and migrated to ARCO II and the settlement of equities and fixed income is now made in a single platform connected to T2S.

In general, T2S settlement cycles should bring many benefits to the settlement rates. The introduction of daily real time settlement will help alleviate some of the restrictions created by the current cycles, which together with the CCP release process, sometimes made it difficult to settle all transactions on the intended settlement date. In addition, the T2S auto-collateralisation process will certainly optimise liquidity management, simplifying the cash setup across markets, and optimising intraday liquidity.

Despite the retention mechanism and many other CCP-level peculiarities, BME Clearing has eliminated the last resort loan offer, simplifying and harmonising the management of on-exchange fails with the other pan-European CCPs.

Is Spain now harmonised?

Like its market reform, Spain’s move to T2S has not been easy, and important differences and local specifics remain in the post-T2S environment.

Registration is still the main characteristic of the market and has not been eradicated in T2S - registration requirements must still be fulfilled from trading to settlement. Despite the Special Financial Intermediary model, an optional settlement model used to manage registration on the value date and alleviate the impact, take-up has been slow due to complexity in the flows, especially on reporting obligations to the Post Trading Interface (PTI) central registry database. 

In T2S, registration details must be populated as a settlement matching criteria (“Party 2”), while in the rest of T2S markets Party 2 informs the client of the CSD participant (optional field).  This non-harmonised usage of Party 2 could create a new challenge for custodians, who will have to adapt their processes and systems to, for example, enrich client’s instructions prior to delivering the instructions to T2S (party 2, type of transactions, etc.).

Also the existence of the retention mechanism at the CCP execution level proves to be one of the most challenging aspects of the Spanish market. In order to avoid the poaching of securities and to guarantee the usage of correctly registered shares for market sales, settlement agents must identify the executions for which they do not have position (at registration level) prior to the creation of the net instruction by the CCPs. Throughout the settlement cycle, settlement agents need to continuously monitor positions, again at registration level, and release executions to partially settle the pending net until buy-in is reached. The fact that this process is carried out at registration and execution level adds a significant degree of complexity to post trade processing.

Beyond wave 5?

Even if some complexity remains, there are clear benefits of moving from the current Iberclear settlement cycles and the reduced use of the real time indicator to T2S’ real time and night time settlements (RTS and NTS). We must presume that the implementation of T2S will result in an improvement in Spanish market settlement rates and will certainly benefit from a liquidity management perspective thanks to the use of auto-collateralisation and optimisation of treasuries across T2S markets.

The post-trade market will continue to evolve. Wave 5 is now successfully implemented but, across Europe, many harmonisation challenges remain.  To help defining its future agenda, the European Commission has recently launched a consultation paper on the remaining post-trade barriers.

CSD regulation will also further reshape the securities settlement landscape in Europe, affecting European CSDs but also all their participants and introducing new reporting obligations and settlement discipline rules for penalties and buy-ins.

In parallel, the European Union is laying down plans for new European projects which will also have operational impacts and should offer new opportunities such as T2-T2S platform consolidation, ECMS (European Collateral Management System), and EIS (European Issuance Service). Brexit will certainly also be on top of the agenda and drive international players to revisit their models.

One thing is certain: there is more than enough change to keep the industry busy over the next few years.

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