T2S is one of the largest infrastructure projects launched by the Eurosystem so far. It brings substantial benefits to the European post-trading industry by providing a single pan-European platform for securities settlement in central bank money.
- What is T2S?
T2S will consolidate across all countries in Europe the most fundamental part of the securities infrastructure value chain: settlement. It will be a state-of-the-art settlement engine offering to the whole European market centralised delivery-versus-payment (DvP) settlement in central bank money. It will be operated by the Eurosystem on a cost-recovery basis, to the benefit of all users. T2S will be neutral towards all countries and market infrastructures and towards the business models adopted by all CSDs and market participants.
- T2S General Principles
The T2S concept is based on 19 General Principles, formulated in cooperation with the market and aimed at ensuring the resilience, integrity and neutrality of the Eurosystem’s settlement platform.
The main characteristic of T2S, and its most revolutionary one, is that it will make cross-border settlement identical to domestic settlement, in terms of cost, technical processing and efficency. A single set of rules, standards and tariffs will be applied to all transactions in Europe, dramatically reducing the complexity of the current market infrastructure. Cross-border fees will be considerably lowered, making the European securities markets more attractive and cost-effective.
Transactions in T2S will be final and safe. The use of DvP on a real-time gross basis will eliminate the counterparty risk, ensuring that a participant’s counterparty fulfils its obligations. The use of central bank money, i.e. the transfer of cash between participants’ accounts held at the respective national central banks, will eliminate the settlement agent risk. In T2S, both the securities and cash legs of the transactions will be settled in DvP mode: the securities will only be delivered to the buyer when the cash is delivered to the seller.
- A service to CSDs, not a CSD
T2S will only perform settlement and will be a service offered to central securities depositories (CSDs), and not a CSD in itself. The CSDs will be the only parties involved in a contractual relation with the Eurosystem and will remain responsible for the legal and business relations with their clients. They will continue to maintain their customers’ accounts and to perform all activities pertaining to the rest of the post-trading value chain. Such services include custody, asset servicing, corporate actions processing, and tax and regulatory reporting.
- Why the Eurosystem is best suited to run T2S
- Settlement in central bank money is a very important safety feature that only central banks can offer
- As a supra-national organisation, the Eurosystem is neutral vis-à-vis all EU countries and stakeholders
- The Eurosystem has no economic interest and only works towards full cost recovery
- The Eurosystem has experience in successfully designing and implementing Europe-wide financial infrastructures, such as TARGET and TARGET2.
- Beyond the euro: a multicurrency engine
T2S will have a multicurrency dimension. It will extend beyond the euro area, enabling the interested non-eurozone national central banks to connect to T2S with their currencies. Today most CSDs organise DvP settlement in central bank money with only one central bank. In T2S securities will be settled against any of the available currencies.
- How does T2S work?
T2S will ensure real-time DvP and settle across borders by employing the so-called “integrated model”: both securities accounts and cash accounts will be integrated on one single IT platform, so that only one interface will be necessary between the CSDs and the T2S platform. T2S will accommodate both the market participants’ securities accounts, held at either one or multiple CSDs, and their dedicated central bank cash accounts, held with their respective national central bank. The dedicated cash accounts will be used exclusively for settlement purposes in T2S and will be linked to the participants’ cash accounts held in TARGET2 or another non-euro central bank RTGS account.
The use of an “integrated model” will allow T2S to connect any securities account at any participating CSD with any cash account at any participating central bank, within the same currency.
T2S will offer a set of advanced technical features that will make it one of the most sophisticated settlement engines in the world: advanced optimisation algorithms to enhance settlement efficiency, state-of-the-art autocollateralisation mechanisms leading to considerable liquidity savings, a wide range of liquidity management services through the dedicated cash accounts, and direct connectivity, i.e. the possibility for banks with large settlement volumes to have a direct network connection to the platform (under the rules and procedures defined by their CSD).
Currently, each CSD settles according to its own technical set-up and respective national legal requirements. Interaction between CSDs is inefficient and costly.
T2S will provide all CSDs with a single platform for security settlement in Europe. With T2S, interaction between CSDs will occur on a harmonised basis.
- Overview of the general principles of T2S
Overview of the general principles of T2S Principle 1: The Eurosystem shall take on the responsibility of developing and operating T2S by assuming full ownership. Principle 2: T2S shall be based on the TARGET2 platform and hence provides the same levels of availability, resilience, recovery time and security as TARGET2. Principle 3: T2S shall not involve the setting-up and operation of a CSD, but instead serves only as a technical solution for providing settlement services to CSDs. Principle 4: T2S shall support the participating CSDs in complying with oversight, regulatory and supervisory requirements. Principle 5: The respective CSD users’ securities accounts shall remain legally attributed to the CSD and the respective central bank customers’ cash accounts shall remain legally attributed to the central bank. Principle 6: The T2S settlement service will allow CSDs to offer their participants at least the same level of settlement functionality and coverage of assets in a harmonised way. Principle 7: Securities account balances shall only be changed in T2S. Principle 8: T2S shall settle exclusively in central bank money. Principle 9: The primary focus of T2S is to provide efficient settlement services in euro. Principle 10: T2S shall be technically capable of settling in currencies other than the euro. Principle 11: T2S shall allow users to have direct connectivity. Principle 12: CSDs’ participation in T2S shall not be mandatory. Principle 13: All CSDs settling in central bank money and fulfilling the access criteria shall be eligible to participate in T2S. Principle 14: All CSDs participating in T2S shall have equal access conditions. Principle 15: All CSDs participating in T2S shall do so under a harmonised contractual arrangement. Principle 16: All CSDs participating in T2S shall have a calendar of opening days and harmonised opening and closing times for settlement business. Principle 17: T2S settlement rules and procedures shall be common to all participating CSDs. Principle 18: T2S shall operate on a full cost-recovery and not-for-profit basis. Principle 19: T2S services shall be compatible with the principles of the European Code of Conduct for Clearing and Settlement.
- Why T2S?
TODAY: fragmentation and high costs
Today, over ten years after the introduction of the euro and despite the creation of a single currency area across 19 countries, the provision of post-trading services remains highly fragmented along national lines. The main consequences of this lack of integration are:
Fragmented European landscape and comparison with the US
- Very high cost of cross-border settlement – Today, settlement across European countries is extremely complex, involving at least two CSDs and very often also one or several custodian banks. In addition, settlement is de facto a national monopoly, with little or no competition among European providers. For these reasons, cross-border settlement fees are today many times higher than domestic fees, and much higher than in the United States, which already has a highly centralised clearing and settlement infrastructure.
- Complex settlement procedures and high level of risk – The high cost of cross-border settlement is also caused by the lack of harmonisation on a legal, technical and fiscal level. Such non-homogeneous market practices make settlement complicated and entail a high level of risk.
TOMORROW: T2S is the solution
T2S will remove barriers across countries and eliminate differences between domestic and cross-border settlement, offering a solution to the drawbacks of the current fragmentation. T2S is a key driver for the harmonisation of post-trade services and standards, and will contribute to achieve stronger financial integration and a true European single market.
Towards an integrated post-trading market
The current market fragmentation in the post-trading sector conflicts with the objective of a single and competitive European market for financial services. Other current initiatives pursuing the same integration objective as T2S are
- the removal of the so-called Giovannini barriers to smooth and efficient post-trading in Europe (more)
- CESAME2, EGMI and EPTG
- Code of Conduct for Clearing and Settlement (more)
- EU Commission – CSD Regulation)
- EU Commission – Harmonisation of Securities Law
- T2S will cut settlement costs to one of the lowest levels in the world. It will bring down cross-border settlement fees by fully exploiting the economies of scale resulting from the use of a single IT settlement platform, a single set of standards and a single operational framework. By enabling CSDs and banks to rationalise their internal processing and systems, moreover, T2S will also lead to a more general reduction of the total costs for settlement.
- T2S will be a catalyst for harmonisation across Europe, helping to remove the current barriers and inefficiencies and to create a single, sound and competitive financial market in Europe, thus contributing to financial integration in Europe.
- T2S will have a positive impact on financial stability, which is seen by the market as crucial in view of the recent financial turmoil. T2S will settle exclusively in central bank money and offer the most advanced standards of resiliency, availability, business continuity and security. It will significantly reduce the risks that still affect cross-border settlement today; it will enable banks to optimise their liquidity and collateral management; it will promote greater diversification and sharing of risk.
- T2S will foster competition, open new business opportunities and ultimately benefit the European end-investors and issuers. T2S will thus have a positive impact on European economic growth in general.