T2S faces its first real test

Jean-Michel Godeffroy, chairman of the T2S Programme Board

At the Sibos event in Hong Kong last autumn, as well as in the Euro Finance Week in Frankfurt, I warned that the additional seven months required to validate the General Functional Specifications had eliminated many of the buffers that had been available in the project plan. But, at that time, we still hoped that the project would remain on schedule by increasing the number of activities run in parallel.

In the last few months, however, it has become clearer that we will need to undertake a more far-reaching review of our work plan. I announced it at the Advisory Group meeting on 15 January 2010, and market participants inferred that this would most likely mean a delay in the initial go-live date.

Some of the reasons for these time problems are external to the Eurosystem. For example, the User Requirements Document (URD) has proved to be more complex than anticipated, although I believe we still achieved our goal of a “lean” T2S. To some extent, we paid the price of our transparency policy which required sometimes that we consult the market several times before reaching the minimum level of consensus before taking the final decision. I have no regret in this respect because the system that we are building together is being built on rock and not on sand, i.e. on market consensus rather than on arbitrary decisions. But, of course, this higher-than-expected level of complexity and this search for market consensus had an impact on the timetable.

I would not like to give the idea that we are only looking for outside excuses. Progress on T2S has been slower than anticipated also for reasons which are internal to the Eurosystem. To some extent, the difficulties in finalising the General Functional Specifications were linked to the need to thoroughly understand the specificities of securities settlement, related to the integration of cash and securities processing in one platform. The complex organisation of “T2S company”, which involves two “subsidiaries” (the ECB and the 4CB) and its five “factories” (one at the ECB and four at the 4CB), has also had an impact on the timetable, most notably during the validation of the General Functional Specifications.

This comprehensive review of the work plan that we are currently undertaking is the most difficult challenge that we have faced since the start of the T2S programme. But the Programme Board that I chair is determined to address this issue without complacency. In the last few weeks, we have started carefully reviewing our current organisational set-up and checking that the problems that have been identified have been properly addressed. Although this is a difficult time, I believe that it will, in the end, strengthen our organisation for the future.

I am extremely grateful for the market reaction so far, both in the Advisory Group and in the bilateral discussions which followed. There was a clear sense of understanding for our difficulties. Nonetheless, we now want to make sure that we can set a new go-live date and stick to it. We know that market participants need a firm date in order to plan their own system adjustments. We are therefore in the process of coming up with a new date to open T2S to business; a go-live date which will not be challenged again.

But I do not want to paint too gloomy a picture because there is also much good news to celebrate. The project is, indeed, progressing really well, albeit at a lower speed than anticipated.

The most important achievement is the freezing of the User Requirements Document during our AG in Amsterdam on 15 January. This is an important milestone. This version of the URD also includes the - much debated - Credit Memorandum Balance functionality, which will provide an enhanced service to payment and settlement banks for the management of their clients’ credit lines.

The Governing Council has also approved the eligibility rules for the participation of Central Securities Depositories (CSDs) in T2S. These rules will ensure a level playing field between CSDs, and that there is no free-riding. They leave some flexibility nevertheless to care for very specific local situations, where needed.

In the last few months, we have also begun our discussions with securities regulators. This is necessary in order for the Framework Agreement to pass smoothly. The negotiations with CSDs on the Framework Agreement are also ongoing. The discussions are tough, but this is not surprising given that all business requirements have to be put into proper legal wording.

We are also engaged in well-advanced discussions with KDPW, the National Depository for Securities in Poland, regarding their signature of the T2S Memorandum of Understanding. This would increase the number of CSDs which have signed the Memorandum to an impressive 29. This brings us another step closer towards achieving our ambitious single market objective for the European financial market.

I would now like to introduce the other articles in this issue of T2S Online. As usual, Helmut Wacket provides the latest update on recent project developments and policy decisions. We then have an interview with Guido Ravoet, the Secretary General of the European Banking Federation, who gives his views on the governance of T2S and the future role of the Advisory Group. This is followed by an article by Johannes Luef, the chairman of VP Securities, the Danish CSD, about the challenges and opportunities of T2S from a CSD perspective. Marc Bayle, the T2S Programme Manager, then gives his outlook on the forthcoming negotiations of the Framework Agreement. Finally, we have an article which introduces the 4CB and how it is organised in order to manage their responsibilities in such a large and complex project.

I hope you enjoy this quarter’s magazine.