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In November 2009 the General Functional Specifications and the General Technical Design were approved by the T2S Programme Board and published on the T2S homepage. (see Spotlights archive)
The General Functional Specifications explain in general terms how the T2S software application will meet the user requirements as currently described in the User Requirements Document, version 4.2 (download [4.48 MB]), while the General Technical Design presents the technical infrastructure that will be used to run the T2S software application. One particular aspect of the technical design is the user connectivity, namely the way T2S will interface with central securities depositories (CSDs) or directly connected participants. The Eurosystem will attribute the function to the network providers that win a selection process. The Eurosystem is collecting feedback from T2S actors on the envisaged approach, and, on the basis of this input, will publish the high level principles of the selection process in spring 2010.
In general, the publication of the General Functional Specifications and the General Technical Design represents a major milestone in the project’s development and sets the pace for the completion of the next key technical document: the User Detailed Functional Specifications. The User Detailed Functional Specifications provide the T2S actors directly connected, i.e. CSDs, national central banks and users, with all the information they need to prepare their internal systems for interacting with T2S.
With regard to the migration to T2S, two approaches have been thoroughly investigated by the T2S Advisory Group: migration by security and migration by CSD. In the latter approach, all settlement activity of CSDs will move to T2S on their migration date. In the migration by security approach, a pre-defined set of securities would move to T2S on each migration date, thereby affecting all CSDs settling those securities, whereas in the migration by CSD approach group of CSDs would migrate to T2S in a gradual way. Following the careful analysis of the Advisory Group, the Governing Council endorsed the migration by CSD approach because it allows a better balance of project costs and risks (e.g. in terms of software development and testing for CSDs and users) than the migration by security approach. Moreover, it better ensures the smooth conduct of business operations during the migration period.
The Eurosystem has a strong interest in ensuring that the CSDs participating in T2S open up to competition. Many market participants have mentioned the risk that some CSDs may be tempted to free-ride on T2S. This would happen if a CSD used T2S to access securities issued by other CSDs, but did not make its balances available to them. The fear that some CSDs may free-ride might in turn prevent other CSDs from bringing into T2S the securities for which they are the issuer CSD, thus generating a vicious circle.
In addition, some CSDs might join T2S with their full domestic and cross-border volumes, while other CSDs might join only with their cross-border/cross-CSD volumes. In this situation, the CSDs bringing their full volumes would be subsidising the cross-border volumes of the other CSDs.
It is essential to protect T2S from such free-riding situations, which hinder the implementation of T2S’ main objectives and principles. The Governing Council therefore adopted five eligibility criteria for CSDs in T2S. The objectives of the eligibility criteria are: i) ensuring that the participating CSDs do not pose a risk for other CSDs and their users (see criteria 1 and 2 in the box); and ii) preventing free-riding behaviour in T2S, which would be to the detriment of other CSDs and of the European financial markets in general (see criteria 3, 4 and 5 in the box).
Of course, if a currency is not in T2S, the CSD cannot conduct DvP settlement in central bank money in T2S for securities denominated in such currency. In this case, the CSD may join T2S and continue to perform DvP in its legacy platform, provided that the securities it issued are easily accessible to other T2S CSDs (see criterion 5 in the box).
Meeting the eligibility criteria is a precondition for a CSD to join T2S and to remain in T2S. A continuous assessment of the criteria will enable cases of non-fulfilment to be investigated. This may lead to penalties which will have to be specified contractually in the Framework Agreement between the Eurosystem and the participating CSDs.
The actual implementation of the criteria will be further discussed in the Advisory Group, in accordance with the principle of transparency.
The Governing Council decided to synchronise and extend the current mandate of the T2S Advisory Group and of the CSD Contact Group until the Framework Agreement between the Eurosystem and the CSDs enters into force.
The T2S Programme Board has started discussions within the T2S Advisory Group and the CSD Contact Group on how T2S governance could evolve over time. It has started preparing the governance for the development phase and the principles for the operational phase. These will be finalised in spring 2010.
Following the approval by the T2S Advisory Group in September 2009, the standards on corporate actions were sent to the European Commission’s Clearing and Settlement Advisory and Monitoring Expert Group in November for endorsement. The T2S Corporate Actions Subgroup will monitor the implementation of the standards in the T2S markets (more).
In December 2009 the T2S Process Efficiency Subgroup provided its final report to the T2S Advisory Group for the approval of eleven issues. The implementation of these proposals will bring additional efficiency and transparency to the European post- trade environment (more).
Following a request from European issuers, the T2S Advisory Group agreed in December 2009 to create a task force for exploring harmonisation of shareholder visibility in cross-border settlement. The work will be conducted in close cooperation with the European Commission.
