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In the future T2S world, securities settlement will take place in T2S for all participating CSDs. Those who plan to join T2S are currently in the process of analysing how to reshape their infrastructures in order to integrate T2S. The efficient integration of their settlement services with T2S, including the existing and potential new services they will offer to their markets, is essential for minimising their costs related to settlement activities.
The adaptation of CSDs’ systems and processes to integrate T2S will require an initial investment. How T2S will benefit the market, the CSDs and their customers, will depend on the strategy the CSDs and markets choose. The question is how will they decommission the settlement processes on the legacy systems and how will they integrate their services offer into the T2S world? Naturally, if legacy systems, settlement data and processes at the CSD are fully maintained in parallel with T2S, little cost reduction can be expected from T2S and savings will be difficult to reap, in particular for settlements at national level.
How T2S will benefit the market, the CSDs and their customers, will depend on the strategy the CSDs and markets choose.
My colleagues in the CSDs face an important challenge at the moment in evaluating the possible technical solutions for re shaping to T2S. Before giving my view on this issue, I would like to clarify an important point. Today, securities settlement takes place in the CSDs’ local IT infrastructure together with other processes linked to additional related services. In the future, settlement will take place in T2S, which should be considered by the CSDs as their remote IT infrastructure for securities settlement.
At this stage of the project, the CSDs can choose between two models.
In this design and decision-making process, CSDs could consider many different architectural solutions for integrating T2S with their CSD systems that provide other services (e.g. custody) on their own platforms. The main difference between the possible architectural solutions concerns how the information available in T2S – real-time messages, report subscriptions and on-demand queries – is used. The different architectural approaches and the use of the T2S information services will significantly influence the adaptation costs as well as the reduction of future running and development costs. At this stage of the project, the CSDs can choose between two models – “data replication” and “data on demand” – or they can opt for any combination of the two.
CSDs could implement a data replication solution, whereby the CSD replicates all or part of the settlement-related data based on real-time messages received from the T2S information services. This first option would allow the CSDs to have up-to-date real-time information at all times within their local IT infrastructure (with a small delay compared with T2S). However, this option entails a high frequency of interaction between the CSDs’ local IT infrastructure and their remote IT infrastructure (namely T2S). In addition, a copy of large amounts of T2S data has to be maintained in the CSDs’ systems and this copy has to be built up using each and every small update throughout the day. Therefore, there is also a need to implement quality control and reconciliation mechanisms in order to ensure the integrity of information between the CSDs’ local data repositories and the CSDs’ remote data repositories in T2S.
It is apparent that this option implies high running costs for the CSDs. This would also include certain communication costs linked to the subscription of messages, regardless of the actual usage of data. Therefore, any data replication should be justified by an express need to organise complementary processing outside the T2S platform.
Data replication might not be justified, for example, if a CSD offers customer services for settlement issues only, as all CSDs will have full access to settlement data in their remote IT infrastructure (namely T2S). In other words, data replication which requires CSDs to store T2S data redundantly would entail costs without revenues. However, if more complex custody services (e.g. related to corporate actions) are to be offered by CSDs, data replication might be necessary to a certain extent and, therefore, justified.
Alternatively, CSDs could implement a data on demand solution, whereby the CSD uses its remote IT infrastructure (namely T2S) to receive settlement-related data directly from the T2S platform. Through queries or reports, CSDs will directly access the data which is required by other systems (e.g. the registry) for non-settlement purposes or additional services. This architecture would require that only a minimum amount of data is stored in the CDS’s local IT infrastructure, as the data is retrieved on demand from T2S only when necessary for business purposes.
Avoiding the storage of redundant data by adopting a data on demand solution, the CSDs will not need to implement new quality controls and reconciliation mechanisms to ensure the integrity of information, as the data is retrieved directly from the source. Therefore, the running costs of such an approach will be rather low. Communication costs will depend on actual usage and will be commensurate with business needs, i.e. on the frequency of the need for queries/reports from T2S.
The two solutions described so far have different advantages and disadvantages that have to be taken into account by the CSDs when reshaping their infrastructures to integrate with T2S. The rational choice between local versus remote IT infrastructure should be driven by technical and not political considerations. To give some examples, certain business requirements in a CSD may require real-time information for certain types of data, such as a pending settlement owing to a lack of securities to trigger a securities lending/borrowing service. Conversely, other major processes that run at defined times at a CSD, such as corporate event processing, might only require the end-of-day positions from the T2S information services. Finally, some data processed or stored on the CSD’s remote IT infrastructure e.g. “messages that are not yet accepted by T2S”, do not require any processing or storage at the CSD’s local IT infrastructure, provided that such data is directly accessible through a query or a report when necessary.
Requirements for T2S information services may differ from market to market and CSDs may find the optimal solution to be a combination of the two described options. Again, I believe that technical and not political considerations should lead to the right choice.
Indeed, savings will be maximised and future running/development costs minimised if a CSD does not maintain any residual settlement processes or data in its systems. This approach may imply higher initial adaptation costs but, in the medium to longer term, significantly lower running costs. Some CSDs may need to maintain certain aspects of the currently existing settlement processes at their local IT infrastructure owing to existing national specificities.
Finding the right solution will maximise the benefits for all, will lower the costs for securities settlement in Europe, and will pave the way for new business opportunities in the global financial market.
However, harmonisation and removal of national specificities will further allow CSDs to reshape their infrastructure and reduce their costs, bringing about savings in their markets. Similarly, T2S together with the introduction of ISO-20022 – frontrunner of the new generation of standards for financial services –will allow CSDs (and the market) to increase the benefits of harmonisation and standardisation across financial services, thus preparing the infrastructure of tomorrow (see T2S OnLine No 6, Bayle’s view).
It is essential for CSDs and their markets to get involved in the decisions on how to build a consistent overall functional and technical architecture. This architecture should integrate local and remote processes seamlessly and efficiently. The European single settlement engine will enable more efficient processing, without unnecessary duplication of processes and data. Reshaping to T2S will require initial investments and restructuring efforts, but it will significantly lower future running costs. Finding the right solution will maximise the benefits for all, will lower the costs for securities settlement in Europe, and will pave the way for new business opportunities in the global financial market. Last but not least, such a longer term oriented adaptation strategy will also augment CSDs’ competitiveness in the future post-trading environment.
