MIP OnLine - 2017

T2S roll-out: opportunities and challenges for users (part 2)

June 2017

Last week we spoke with Stephen Lomas from Deutsche Bank and got a glimpse of what he perceives to be the major opportunities and challenges that the platform has brought to its users in the financial market. In case you missed it, you can read the first part of the interview here.


This week we talked to Marcello Topa, Director EMEA Market & Policy Strategy at Citi, to find out how Citi views the transformation of the post-trade industry in Europe following its migration to T2S.

Marcello, we asked Stephen how T2S has changed Deutsche Bank’s business model and what key opportunities he sees arising from the T2S roll-out. What is your take on this? How has Citi’s experience with T2S been so far?

T2S has succeeded in being a catalyst for harmonisation in the European post-trade industry. That is not to say harmonisation is complete, by any means, but significant progress has already been made, for example in getting all of the T2S markets onto a T+2 settlement cycle well in advance of the Central Securities Depositories Regulation (CSDR) deadline, and in completing (almost) all the “Priority 1” activities on the Harmonisation Steering Group’s harmonisation agenda.

In the search for appropriate business models, the most common strategy for those other than sub-custody banks has been the infamous “wait and see”. This has not turned out to be a bad strategy for most, as there have been no obvious first-mover advantages, and this way most market participants leaned on their custody banks to manage the heavy lifting of adapting to T2S.

In our case, it has been clear right from the start that the best way to maximise the breadth and depth of Citi’s existing direct custody network was to maintain our existing model of direct access to the CSDs in all the T2S markets. Differently from all other competitors, we have adopted a directly connected party (DCP) connectivity model in all the markets where we have a direct local presence and where our clients have settlement and custody needs to support their businesses. This approach allows Citi to continue to offer its clients a top-quality experience across all of our post-trade services, beyond the basic processing of securities settlements.

Looking to the future, the ability to seamlessly integrate liquidity and balance sheet management, asset servicing and collateral management into a single operating model, with the T2S settlement platform as the core foundation, will be the most critical differentiating factor. Other longstanding techniques, such as account operator models and asset-servicing-only solutions, can also be applied in new and interesting ways in the context of T2S. We look forward to the full completion of the migration phase and to the resolution of the few remaining items in the integration of all planned functionalities in T2S and in the participating CSDs, so that the opportunities to be derived from the single settlement platform will be fully achievable.

Numerous stakeholders have been involved in the T2S project to steer its development and ensure that market needs and requirements are met. Marcello, you have been involved in the project from the beginning. Looking back, how would you evaluate the collaboration – what has worked and what has not?

One key accomplishment of T2S has undeniably been the extent of cooperation and joint focus that has developed over the past decade among all stakeholders in the “T2S community”. The ECB’s approach of equal participation, full transparency and pragmatic cooperation between representatives of market infrastructures and users, of public and private sector and of all national user groups and trade associations that are involved in post-trade services has made it possible to achieve an enormous amount of work that satisfactorily meets the needs of all interested parties.

The flip-side of this extensive governance structure, however, has been that, on many occasions, the whole process was too bureaucratic, too slow, too “resource-intensive” and, as a result, tended to avoid too many tough decisions. The result has been that, while using a single settlement platform, we still have to face too many local exceptions and too little true harmonisation, not only in understandably “complex” areas such as asset servicing and tax processing, but even, quite surprisingly, in basic aspects of the settlement process.

Looking at some specific areas, T2S has succeeded in making liquidity management across the T2S markets more efficient. Many market participants active in multiple T2S markets are consolidating their T2S funding into a single national central bank. This, along with an effective cross-border auto-collateralisation mechanism, has brought efficiency to liquidity management.

T2S has only partially succeeded in improving cross-border settlement efficiency. Where two CSDs have joined T2S and established direct links with each other, cross-border settlement is simple and straight-through processing is possible. But the establishment of CSD links has been slower than expected. For Spain, the unfortunate adoption of a slightly different matching standard versus the T2S standards in other markets – requiring the use of the Party 2 field to identify the investor’s registration name – will undoubtedly create problems for cross-CSD settlement. Incomplete adoption of harmonisation standards, particularly in areas such as corporate actions on flow, is a significant barrier to smooth direct links, as investor CSDs need to cater for many different standards. Ensuring compliance with standards would pave the way to more effective CSD links and, therefore, more effective cross-border settlement.

Lastly, T2S has not succeeded yet in bringing down settlement fees. Overall, settlement fees for most issuer CSDs have stayed the same or increased since their migration to T2S. Issuer CSDs have also started charging investor CSDs settlement fees for cross-CSD realignments, which are processed by T2S free of charge. This is one of the key reasons that cross-CSD settlement has not increased meaningfully despite the introduction of T2S.

Post-trade harmonisation is crucial to achieving greater financial integration in Europe and T2S is playing a major role in this. The Ami-SeCo group, established by the ECB, will continue to push the harmonisation process forwards and the European Post-Trade Forum (EPTF), created by the European Commission, will review the progress made in removing the Giovannini barriers. Marcello, as a member of the EPTF, what still needs to be done and how critical are the remaining barriers? How do we tackle the remaining issues and what should have the highest priority?

Almost a decade since the financial crisis and after a rapid succession of legislative measures to regain stability, safety and discipline in the financial markets, the changed focus of the European Commission and its capital markets union (CMU) project is a very welcome breath of fresh air.

The Commission is right in taking a practical step-by-step approach across all workstreams under the CMU umbrella. Specifically from a post-trade perspective, the EPTF group of experts, which represents a broad cross-section of the industry, has performed a very detailed analysis of the remaining Giovannini barriers (not yet removed or resolved since their identification in 2001-03) and of new barriers emerging in recent years as a result of changes in business needs, operational processes and legislative measures.

The 12 “EPTF barriers” and the related proposals for their removal have been carefully calibrated among participating members, as a realistic and pragmatic trade-off between urgency and complexity, seeking to identify areas where the most significant benefits could be reasonably achieved with a relatively manageable amount of effort over the next 18-24 months. The most urgent priorities cover a broad range of aspects related to legal certainty, the inefficiency of tax collection procedures, the complexity and fragmentation of corporate actions processing, the inconsistent application of asset segregation rules, the lack of harmonisation in registration and identification rules and processes, and the complexity of post-trade reporting structures. For the T2S community, the most important priorities will be the removal of barriers in the area of corporate actions processing, shareholder registration and tax processing.

Following publication by the Commission of its “CMU Action Plan” at the end of 2017, which will hopefully include many of the EPTF’s recommendations, we should confidently expect to have a clear set of practical actions and workstreams for the removal of many significant impediments to an efficient and flexible single market for financial services in Europe.

Given its position at the heart of the securities services industry, the T2S project will form an excellent basis for further integration action in the EU financial markets. The sense of urgency and determination that has been shown to break through the complexities of development, testing and migration should continue to be demonstrated, with no hesitation because of too many conflicting interests, in order to rapidly remove the many remaining specificities and local impediments. A pragmatic and operationally focused approach will again be the critical success factor: more legislation or the creation of new EU institutions cannot in themselves deliver jobs and growth!


We would like to thank Marcello for the engaging interview and we look forward to discovering what T2S will bring after the final migration wave in September!