Congratulations Europe – the final T2S migration wave has been completed
On 18 September 2017 Iberclear Spain and the central securities depositories (CSDs) from Estonia, Latvia and Lithuania completed their first operational day on the TARGET2-Securities (T2S) platform. All CSDs that signed the contractual agreement have now migrated to T2S and are able to settle all their securities transactions in euro via the platform.
Having reached the end of the migration phase with the successful migration of the Spanish and Baltic markets, it is time for reflection. In this MIP OnLine article we assess the role of T2S and its impact on the creation of a single capital market in Europe. Jesús Benito, CEO of Iberclear, and Indars Ascuks, Associate Vice-President and Head of Baltic Markets at Nasdaq, share their views about opportunities ahead, the role of T2S in the merger of the Baltic CSDs, and experiences gained when preparing for T2S migration while participating in the reform of the Spanish market.
Challenges along the path to one of the largest settlement platforms in the world
The T2S project was officially launched by the ECB’s Governing Council following a positive market consultation in 2008. Not all phases of the project have been without their challenges; as in any other large project, there were twists and turns. In the past, Europe had an overwhelming number of national and divergent rules and procedures. Harmonising them had eluded the market for many years. Developing an integrated securities settlement platform, before we had a fully harmonised rulebook for post-trading, was said to be the wrong way to achieve our goal. But the development of T2S has shown that, if you provide the market with a concrete initiative, the various national market stakeholders will embrace harmonisation as they can see its potential benefits. Seven years later, the first CSDs migrated to the platform in June 2015, bringing 15% of the platform’s expected volume. Now, with the last CSDs on board and 100% of the volume achieved, an average of 550,000 transactions is expected to be settled daily.
What have we achieved so far?
What remains to be done?
- Austria – OeKB CSD
- Baltic CSDs (Estonia, Latvia, Lithuania)
- Belgium – National Bank of Belgium Securities Settlement Systems and Euroclear
- Denmark – VP Securities
- France – Euroclear
- Germany – Clearstream Banking
- Greece – Bank of Greece Securities Settlement System
- Hungary – KELER
- Italy – Monte Titoli
- Luxembourg – VP Lux and LuxCSD
- Malta – Malta Stock Exchange
- Netherlands – Euroclear
- Portugal – Interbolsa
- Romania – Depozitarul Central
- Slovakia – Centrálny depozitár cenných papierov SR
- Slovenia – Centralna klirinško depotna družba (KDD)
- Spain – Iberclear
- Switzerland – SIX SIS
* Almost all CSDs in Europe are participating in T2S. Only the Cyprus CSD, operated by the Cyprus Stock Exchange, and the Greek CSD, Hellenic Exchanges SA Holding, Clearing, Settlement and Registration (HELEX), have not signed the T2S Framework Agreement.
Before T2S went live, financial market infrastructures in Europe were primarily focused on domestic markets, providing post-trade services that were optimised within borders. However, across Europe the markets were highly fragmented and securities settlement was cumbersome and clearly not designed to benefit the single currency area. Risk diversification and the benefits of competition did not materialise, as investors faced non-harmonised processes, making cross-border investment slow and expensive. T2S, together with the adoption of the Central Securities Depositories Regulation (CSDR), triggered the momentum for substantial post-trade harmonisation. Technical and operational harmonisation was agreed and the full benefits of the new single settlement platform could be achieved. As acknowledged in the European Post-Trade Forum report (published by the European Commission on 23 August 2017), a number of the barriers identified by the Giovannini Group - a group of experts chaired by the European Commission focusing on obstacles to an efficient single European market for clearing and settlement of securities transactions- were eliminated with the introduction of T2S (as well as the T2S-compatible CSDR). Issues such as intraday finality, differences in settlement periods, operating hours, settlement deadlines and IT communication protocols are all covered by the combined rulebook of T2S and the CSDR, at least for the T2S-connected markets. Additional barriers that go beyond settlement, such as corporate action rules and procedures, have also been largely, if not totally, harmonised thanks to the momentum created by T2S. It can certainly be said that T2S has played a key role in creating a single market for settlement services in Europe.
T2S also benefits its users in several ways. As it is a single, pan-European platform for securities settlement in central bank money, cross-border and domestic settlement of securities is both efficient and safe in T2S. It is safe because the settlement takes place in central bank money, and it is efficient because securities and liquidity can be used where they are – assets held in the T2S market can be viewed as a single pool. Before the go-live of T2S, cross-border securities settlement was subject to certain risks – as it took place in commercial bank money – and slow and inefficient owing to the multitude of different national rules, procedures and time frames.
When we asked Indars Ascuks, Associate Vice-President and Head of Baltic Markets at Nasdaq, what opportunities he sees ahead thanks to the successful migration to T2S, he too mentioned more efficient cross-border settlement:
“The single settlement infrastructure of T2S is a driver of standardisation within Europe, including in the Baltic region. Nasdaq CSD provides Baltic customers with a centralised access point to T2S, enabling them to service all of their post-trade businesses via a safe access point. Thanks to its interconnectivity, T2S makes cross-border settlement easier and more efficient, ensuring more integrated and cost-effective securities trading and post-trade services. We believe these changes will create valuable synergies for market participants, as T2S enables Baltic assets to be brought into the European pool and also makes foreign securities more accessible to Baltic investors. This will lead to an optimised market infrastructure and new business opportunities, meaning more efficiency and fewer risks to investors.”
Jesús Benito, CEO of Iberclear, also focuses on more efficient cross-border settlement, as well as new business opportunities, when asked the same question:
“We foresee a great opportunity to develop the capabilities to offer our clients settlement and asset services for securities issued in other CSDs, now that T2S is at last a reality. Links with T2S CSDs – which before migrating were complicated – have suddenly become delivery versus payment links that are fully harmonised with domestic settlement procedures. We believe this is an opportunity that Iberclear has to take advantage of for the sake of its current clients.
We acknowledge that the service that we offer to our clients, as far as cross-border securities are concerned, cannot be limited to settlement services. Additionally, it is of utmost importance that Iberclear offers asset services to its clients in order to convince them to move their current portfolio from their current provider to Iberclear. We have already started working on this new project.
We will also have more resources to investigate new business opportunities, since in our opinion, EU CSDs have been focused on the T2S project for many years, and it is now time to turn our minds towards the new technologies that might completely change our industry in the coming years, just as they have in many other sectors.”
Echoing both Mr Ascuks and Mr Benito, other market players, such as Stephen Lomas from the Deutsche Bank and Marcello Topa from Citi, repeatedly stress that, in addition to the post-trade harmonisation, two of the key benefits of T2S are the collateral savings and liquidity optimisation: with the single pool of collateral and liquidity, which can be used in all T2S markets, banks no longer need to hold sufficient collateral buffers in all relevant markets. Short and long positions can be balanced out, generating substantial collateral and liquidity savings. In addition, the auto-collateralisation functionality in T2S provides users with a liquidity-saving feature, as the security that is settled can immediately be used to generate liquidity for the purchase. There is therefore no need to keep surplus liquidity.
The Baltic CSDs have merged into one CSD. We asked Indars Ascuks about the role of T2S in the merger:
“The three Baltic CSDs’ merger into one licensed legal entity – Nasdaq CSD SE – took effect from 18 September 2017. The change was triggered by a number of factors: new technology demands for the CSDs in Europe and globally, the regulatory requirements such as CSDR and reauthorisation of CSDs in Europe, as well as Nasdaq’s ambition to build a strong and unified market infrastructure in the region.
Nasdaq CSD is the first CSD in Europe to be licensed under the CSDR and has now joined the pan-European securities settlement platform TARGET2-Securities (T2S), powered by state-of-the-art technology, operated with service excellence and maximum efficiency.
This strategically important project has been carried out in very close cooperation with the European Central Bank and in trusting partnership with the three central banks in Estonia, Latvia and Lithuania, as well as in strong collaboration with the Baltic market participants, the regulators and other stakeholders.”
Even though we have reached the end of the migration waves, the T2S journey is not yet over. Other CSDs are welcome to join upon request. The multicurrency aspect of the project will also only become a reality when DKK migrates in October 2018. Currently, no other currencies are planning to migrate, but T2S is ready if other countries see the potential of being part of the single pan-European settlement platform. In addition, the Eurosystem, in close collaboration with the market stakeholders, is committed to continuing to pursue the remaining T2S harmonisation objectives within the wider context of the capital markets union.
As a follow-up to the final T2S migration wave, we will focus more on the actual outcome of implementing T2S by speaking with relevant market players and assessing the functioning of the market in the coming months.
In addition to preparing for the migration to the T2S platform, Iberclear also needed to prepare for the Spanish equities reform. We asked Jesús Benito what it was like preparing for both at the same time:
“Iberclear has worked hard over the past few years. In addition to the T2S project, we have had to cope with the Spanish equities reform. We designed a two-phase approach in order to minimise risks as much as possible. First, we tackled the equities reform. This phase of our plan was extremely complicated as we had to design the introduction of central counterparties, the elimination of the notorious references of registration and the switch of the finality moment from trading to settlement. We also introduced our new system – ARCO.
When designing ARCO we also took a clear and firm decision. We had to develop it in accordance with T2S principles and standards, not only for settlement but also for everything related to corporate actions. Obviously, this implied additional effort since implementing these standards, in particular those related to corporate actions, was a lot of work for the whole community. However, this did help us anticipate, to some extent, the work involved in migrating to T2S, which helped us cope with the second phase of our plan.
The second phase implied decoupling our fixed-income system (CADE) by migrating to ARCO at the same time as ARCO was connected to T2S. The real problem was that the second phase overlapped significantly with the first phase, both in terms of time and resources. We obviously employed additional staff but the key knowledge was in the heads of the same people that had to deal with both phases at the same time for a long period, and Iberclear has a small headcount compared with its T2S peers. You can imagine the extra effort that Iberclear had to invest in comparison with the other T2S CSDs, which “only” had to tackle the migration to T2S. Don’t forget that, in addition to the reform, we had to conduct business as usual and continue working on other, more minor projects, as well as preparing the documentation for requesting the CSD license in accordance with the CSDR. This documentation, which is very exhaustive and must be delivered to our supervisor (CNMV) before 30 September, has required a large investment of time from people that already had too many other things on their plates.
All in all, arriving at the final migration wave on time has been a great success, to be honest. 15 months ago, before summer 2016, many people in and outside Spain thought this was going to be impossible. I have to express my deepest gratitude for the incredible efforts and commitment shown by the Iberclear and BME staff, the cooperation and time dedicated by our clients, as well as the supportive attitude of Banco de España and CNMV. I personally feel very proud of the job done by the Spanish community. I’m writing this just a few days before our migration weekend. Despite the teething problems that we will face during the first few days, which are completely normal, I’m very confident our migration will be a success.”