What is T2S?
T2S (TARGET2-Securities) is a European securities settlement engine which offers centralised delivery-versus-payment (DvP) settlement in central bank money across all European securities markets. T2S has removed barriers and eliminated differences between domestic and cross-border settlement by offering a single market infrastructure solution.
After market consultations and a decision by the ECB’s Governing Council, the T2S project was launched in 2008 and the platform became operational on 22 June 2015. The T2S Framework Agreement, negotiated between central securities depositories (CSDs) and the Eurosystem, has been signed by over 20 CSDs, which will migrate to the T2S platform in five waves between June 2015 and September 2017. T2S itself is not a CSD; it is a platform which enables CSDs to increase their competitiveness.
T2S also enables non-euro area central banks to connect to T2S with their currencies. The T2S platform allows DvP settlement in central bank money in any of the available currencies. For the time being, Denmark is the only non-euro area country which will make its currency available for settlement on T2S (scheduled for 2018).
The fundamental objective of the T2S project is to integrate and harmonise the highly fragmented securities settlement infrastructure in Europe. It aims to reduce the costs of cross-border securities settlement and increase competition and choice among providers of post-trading services in Europe. It is therefore a critical step forward in the creation of a true single market for financial services in the EU.
The development and operation of T2S was assigned to four Eurosystem central banks – those of France, Germany, Italy and Spain. The project is coordinated by the ECB and run on a cost-recovery basis. The IT platform itself is owned and operated by the Eurosystem to ensure it is resilient and stable. But what makes the Eurosystem best suited to run T2S?
- Settlement in central bank money is a very important feature that eliminates settlement risk – this can only be offered by central banks
- As a supranational organisation, the Eurosystem is neutral towards all EU countries and stakeholders
- The Eurosystem has no economic interest and only works towards full cost recovery
- The Eurosystem has experience in successfully designing and implementing Europe-wide financial infrastructures, such as TARGET and TARGET2
All relevant stakeholders affected by the project are closely involved in the governance of T2S. The Market Infrastructure Board is the main body tasked by the ECB’s Governing Council with the management of the T2S project and the relationship with market stakeholders.
Objectives and benefits
As one of the largest infrastructure projects launched by the Eurosystem to date, T2S brings substantial benefits to the European post-trade industry.
- Cost-reduction: One of the objectives of T2S is to reduce the cost of securities settlement in Europe, in particular for transactions across EU countries, which can be ten times more expensive than domestic transactions.
- Deepening market integration: The T2S settlement engine also brings us a step closer to a single market for financial services and deeper financial integration in Europe. Furthermore, T2S has harmonised post-trade practices across Europe.
- Improving collateral management: The platform also helps banks optimise their collateral and liquidity management by creating a single pool, essentially ensuring that collateral is not blocked in local markets but can quickly be moved to where it is needed.
As a result of reduced settlement costs, increased competition and greater harmonisation, T2S is expected to have a positive impact on European economic growth. The lower costs of settlement can be passed on to investors. By making it easier and less costly to access securities in other EU countries, investors can now hold more diversified bond and equity portfolios. In addition, issuers have access to a more diversified investor base.
The positive impact of T2S does not end here. The T2S platform may also increase financial stability in the long run. In particular, it will reduce the risks that still affect the settlement of cross-border transactions. With its robust business continuity solution and settlement in central bank money, it helps decrease counterparty and settlement agent risk. By fostering greater efficiency and integration of European financial markets, T2S may lead to greater diversification and sharing of risks, adding to the stability of the whole system.
Due to the “lean T2S” concept, which facilitates post-trade activities, banks will be able to streamline their back offices and thus reduce costs. As T2S separates the settlement infrastructure from the services offered by central securities depositories, competition in the provision of these services has increased, and will continue to increase, to the benefit of customers across Europe.
How does T2S work?
T2S offers settlement of securities and cash in central bank money – a service that is not readily available elsewhere. Securities accounts and cash accounts are integrated, making settlement fast, highly efficient and low risk. T2S accommodates market participants’ securities accounts, held at one or more central securities depositories (CSDs), and their dedicated central bank cash accounts. CSDs keep their clients’ positions in T2S, each securities account is attributable to a single CSD and each cash account is assigned to a single central bank. Dedicated cash accounts are linked to market participants’ main cash accounts in TARGET2 or another non-euro real-time gross settlement account. The use of an “integrated model” allows T2S to connect any securities account at any participating CSD with any cash account at any participating central bank. Settlement instructions are matched by T2S and DvP settlement is carried out in real time.
T2S is a state-of-the-art platform that offers a set of advanced, highly sophisticated technical features, including high-tech optimisation algorithms to enhance settlement efficiency and advanced auto-collateralisation mechanisms.
T2S in perspective
Historically, financial market infrastructures in Europe were created to meet the requirements of national financial markets. In most cases, there were one or two dominant players at each stage of the value chain: typically one stock exchange for trading, one central counterparty for clearing and at least one central securities depository for settlement. Furthermore, these national infrastructures were primarily designed to manage securities at the national level. Securities settlement across Europe thus remained costly and cumbersome.
Despite the introduction of the euro over a decade ago, the provision of post-trading services (i.e. clearing and settlement) remained heavily fragmented along national lines. This situation was clearly not optimal for a single currency area or for the EU, as it encouraged each country’s financial market to remain domestically oriented. Investors continued to invest mostly in domestic securities and, as a result, the euro area financial market could not fully benefit from the risk diversification and competition benefits that arise from having a single currency. These barriers provoked a considerable competitive disadvantage for European capital markets and were identified in a report by the Giovannini Group.
EU authorities have launched various initiatives to remove barriers to competition between national markets. The most important initiatives from the European Commission are the Markets in Financial Instruments Directive (MiFID), the European Market Infrastructure Regulation (EMIR) and the Central Securities Depositories Regulation (CSDR). T2S, as a pan-European platform, aims to complement these existing initiatives by boosting competition, increasing price transparency and harmonising practices across Europe