New publication looks at what follows after a successful year with T2S
To celebrate the first anniversary of T2S we are launching a new Special Series issue, A year with T2S – what’s next? Marc Bayle takes stock of where we are and looks ahead to consider the future direction of our common market infrastructure. In an interview, some of the main actors involved in the project share insights from T2S. And in a dedicated article you can find out what the market thinks about the future of real-time gross settlement and the consolidation of TARGET2 and T2S. To get a better understanding of the Eurosystem’s real-time gross settlement services, check out the new ECB explainer, What is TARGET2?. We hope you enjoy the read!
What is T2S?
TARGET2-Securities (T2S) is a major project launched by the Eurosystem to stimulate the integration of the securities post-trading infrastructure in Europe and is scheduled to go live by June 2015. T2S is a key driver for the post-trade harmonisation, and will contribute to achieve stronger financial integration and a true European single market.
T2S will provide a single harmonised venue where virtually all heavily traded securities circulating in Europe can be settled in central bank money. Settlement is done against euro and, as of 2018, also against Danish krone (or any other European currencies which will join).
Today, the settlement of securities transactions in Europe takes place on multiple platforms and therefore remains fragmented along national borders; this is why settlement across countries is very complicated and costly. In the new scenario introduced by T2S, conversely, it will make no difference – in technical, risk and cost terms – whether the end-investor and the security will be located in the same country or not. A single set of rules, standards and tariffs will be applied to all transactions, dramatically reducing the complexity of the current market infrastructure.
T2S will be a service offered by the Eurosystem to the European central securities depositories (CSDs), which are responsible for the settlement of securities transactions in the countries where they are located. The CSDs that decide to join T2S will move their securities accounts to T2S for settlement purposes; to do so, they have established a contractual relation with the Eurosystem and will establish a technical connection to the platform as of 2015.
T2S will accommodate on a single platform the securities accounts held by the CSDs on behalf of their customers as well as the dedicated cash accounts kept by national central banks for their participants. This so-called “integrated model” will allow settlement in delivery-versus-payment mode, i.e. the real-time, safe and final settlement of all transactions. Additionally, by settling in central bank money and offering a number of highly advanced facilities (such as auto-collateralisation, continuous optimisation, etc.), T2S will eliminate the financial exposure in cross-CSD settlement and will thus contribute to financial stability in Europe.
T2S will have a multicurrency dimension. It will extend beyond the euro area, enabling the interested non-euro area national central banks to allow settlement in their local currencies to take place in T2S.
An evident advantage brought about by T2S is that it will cut cross-border settlement costs in Europe to one of the lowest levels in the world, thus benefiting both CSDs and banks. Settling across European countries today is many times more expensive than settling within one country, because the process is fragmented over several platforms and requires the contribution of a chain of intermediaries. T2S will substantially reduce the current cross-border settlement fees by exploiting the economies of scale deriving from the concentration of settlement on a single platform.
However, the benefits of T2S will not be limited to bringing down the cross-border settlement fees. The introduction of T2S is also anticipated to lead to a more general reduction in the total costs for settlement through the rationalisation of systems on the part of both CSDs and banks. CSDs will be offered a state-of-the-art and highly robust settlement engine that will enable them to offer efficient settlement services in central bank money to their customers, whilst concentrating on developing their other services. Banks will in turn be able to streamline their back-office operations and also to optimise their liquidity and collateral management. For example, T2S will abolish the need for market participants to hold multiple buffers of collateral and liquidity when settling in several European markets, making it possible to have a single pool for the entirety of their European business. The common settlement time schedule and optimisation mechanisms set by T2S will ensure real-time cross-border settlement and the immediate re-use of collateral on a cross-border basis.
Further efficiency gains will emerge as a result of the market practices harmonisation triggered by T2S: there will be standardised communication protocols, a single settlement schedule and calendar, a single set of matching standards, and common standards for corporate actions processing.
By eliminating barriers to settlement and creating a level playing field across Europe, T2S will open up the market for competition and create new business opportunities for both CSDs and end users. CSDs will be able to access all participating markets and compete with each other. Banks will be able to centralise their settlement activity, and to have access to virtually all heavily traded securities circulating in Europe through a single CSD. The savings on settlement costs are expected to be passed on to end investors through increased competition between intermediaries.
From a broader perspective, T2S will be a driver for economic growth in general. By making it easier and less costly to access cross-border securities, investors will be able to hold, and benefit from, more diversified portfolios, and issuers will benefit from a more diversified investor base. European securities markets will become more integrated and therefore more liquid and more attractive. Therefore, the cost of capital will decrease for issuers. They will be able to invest more and thus generate more economic growth.
Finally, T2S will have a positive impact on financial stability, drastically reducing risks and allowing a better management of liquidity by banks. This is even more important in view of the recent financial crisis, which has highlighted the crucial role that market infrastructures will continue to play in preserving the stability, soundness and safety of the global system in the future.
T2S Benefits: much more than fee reductions
T2S is owned and operated by the Eurosystem, with strategic decisions being made by the Governing Council of the ECB. The day-to-day conduct of the project falls under the responsibility of the T2S Board, the T2S management body appointed by the Governing Council and supported by the T2S team of the ECB. The Governing Council has assigned the development and future operation of the platform to four national central banks of the Eurosystem, i.e. Deutsche Bundesbank, Banque de France, Banca d’Italia and Banco de España (so-called 4CB).
T2S is built by the Eurosystem to the benefit of all users and of Europe in general. All stakeholders have therefore been involved in the project’s governance from the very inception of the initiative back in 2006, and the Eurosystem is strongly committed to continuing this transparent and consensual approach in the future. In 2012, following the initial signing of the T2S Framework Agreement and the Currency Participation Agreement, the idea of a “T2S Community” became a reality. This community has grown over time and is still open for enlargement for any CSD or non-euro central bank wishing to join T2S. Along with the establishment of the T2S Community, a new governance structure came into force in July 2012 following the signing of the two contractual agreements.
The new governance structure, which remains based on the principles of wide market involvement and transparency, assigns greater influence to the contractual counterparties of the Eurosystem and will also apply after T2S begins live operations. It is divided into steering, advisory and working levels. The first comprises the T2S Board, responsible for the day-to-day management of the project and live operations, and the CSD Steering Group, which represents the “single voice” of the CSDs vis-à-vis the Eurosystem. At the advisory level, the T2S Advisory Group brings together all stakeholder categories, i.e. central banks, CSDs and the banking community as well as regulators, overseers and the industry. The National User Groups represent the formal link between national markets and the Advisory Group. At the working level, the ECB’s T2S Programme Office and the Technical Groups support the steering-level bodies.
Furthermore, the foundations of the platform’s design have been laid by market participants themselves through the elaboration of the User Requirements Document (URD) , which describes all the T2S features as required by CSDs and banks. The URD embodies the concept of T2S and provides the basis for the functional and technical development of the platform.
T2S will perform settlement of securities transactions and its primary users will be the CSDs. The CSDs will move their securities accounts to T2S for settlement purposes. However, they will remain the legal owners of these accounts and be responsible for customer relations. CSDs will continue to offer their services to banks and will be responsible for all business and legal relations with them. So far, 23 European CSDs have signed the T2S Framework Agreement (FA). The FA sets out the contractual rights and obligations of the Eurosystem and each contracting CSD, and covers the development and operation of T2S. It regulates the scope of the controlling powers of the CSDs relating to the outsourcing of their IT functions to the Eurosystem, as well as issues such as liability, protection of intellectual property rights and confidentiality.
As T2S will offer real-time settlement in central bank money, the participating national central banks will have to hold dedicated cash accounts in T2S for settlement purposes. All euro area central banks will join T2S, and Danmarks Nationalbank will bring the Danish krone to T2S as of 2018 following the signing of the signature of the Currency Participation Agreement (CPA). The CPA governs the relationship between the Eurosystem and non-euro area central banks that wish to make their currency available in T2S.
T2S remains open for other CSDs or central banks wishing to join at a later stage.
In autumn 2014 the platform is scheduled for testing with the participating CSDs. After completion of tests, T2S will become operational in June 2015. Following consultation with the market, it has been decided that the connection to T2S will be arranged by groups of CSDs, over a number of waves to ensure the gradualness and safety of the “migration” process. The migration plan – involving four migration waves over 21 months (see table below).
22 June 2015
28 March 2016
12 September 2016
6 February 2017
|Bank of Greece Securities Settlement System (BOGS)||Euroclear Belgium||Clearstream Banking (Germany)||Centrálny depozitár cenných papierov SR (CDCP) (Slovak Republic)|
|Depozitarul Central (Romania)||Euroclear France||KELER (Hungary)||Eesti Väärtpaberikeskus (Estonia)|
|Malta Stock Exchange||Euroclear Nederland||LuxCSD (Luxembourg)||Euroclear Finland|
|Monte Titoli (Italy)||Interbolsa (Portugal)||Oesterreichische Kontrollbank (Austria)||Iberclear (Spain)|
|SIX SIS (Switzerland)||National Bank of Belgium Securities Settlement Systems (NBB-SSS)||VP Lux (Luxembourg)||KDD - Centralna klirinško depotna družba (Slovenia)|
|VP Securities (Denmark)||Lietuvos centrinis vertybinių popierių depozitoriumas (Lithuania)|
The signings of the Framework Agreement by 22 CSDs and the Currency Participation Agreement by Danmarks Nationalbank in May/June 2012 were very important milestones for the T2S project. T2S remains open to new participants at all times, and central banks as well as CSDs may still sign the CPA or the FA at a later stage. However, CSDs will henceforth have to pay an entry fee.With these two contracts entering into force, a new governance structure came into place as of 1 July 2012
In May 2013, a newly established CSD signed the Framework Agreement, thus deciding to join T2S and bringing to 23 the number of CSDs that have committed to T2S.
The development of the core functions of T2S is now complete. Testing with the market will start in autumn 2014. T2S is set to start operations in June 2015. For further details, please refer to the Programme plan section of the website.
The Usage of the T2S logo is limited to the National Central Banks and Central Securities Depositories which have signed the T2S Framework Agreement and/or the T2S Currency Participation Agreement as well as the contracted service providers which have signed the T2S Licensing Agreement. Any misuse without conclusion of an Agreement with the License Holder will be considered as infringement and will bear legal consequences.