Northern Trust Wins Mandates From T2S Strategy

Terry Flanagan

Northern Trust, the US asset manager and servicer, has won mandates due to its preparations for Target2-Securities, which aims to harmonize securities settlement in Europe.

T2S aims to end fragmentation in Eurozone securities settlement by providing a single IT platform to settle transactions in central bank funds across borders, central securities depositaries and currencies. The service will be offered at the same price for all participating CSDs so there is no difference between domestic and cross-border transactions.

Justin Chapman, global head of the industry management group at Northern Trust told Markets Media: “In the last six months a number of mandate wins have been partly attributed to our T2S strategy. Our clients are under huge pressure due to new regulations such as Emir and the need to clear over-the-counter derivatives so T2S is a huge positive for client engagement.”

This week Northern Trust said it has chosen Deutsche Bank and Euroclear to support its T2S strategy. Northern Trust will directly connect to a number of European markets via Euroclear while Deutsche Bank will service assets held in Northern Trust’s accounts directly at Euroclear’s Investor CSD.

Chapman said Northern Trust self-clears but was not present in many European countries.

“T2S ticked all the boxes in terms of access to central bank cash, liquidity and scale,” he added. “We did not have any legacy infrastructure so we were able to move a little bit quicker than some of our rivals.”

T2S allows auto collateralization where the European Central Bank can anticipate funds needed for settlement and allow netting between national central bank balances e.g a long position in Germany and a short position in France.

Northern Trust started planning its T2S initiative in 2012 and performed market research of all the service providers and sub-custodians. Chapman said Northern Trust is currently testing its platform and expects to participate in the second wave of T2S which launches in 2016.

More than 20 European CSDs have joined T2S covering 21 European markets, so the project will cover almost all securities currently settled in the euro area and lead to significantly lower costs. CSDs will connect to T2S in four waves between June 2015, when the project goes live, and February 2017.

Northern Trust expects to begin rolling out T2S-related products next year. Chapman said there will be a phased migration and the full market impact of T2S will not be felt until 2018.

“T2S is a huge investment and part of our due diligence included looking at providers who will support us in the long-term,” he added. “After 2018 we expect the market to be dominated by three or four high-performing pan-European CSDs while the rest will be challenged.”

Market participants can connect to T2S either as a directly connected participant or an indirectly connected participant through a CSD or national central bank. A DCP has the advantage of sending and receiving instructions, queries and reports directly to T2S but needs to meet the technical requirements and pass the authorization tests set by the CSDs or their national central bank.

A white paper from Swift, the payments and messaging service, said T2S will transform and affect every participant in the European post-trade landscape

Isabelle Olivier, head of clearing and settlement Emea at Swift, said in a statement: “As a large harmonisation project, T2S does not come without challenges for market participants. Many of the organisations that have chosen to become DCPs have done so in an environment of competing industry and regulatory initiatives.”

As well as changing their own procedures must ensure that their clients are prepared for T2S.

“When T2S was first mooted in 2006, the main focus was on savings and cost benefits. Now with the platform about to be launched, Swift identifies that there is a realisation that T2S will deliver many benefits to users beyond cost savings,” added the research.

Featured image via Northern Trust

Related articles

  1. CEDX is planning to expand its range of products in 2023, subject to regulatory approvals.

  2. The CFTC regulated derivatives market and clearer was not included in FTX's bankruptcy filing.

  3. Schroders cleared NDF trades across a Asian and Latam currency pairs via Citi.

  4. The derivatives venue owned by FTX wanted to offer products that were not fully collateralized.

  5. Trading Europe From ‘Across the Pond’

    Cboe acquired EuroCCP on 1 July 2020.