T2S Leads to Settlement Efficiencies
Banks are increasingly using a single or few points of access to settle cash and securities in Europe in the year following the start of operations of Target2-Securities, the project to harmonize securities settlement in the region.
T2S began operating a year ago after being launched by the European Central Bank in 2008 to end fragmentation in securities settlement across the Eurozone. The single IT platform allows settlement in central bank money across borders, central securities depositories and currencies so there is no difference between domestic and cross-border transactions.
The cost of cross-border transactions could be as much as 10 times more expensive than domestic transactions. Through T2S a single set of rules and standards apply to all transactions which reduces the complexity of the market structure and aims to make European markets more efficient and attractive to investors.
Clearstream, Deutsche Börse’s central securities depository, commissioned Accenture to carry out a survey of international banks between March and April this year.
The report said: “We observe the emergence of a trend towards direct access at the infrastructure level: 90% of banks surveyed are opting for direct CSD access as a component of their strategy, with 40% expressing strategic interest, particularly in investor CSD-based approaches, which allow banks to access multiple T2S markets via a single CSD of their choice.”
Banks have several options to connect to T2S – the issuer CSD model allows access to each CSD individually in T2S; the investor CSD model allows connection to T2S via one or two CSDs or they can directly access T2S through an ICSD or a custodian.
“A plurality of access models are in discussion and implementation for T2S; however, there is an emerging trend towards approaches based on single or few points of access at the infrastructure level for both cash and securities,” added the survey. “A majority of institutions (60%) are in the process of adopting multiple access channels, reflecting a desire by participants to “hedge their bets” about which operating model becomes standard for accessing T2S.”
The benefits of T2S cited by survey respondents were liquidity management, followed by settlement processing, collateral management and network rationalization. The survey was sent to senior level participants from banks of all sizes based in Europe and aggregated results came from 20 firms.
Marc Robert-Nicoud, chief executive of Clearstream Holding, said in blog that it makes sense that more customers are choosing direct CSD access, which allows all settlement volume to go through a single Clearstream point of access. “This allows them access to the full functionality of the new T2S platform and the liquidity and collateral pooling advantages it entails,” he added.
Marc Bayle de Jessé, director general market infrastructure and payments at the European Central Bank, said in a special report by the ECB on T2S last month that the platform is operating smoothly and ready for the next wave of participants joining on 12 September.
The first wave of CSD migrations to T2S were between June and August last year and seven markets have joined the platform. Euroclear is due to join in September this year in the third wave, seven months later than originally planned. Clearstream is slated to migrate in February next year with the final migrations in September 2017.
Meike Ströter, deputy head of market infrastructure management division at the European Central Bank, said in the ECB special report on T2S last month that an average of nearly 100,000 transactions have been settled each day this year. Ströter said: “According to our projections, by the time the remaining 14 markets are connected to T2S, we expect to hit 550,000 transactions per day.”
However market participants have said T2S needs to attract more volumes in order to decrease per-unit costs and meet the full potential of the project to harmonize securities settlement in Europe.
Alan Cameron, head of relationship management, international banks and brokers at BNP Paribas Securities Services, said at conference in May: “T2S is a great leap forward in harmonization, security and capital efficiencies but needs to address some immediate issues to fulfil its potential.”
He suggested that volume could be added from five possible areas – the UK, Switzerland, Scandinavia, fund markets, or Eurobonds.
Fabrizio Palmisani, head of payment systems directorate at Banca d’Italia, said in the ECB report that auto-collateralisation, provided at no extra cost, has proven to be a very useful tool.
Palmisani said the 55 dedicated cash accounts opened at the Banca d’Italia show that financial operators have progressively reduced the amount of liquidity transferred from TARGET2, the Eurozone cash settlement system, to T2S from €19bn to €14bn per day between September 2015 and May 2016 even as total settlements have increased from €107bn to €132bn over the same period. Dedicated cash accounts allow banks to settle in central bank money using accounts opened in their own name at a T2S central bank.
“The efficiency gains were possible thanks to the enhanced use of auto-collateralisation, which increased from €5bn per day to €13bn per day,” added Palmisani.
Auto-collateralization allows the ECB to anticipate funds needed for settlement and allow netting between national central bank balances e.g a long position in Italy and a short position in another country.
More on T2S:
CEDX opened on 6 September, offering contracts on Cboe Europe single country and pan-European indices.
The MOU covers certain security-based swap dealers and participants.
Equity underwriting on European exchanges rose 70% in the first half.
The analysis is based on transactions publicly reported by 30 European APAs and venues.
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