T2S: ready to catch the first wave?
October 31, 2014

Following Europe's wholesale switch of settlement cycles in early October, it is hoped that the smooth transition to T+2 will be mirrored when it comes to T2S. With the first wave of T2S implementation looming, the market is turning its attention to the practicalities and technicalities, while welcoming a world of increased competition and, hopefully, lower settlement costs.

In this article, we present a recap on the T2S project and explain the impact it will have. Drawing on a BNP Paribas breakfast briefing, we highlight some of the key technicalities in each of Greece, Italy and Switzerland.

Background

TARGET 2 Securities (T2S) will provide a single platform for securities settlement in central bank money in Europe, harmonizing the way in which securities transactions are completed, easing liquidity requirements and contributing to a smoother and more robust European financial system.

The T2S platform is to be rolled out across Europe in ‘waves', the first of which is due in June 2015 and will cover settlements in Greece, Italy, Malta, Romania and Switzerland. Three further waves are scheduled, through to February 2017.

Since its conception in 2006, T2S was seen as a revolutionary concept – with private-sector central securities depositories (CSDs) set to outsource the running of their clients' securities accounts to a platform run by the Eurosystem. T2S will provide a single, borderless pool of securities, as well as a core, neutral, state-of-the art settlement process. Market participants will be able to access these assets through the national CSDs.

How big a change will this be?

As T2S is phased in across much of Europe, it is expected to push down settlement costs, through driving up competition. Italian CSD Monte Titoli SpA, part of London Stock Exchange Group, has announced its pricing policy: a slight decrease in settlement fees from wave 2 in March 2016. Monte Titoli's general manager, Mauro Dognini, tells us: "We are absorbing the T2S investment cost, as we recognize that we will face increasing competition from other CSDs and from custodians too. We also anticipate that our business of serving many Italian banks will diversify as our remit expands from domestic securities to the entire T2S pool."

We will see new product offerings. The new competitive environment is likely to drive product development among the CSDs, as they seek out new sources of revenue. The London Stock Exchange Group has established GlobeSettle in Luxembourg. For its first client, JP Morgan's collateral management business, it supports operations in central bank money for 22 hours each day. T2S itself adds new features: one of the most significant is ‘auto-collaterization' -- providing the option of intraday credit secured by the buyer's other securities, thereby minimizing the use of cash.

Settlement practices will change. While some market-specific practices will remain, being accommodated by T2S, a degree of harmonization is underway as markets plan for their transition.

T2S will operate a settlement day schedule which differs from the current schedule of the European CSDs. On the day before intended settlement date, there will be a night-time settlement (comprising two batch cycles) and then real-time settlement through to 4pm CET for delivery-versus-payment trades and on to 6pm for free-of-payment transfers.

Pre-matching obligations need to be given particular attention, because T2S introduces new mandatory information requirements. It also introduces non-mandatory 'additional' and 'optional' fields.

Market-specific technicalities

BNP Paribas Securities Services held a client breakfast briefing in London on October 30. Alan Cameron, head of international bank and broker relationships, welcomed an audience of some 60 operations directors and managers to a session which provided a snapshot of the three major markets set to migrate to T2S in June -- Greece, Italy and Switzerland. It highlighted specific issues in these markets, whether the markets are ready and some of the key local complexities which will remain after the migration.

James Woods, the company's head of clearing, settlement and custody services in Italy chaired a panel session which featured Kelly Kakanaki, business head for Greece, and Marco Citrini, head of clearing, settlement & custody for Switzerland. Representing Italy on the panel was Allessandro Zignani, commercial director of the London Stock Exchange Group's post-trade division. Below is a quick reference guide to the key points addressed.

 GREECEITALYSWITZERLAND
Specific issuesDuality: having two CSDs, with Hellenic Exchanges SA yet to commit to T2S, makes for a more burdensome transition.

Greek debt market volumes are low, having dropped significantly since the financial crisis, easing the transition for Bank of Greece.
Monte Titoli is replacing its current Express II system entirely.Volumes are not huge, but there is the complexity of a duality of sorts. Trades on the Swiss stock exchange are in the Swiss Franc and will settle outside T2S. Those in euros will settle within T2S.
Are the markets prepared?Bank of Greece was lagging but has stepped up to the plate in the past few months. Testing within the CSD is underway. The crucial test of readiness will come when we get to the ‘community testing' across all first-wave CSDs in March.Preparations are going to plan. A few open issues are being addressed.

A migration dress rehearsal weekend (for static data) is set for February 23 to 27.

Three settlement dress rehearsal weekends are scheduled during April and May.
SIX SIS has defined the specifications for T2S and is currently working on the technical implementation for the Swiss market.

Tests will commence at the end of February for SIS' participants to ensure their readiness.

The large Swiss banks seem to be prepared, while a few mid-sized and small banks are facing issues with the size of the required developments.
What local complexities will remain?There is disagreement over existing vs. second-layer pre-matching process, which needs to be resolved.

Hellenic Exchanges SA is still to decide whether to join T2S. It has committed to decide before the third wave, set for September 2016.
While the market has achieved a significant reduction in pre-matching by telephone (to less than 10 percent as a rule), MonteTitoli needs to sit down with all market participants to try to agree on second-layer, electronic matching.T2S allows settlement only by directly connected participants. Current Swiss practice allows a custodian's ‘assigned business partner' to settle. The affected counterparties need to find a workaround.




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Following Europe's wholesale switch of settlement cycles in early October, it is hoped that the smooth transition to T+2 will be mirrored when it comes to T2S. With the first wave of T2S implementation looming, the market is turning its attention to the practicalities and technicalities, while welcoming a world of increased competition and, hopefully, lower settlement costs.

In this article, we present a recap on the T2S project and explain the impact it will have. Drawing on a BNP Paribas breakfast briefing, we highlight some of the key technicalities in each of Greece, Italy and Switzerland.

Background

TARGET 2 Securities (T2S) will provide a single platform for securities settlement in central bank money in Europe, harmonizing the way in which securities transactions are completed, easing liquidity requirements and contributing to a smoother and more robust European financial system.

The T2S platform is to be rolled out across Europe in ‘waves', the first of which is due in June 2015 and will cover settlements in Greece, Italy, Malta, Romania and Switzerland. Three further waves are scheduled, through to February 2017.

Since its conception in 2006, T2S was seen as a revolutionary concept – with private-sector central securities depositories (CSDs) set to outsource the running of their clients' securities accounts to a platform run by the Eurosystem. T2S will provide a single, borderless pool of securities, as well as a core, neutral, state-of-the art settlement process. Market participants will be able to access these assets through the national CSDs.

How big a change will this be?

As T2S is phased in across much of Europe, it is expected to push down settlement costs, through driving up competition. Italian CSD Monte Titoli SpA, part of London Stock Exchange Group, has announced its pricing policy: a slight decrease in settlement fees from wave 2 in March 2016. Monte Titoli's general manager, Mauro Dognini, tells us: "We are absorbing the T2S investment cost, as we recognize that we will face increasing competition from other CSDs and from custodians too. We also anticipate that our business of serving many Italian banks will diversify as our remit expands from domestic securities to the entire T2S pool."

We will see new product offerings. The new competitive environment is likely to drive product development among the CSDs, as they seek out new sources of revenue. The London Stock Exchange Group has established GlobeSettle in Luxembourg. For its first client, JP Morgan's collateral management business, it supports operations in central bank money for 22 hours each day. T2S itself adds new features: one of the most significant is ‘auto-collaterization' -- providing the option of intraday credit secured by the buyer's other securities, thereby minimizing the use of cash.

Settlement practices will change. While some market-specific practices will remain, being accommodated by T2S, a degree of harmonization is underway as markets plan for their transition.

T2S will operate a settlement day schedule which differs from the current schedule of the European CSDs. On the day before intended settlement date, there will be a night-time settlement (comprising two batch cycles) and then real-time settlement through to 4pm CET for delivery-versus-payment trades and on to 6pm for free-of-payment transfers.

Pre-matching obligations need to be given particular attention, because T2S introduces new mandatory information requirements. It also introduces non-mandatory 'additional' and 'optional' fields.

Market-specific technicalities

BNP Paribas Securities Services held a client breakfast briefing in London on October 30. Alan Cameron, head of international bank and broker relationships, welcomed an audience of some 60 operations directors and managers to a session which provided a snapshot of the three major markets set to migrate to T2S in June -- Greece, Italy and Switzerland. It highlighted specific issues in these markets, whether the markets are ready and some of the key local complexities which will remain after the migration.

James Woods, the company's head of clearing, settlement and custody services in Italy chaired a panel session which featured Kelly Kakanaki, business head for Greece, and Marco Citrini, head of clearing, settlement & custody for Switzerland. Representing Italy on the panel was Allessandro Zignani, commercial director of the London Stock Exchange Group's post-trade division. Below is a quick reference guide to the key points addressed.

 GREECEITALYSWITZERLAND
Specific issuesDuality: having two CSDs, with Hellenic Exchanges SA yet to commit to T2S, makes for a more burdensome transition.

Greek debt market volumes are low, having dropped significantly since the financial crisis, easing the transition for Bank of Greece.
Monte Titoli is replacing its current Express II system entirely.Volumes are not huge, but there is the complexity of a duality of sorts. Trades on the Swiss stock exchange are in the Swiss Franc and will settle outside T2S. Those in euros will settle within T2S.
Are the markets prepared?Bank of Greece was lagging but has stepped up to the plate in the past few months. Testing within the CSD is underway. The crucial test of readiness will come when we get to the ‘community testing' across all first-wave CSDs in March.Preparations are going to plan. A few open issues are being addressed.

A migration dress rehearsal weekend (for static data) is set for February 23 to 27.

Three settlement dress rehearsal weekends are scheduled during April and May.
SIX SIS has defined the specifications for T2S and is currently working on the technical implementation for the Swiss market.

Tests will commence at the end of February for SIS' participants to ensure their readiness.

The large Swiss banks seem to be prepared, while a few mid-sized and small banks are facing issues with the size of the required developments.
What local complexities will remain?There is disagreement over existing vs. second-layer pre-matching process, which needs to be resolved.

Hellenic Exchanges SA is still to decide whether to join T2S. It has committed to decide before the third wave, set for September 2016.
While the market has achieved a significant reduction in pre-matching by telephone (to less than 10 percent as a rule), MonteTitoli needs to sit down with all market participants to try to agree on second-layer, electronic matching.T2S allows settlement only by directly connected participants. Current Swiss practice allows a custodian's ‘assigned business partner' to settle. The affected counterparties need to find a workaround.