Preparation for T2S Adaption Reveals ‘Significant Gaps’

Implementation of the Target2-Securities (TS2) settlement platform by the European Central Bank (ECB), coupled with the impact of the central securities depository regulation (CSDR) proposed by the European Commission (EC), will require market participants to conduct a thorough review of their back office system capabilities, but a Celent?SWIFT report indicates “major discrepancies” in the readiness of individual firms.

Produced by Celent in conjunction with SWIFT, the report entitled
‘The European Post-Trade Ecosystem under T2S: Dealing with Complexity’
, is based on detailed interviews with major participants in the European post-trade environment and custodians. It finds that the post-trade providers most impacted by T2S – central securities depositories (CSDs) are the most advanced in their preparation. However, market participants that will be impacted to a lesser extent, such as banks and broker/dealers, are still navigating the complexity of TS2.

“We have found that while most market participants have a good high-level understanding of the T2S platform, there are some significant gaps in the industry’s T2S adaptation plan,” said Axel Pierron, the report’s author.

Although the long-term benefits of the T2S European securities settlement engine in improving the efficiency of the European capital markets are clear, the report considers the short-term challenges that banks, CSDs and custodians face and estimates that the level of investment required to adapt a back office to the T2S ecosystem will range from €7m for a market player that modifies its existing system using a communication hub plus adaptation layers to €27m for a player that decides to revamp its back office systems for both settlement and custody.

Much of IT the investment for T2S will be driven by communication complexity, the report finds. “Market participants will have to operate in an ecosystem that relies on disparate messaging formats, and where many local specificities remain. This situation not only generates additional cost but also raises some concerns about the operational risk incurred by market participants in case of communication failure and mismanagement,” it states.

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