T2S aims to reform the industry by providing a single pan-European platform for securities settlements in European Central Bank (ECB) money. The first wave will go live in just a couple of months, signalling the initial step to creating a fully integrated capital market without international borders.
Whilst the euro may have been introduced back in 1999, the single currency has not yet translated through to Europe’s post-trade landscape. The outcome is high fragmentation along national lines, resulting in a great deal of complexity and inefficiency in cross-border settlements. However, T2S should eradicate most of the previous problems of the post-trade arena, by reducing settlement times, costs and credit risks, and improving collateralisation processes.
An Area of Concern
In a recent study carried out by the International Capital Markets Association (ICMA) and GFT, industry players were asked about their readiness and attitudes towards T2S. Many respondents understood that the initiative would be a positive driving force in helping to create a heightened level of competition, and would help with regulatory demands relating to collateral management.
However, one area of concern identified amongst the respondents was repo trades, and more specifically, how these transactions will be recognised by T2S. The tracking of these trades is likely to be one area that causes additional problems and may ultimately require conversations further down the line to resolve.
In the survey, respondents were asked whether they believed T2S should be modified specifically for repo trades. Whilst there was not an overall consensus, the question has been raised since T2S does not recognise the ‘on’ and ‘off’ leg of a repo trade. Consequently, this will mean that the onus will lie with Central Securities Depositories (CSDs), International Central Securities Depositories (ICSDs) or other participants to recognise when the transaction is part of a repo trade, so that the individual transactions can be linked.
This has led some to believe that there is the need for further development in the processing of repo trades within T2S. One way of improving this area would be to track the beneficial owners of coupons/redemptions, ensuring that payments reach the owner on the specified payment date. The beneficial owner should also receive corporate action notifications, immediately removing any risk to them of not receiving their rights to elect.
In addition, T2S must be developed so that it has the functionality to act as a repository for the repo trade data. If this development was to be made, it should provide greater transparency to those parties seeing more information on trades. The tracking of repo transactions could also be improved substantially by the implementation of a common ‘repo ID’.
Referring back to the ‘on’ and ‘off’ leg of the trade, these two would then be linked, thus ensuring that all firms can track the closure of multi-leg trades. In addition to this, T2S needs to be developed to provide a central interest calculation facility, so to reduce the risk exceptions between parties on multi-leg trades at off-leg settlement, thereby reducing failed trades.
T2S is undeniably a project that represents a significant step towards greater European financial integration. However, it is vital to understand that this is just the first step of a longer process transforming Europe’s securities settlement market. Challenges will still remain, with one of the key areas being that of repo trades. Clarification as to how these trades will be performed by the platform is needed so that a truly single harmonised approach can be developed.
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