Countdown to T2S; Who Wins, Who Loses?

Q (gtnews): In brief, what are the origins of T2S and has the final version undergone any major revisions from what was originally envisaged?

A (Emily Cates):
T2S was set up in response to the European Central Bank’s (ECB) aim of overcoming the so-called ‘Giovannini barriers’, these being barriers relating to tax, legal and technical jurisdictions that have prevented efficient EU cross-border clearing and settlements.

T2S can be seen as the logical next step along a road which first started with the introduction of Target 2 for payments and central bank money. Target 2 has been in operation since November 2007.

Following on from T2 implementation, T2S followed quickly with a number of consultations and working groups involved in its development, with central securities depositories (CSDs), issuer central securities depositories ICSDs and market participants. The original go-live date for T2S was scheduled for 2013, which was then postponed. A further postponement followed in 2014, which means T2S is two years late in its implementation. However, considering the size and scale of the project, this delay is not unexpected.

Has progress been similar to the single euro payments area (SEPA), which involved deadlines put back and some countries being better prepared than others? Again referring to SEPA, has T2S attracted similar complaints – such as  the aim of the initiative being good, but the cost and complexity of preparing for it excessive?

No, the progress of T2S hasn’t had much in common with SEPA – the onus of the latter has been on individual countries making their own preparations and provisions for the harmonisation of payments across countries. This does not apply in the case of T2S, as it’s essentially a technological implementation within the financial industry that creates the foundation layer for books and records across the EU.

The number of consultation groups involved in the development of T2S have been more targeted towards ICSDs and CSDs as they will experience the greatest impact and therefore have had a large influence in the development of T2S.

Many within the industry believe the initiative is good. Although the cost of implementation to T2S might be high, this will be offset by the reduction in settlement costs.

In terms of complexity, some CSDs and ICSDs have developed their systems to have complexity; particularly in relation to repo and securities financing. However, T2S has deliberately decided to reduce this complexity, which may have an – as yet – unknown knock-on effect on the CSDs and ICSDs in relation to manufactured coupons and dividends

Could T2S be adopted by securities markets beyond Europe if successful?

It’s unlikely that T2S would be adopted by countries outside of Europe, as the platform is essentially owned by the European Central Bank (ECB). We may, however, see non-European countries adopt a similar platform to T2S.

So does everyone benefit from T2S, or will there be some losers as well as winners?

There will definitely be winners and losers. ICSDs stand to gain the most from T2S. Those ICSDs with multiple platforms operating across a number of countries will be able to take advantage of T2S. The likely losers will be those smaller CSDs, which previously only operated in local markets. They will find it increasingly difficult to compete against their larger counterparts.

T2S will mean that the services provided by CSDs and custodians will have to change as they tailor their services to accommodate the changes brought about by T2S. Some will be required to do more processing, while others will lose their business altogether or decide to consolidate with other CSDs.

Do you foresee a smooth transition to the new platform this June, or could there be ‘hiccups’?

The first wave of migration in June 2015 will be a very cautious affair. There are more significant and higher volume countries entering in the second wave in March 2016. When this takes place, we are more likely to see teething problems – should there be any.


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Dominic Mac