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T2S, CCP, CSD, SSS, LSEG … WTF? (#Sibos 15)

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After a great cappuccino from Franco, it’s off to the first session of the day which is a different one to my norm.  It’s T2S time!

Yes, I do talk about and have many links with the investment and post-trade community thanks to my work on MiFID and EMIR, but I just don’t blog about it too much as it gets a bit technical.

But T2S or TARGET2 for Securities is important as it’s a key backbone for European trading, and also the discussion that will launch the Financial Services Club Nordic on 24th October in Stockholm.

So what is T2S?

Well, the ECB has kindly given us a cartoon to explain it:

All clear?

Oh, some of you cannot watch the video?  Well, here’s a simple overview.

T2S is Europe’s new engine for securities settlement in central bank money. It will change the
architecture of Europe’s securities settlement landscape and offer CSDs (Central Securities Depositories) a centralised service for the settlement of securities transactions.

The service works on a low cost basis, irrespective of whether transactions are domestic or cross-border, and is not just for European players but anyone trading with links to Europe.  This  means that CSDs in T2S will be the new gateway to Europe’s financial market for non-European players.

  • How can new markets prepare and benefit from T2S?
  • What advantages are envisaged for non-European issuers and investors?
  • How will T2S help to make Europe a better place to invest in?

To find out, SIBOS gathered a great panel of speakers:

ably chaired by Marc Bayle, Principal Adviser, European Central Bank.

The panel began with a discussion of collateral management, a big challenge in this new world
of lower risk and greater transparency. 

At the CAS-WG we’ve already discussed in depth the need for real-time collateral management and this was underscored in a discussion around the velocity of collateral movements that will force banks to create real-time collateralisation dashboards. 

What that means in plain English is that banks will only be able to trade if they can show they have enough cash to be good for it, but that means they will have to move their cash around rapidly to back their trading activities, or they won’t be able to trade as they used to.

The good news about T2S is that it means a common pool of collateral and view of where it’s
moving across the European landscape.  That is why this is a key change to European trading.

T2S is not just about collateral management for euro however, but is also important for non-euro management.  For example, Denmark sees that T2S will provide benefits in the long-term for all trading, and that adapting to support the program is therefore important.  The Danmarks Nationalbank sees this as not a euro project therefore, but as a trading project with Kristian saying that the aim of T2S is to improve trading, not just euro trading.

In other words T2S is a cross border, cross currency, cross CSD platform.

Right now, trading is fragmented across disparate and separated systems, and T2S is the key to harmonisation.  That is a core motivation for change as, harking back a decade ago, T2S is a core part of removing the Giovannini barriers to trading in Europe.  At their core, these barriers represent nationalistic protection of member states through demands for Corporate Actions and other legal and taxation issues to take place at the domestic rather than regional level.

T2S is the first step to overcoming these barriers in a constructive fashion by wiping out the
domestic protectionism almost overnight.  Not entirely, but certainly pan-European CSD capabilities is a key at the heart of T2S.

For issuers outside Europe, T2S is also good news because issuers can just place their securities
for non-EU and non-euro instruments through T2S.  That is why JPMorgan has signed a deal
with London Stock Exchange Group (LSEG) to manage all their collateralisation for trading in Europe, as a single settlement mechanism so to speak, sitting on top of T2S.  In order to achieve this, LSEG has created a new CSD in Luxembourg.

As the press release states:

This development is in response to the European Market Infrastructure Regulation (EMIR), which requires margin and default contributions posted to a central counterparty (CCP) to be held with a securities settlement system, where possible. CCPs will become subject to this requirement when they obtain authorization under EMIR. LSEG’s new CSD, subject to regulatory approval, is expected to be operational in the first half of 2014, in order to provide services to CCPs when they become authorized.

Similarly, BNY Mellon talk about T2S as a regulatory change, even though it has no mandate.  The reason for this is that as a custodian and SSS (Securities Settlement System), the only way that a bank like BNY Mellon can provide full service capabilities is to migrate and work with T2S. 

Equally, as Nadine emphasised, it is a very complex migration that cannot be done alone but needs partnership and collaboration, another key point that has developed this week.

Joel from Euroclear agreed, and talked about co-opetition being the new model for banking in Europe.  This will require far more openness, flexibility and collaboration, as well as speed and agility to operate in this new environment.  That is not just a need from T2S but also EMIR, and Euroclear has built their strategy on that basis.

This is because we should not forget that harmonisation is the objective here, with less fragmentation and more simplification of post-trade processing.  That is the vision, and that has to be held at the core of all bank activities as they migrate to T2S.

It will lead to consolidation as well, not just of the infrastructure but of the players in all aspects of clearing and settlement, and especially the intermediaries in the process.  Otherwise what’s the point of deploying pan-European services?

You can read a lot more about T2S on their website , which includes glossaries of terms used and more explanation of the background behind the project which is scheduled to be live sometime in 2015.

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Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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