Target2-Securities (T2S) was launched by the European Central Bank (ECB) in 2006, with the aim of creating a unified cross-country settlement landscape across Europe that would bring down cross-border settlement barriers between members states, improve market efficiency and competition, and reduce risk.
Who will gain the most from T2S?
T2S offers great opportunities for banks to reduce costs by rationalising the settlement process. Investment banks and other organisations with significant cross-market trade volumes will gain from liquidity and collateral savings, along with reduced back-office costs.
• Significantly lower settlement fees for domestic and cross-border transactions
• Possibility to access all securities from potentially one CSD (Central Securities Depository)
• Possibility to optimise collateral and liquidity management
• Reduced back-office costs by streamlining interfaces and centralising settlement activity
• New business opportunities and access to new markets for asset-servicing
T2S will pave the way
A settlement will be conducted through the T2S platform, harmonizing procedures, enhancing transparency and improving efficiency. Last year, Citi and Clearstream launched a joint T2S hub to enable banks and broker-dealers to access the pan-European securities settlement platform, with UBS as its first client. State Street has developed its own self-custody capabilities in certain T2S markets, however, the partnership with Deutsche Bank will allow it to process larger volumes in Europe. This is the third major deal for Deutsche Bank and its T2S platform, with RBC Investor and Treasury Services (RBC I&TS) and Northern Trust awarding the German bank T2S asset servicing mandates. The Deutsche Bank Settlement Hub is one of the only standalone platforms to directly connect with T2S, with other market infrastructures and banks opting for collaborative models.
- Contributing to competition and harmonisation of clearing and settlement in Europe
- Promoting a Single European Market for financial services
- Reducing the cost of capital for firms, thus contributing to economic growth
- Positively impacting financial stability by reducing settlement risks on cross-border transactions
- Offering easy portfolio diversification to investors
- Enabling issuers to easily reach European investors
The implementation of T2S will create more efficient trading and investment and should make Europe more attractive to issuers and investors. Additionally, issuers from non-T2S markets may look closer at opportunities provided by T2S to reach all markets in Europe at the same time.
Improving efficiency was a major objective of the design and creation of T2S. Currently, T2S has achieved interoperability between some CSDs but failed to provide full interoperability across all 20 markets. Only when this occurs will full efficiency be achieved, both operationally and in terms of the cost reduction to access T2S markets.
The benefit of scalability offered by T2S has started to be realised, with the number of daily trades settled increasing from 92,000 in January 2016 to a staggering 500,000 in February 2017. This trend will only continue as interoperability and efficiency increases, however, the industry has not yet seen the full benefit of T2S – 2018 transaction volumes will surely provide a clearer picture.
Until then, the jury is still out on T2S in terms of its ability to deliver real benefits to the market and to justify the investment from the ECB. In time, however, we believe the verdict will be “a game changer in transforming the Financial Services industry.
Pablo recently appeared on Finextra TV to discuss the role of collateral management solutions in relation to T2S and how this will affect post-trade securities in the future.