New horizons
20 July 2022
Brian Bollen takes a look back at the history of TARGET2-Securities, and how the introduction of the T2/T2S Consolidation Project this coming November is set to change Europe’s financial landscape
Image: mopic/stock.adobe.com
There can be little doubt that TARGET2-Securities (T2S) has exceeded most original expectations in the improvement of operational matters in the EU’s financial markets since it was launched in 2015.
It has made the whole process following the purchase and sale of securities better, quicker and more efficient as the settlement of underlying trades has been integrated and harmonised.
For readers who may have been napping under the Catskill Mountains for 20 years, T2S is a settlement system that allows participating central securities depositories (CSDs) to offer delivery-versus-payment in central bank money across Europe. It settles in Euro and in Danish krone, allowing cross-border settlement with a single liquidity pool, optimising the use of liquidity for its users.
T2S revolutionised securities settlement in Europe by offering a solution to simplify cross-border settlement procedures and helped to ease the difficulties caused by different settlement practices among countries.
The revolution was so evolutionary that the phrase “the future is bright and full of potential” is a thought that sprang unbidden to mind when discussing the past, present and future of T2S with Ulrich Bindseil, director general of market infrastructure and payments at the European Central Bank (ECB).
“T2S has been a great catalyst for standardisation and harmonisation by replacing national legacy procedures, contributing to post-trade integration and the goals of the Capital Markets Union,” says Bindseil.
Human nature being what it is, hopes are now being raised ahead of the next stages of T2S’ evolution. Euroclear Bank and Euroclear Finland are both in the process of joining the project and Sweden has also expressed interest. Looking ahead to plans for continuing expansion of the Eurozone, conversations with Croatia and Bulgaria are in the pipeline.
“There are 22 countries using it now and those on board are seeing great harmonisation,” comments Pardeep Cassells, head of securities and claims product line at AccessFintech. “It has gone beyond what the market initially thought was possible. To have 50 per cent of CSDs on board feels like a great achievement, but ideally we want to see all European CSDs operating on the same playing field.
“Can the UK ever join? That is a tricky question. There is an argument that the UK should continue to align with the EU, but that very much depends on the political mindset. What we need to look at is addressing the bifurcated system we now have. I believe that T+1 — already implemented by India — will propel more CSDs to join.”
Corporate actions and tax regimes
“The biggest achievement of the deployment of T2S in the EU is the ability for custodians, or any market participant, to directly access EU infrastructure for the purposes of settlement using central bank rather than commercial bank money,” states Chris Rowland, head of custody product at State Street. “Both banks and CSDs have offered new variations on service to enable smoother access to market infrastructure.
Rowland adds: “There remain a number of challenges that T2S on its own has not yet solved, and which continue as a drag on the promised economic and harmonisation benefits of T2S, including the lack of harmonisation of corporate actions and tax processes across Europe. Further, the model of issuer and investor CSD has not truly evolved to the point where a market participant can have a single point of access to EU settlement infrastructure without multi location handoffs to market infrastructure at a country level which continue to sustain a lengthened chain of custody from investor to market.
“Looking forward, T2S will need to adapt to industry changes including the advent of tokenisation. Focus should continue on the ease of market access and the ability to have multi-market access through a single point of market access without multiple steps in the settlement chain, and the Eurosystem should continue to help encourage harmonisation of corporate actions and tax regimes across Europe to enable the social and economic benefit initially promised with T2S.”
The November go-live
Looking ahead to what we know is planned to happen, November 2022 will see the current T2/T2S Consolidation Project go-live. This will bring elements of T2 and T2S together, delivering further economies of scope and scale.
The ECB explains that the objective is to “meet changing market demands by replacing TARGET2 with a new real-time gross settlement (RTGS) system called T2 and optimising liquidity management across all TARGET Services”.
The ECB notes that while TARGET2 has been running smoothly for over a decade, ensuring safety and efficiency in European payments, payments have changed significantly in the meantime due to technological developments, regulatory requirements and changing consumer demands.
The new RTGS system will offer the market enhanced and modernised services. The messaging standard ISO 20022 will be used, which is also the case for T2S and TARGET Instant Payment Settlement (TIPS). The new system will also be able to facilitate payments in several currencies, if decided by the respective central bank.
The consolidated platform will feature a centralised tool that will allow participants to steer, manage and monitor central bank liquidity across all TARGET services. The tool will function via a main cash account that participants can open with a national central bank. This account will be linked to the participant’s dedicated cash accounts for the new RTGS system, T2S and TIPS.
The main cash account will also offer a dashboard for a centralised overview of liquidity positions and advanced liquidity management tools, meaning a higher level of automation and optimised use of liquidity. An important feature is that any liquidity held on dedicated cash accounts will be considered for minimum reserve purposes, without the need to transfer the balances back to the main cash account.
In addition, the Eurosystem will introduce a number of components that will be shared across all TARGET Services.
A harmonised interface — the Eurosystem single market infrastructure gateway — will make it easier for participants to access and use the Eurosystem’s services from a single entry point. This should help them optimise performance and deliver time savings.
The interface will support multi-vendor connectivity, allowing for participants to choose between different connectivity options and fostering competition among network service providers.
Common reference data will reduce the effort required to create and maintain multiple copies of reference data, and will centralise the management of user access rights. A common data warehouse will make it possible for participants to access historic information, while a common billing system will help the Eurosystem optimise its operational costs.
November 2022 will be the go-live of the new RTGS T2, the shared components and the centralised liquidity management tool. A large milestone in the project was reached early July when the biggest single software release for T2S, release 6.0, was launched successfully. It prepared the T2S platform for the new T2 system and the shared components.
“T2S is getting bigger,” says Bindseil, picking up the opening theme. “We have a growing community of participant CSDs, custodians and large banks. It drives integration of the post-trade market and brings efficiency.”
Perhaps unusually for a central bank system, T2S charges users for the privilege of using the service, and is run on a full 100 per cent cost recovery basis.
It has made the whole process following the purchase and sale of securities better, quicker and more efficient as the settlement of underlying trades has been integrated and harmonised.
For readers who may have been napping under the Catskill Mountains for 20 years, T2S is a settlement system that allows participating central securities depositories (CSDs) to offer delivery-versus-payment in central bank money across Europe. It settles in Euro and in Danish krone, allowing cross-border settlement with a single liquidity pool, optimising the use of liquidity for its users.
T2S revolutionised securities settlement in Europe by offering a solution to simplify cross-border settlement procedures and helped to ease the difficulties caused by different settlement practices among countries.
The revolution was so evolutionary that the phrase “the future is bright and full of potential” is a thought that sprang unbidden to mind when discussing the past, present and future of T2S with Ulrich Bindseil, director general of market infrastructure and payments at the European Central Bank (ECB).
“T2S has been a great catalyst for standardisation and harmonisation by replacing national legacy procedures, contributing to post-trade integration and the goals of the Capital Markets Union,” says Bindseil.
Human nature being what it is, hopes are now being raised ahead of the next stages of T2S’ evolution. Euroclear Bank and Euroclear Finland are both in the process of joining the project and Sweden has also expressed interest. Looking ahead to plans for continuing expansion of the Eurozone, conversations with Croatia and Bulgaria are in the pipeline.
“There are 22 countries using it now and those on board are seeing great harmonisation,” comments Pardeep Cassells, head of securities and claims product line at AccessFintech. “It has gone beyond what the market initially thought was possible. To have 50 per cent of CSDs on board feels like a great achievement, but ideally we want to see all European CSDs operating on the same playing field.
“Can the UK ever join? That is a tricky question. There is an argument that the UK should continue to align with the EU, but that very much depends on the political mindset. What we need to look at is addressing the bifurcated system we now have. I believe that T+1 — already implemented by India — will propel more CSDs to join.”
Corporate actions and tax regimes
“The biggest achievement of the deployment of T2S in the EU is the ability for custodians, or any market participant, to directly access EU infrastructure for the purposes of settlement using central bank rather than commercial bank money,” states Chris Rowland, head of custody product at State Street. “Both banks and CSDs have offered new variations on service to enable smoother access to market infrastructure.
Rowland adds: “There remain a number of challenges that T2S on its own has not yet solved, and which continue as a drag on the promised economic and harmonisation benefits of T2S, including the lack of harmonisation of corporate actions and tax processes across Europe. Further, the model of issuer and investor CSD has not truly evolved to the point where a market participant can have a single point of access to EU settlement infrastructure without multi location handoffs to market infrastructure at a country level which continue to sustain a lengthened chain of custody from investor to market.
“Looking forward, T2S will need to adapt to industry changes including the advent of tokenisation. Focus should continue on the ease of market access and the ability to have multi-market access through a single point of market access without multiple steps in the settlement chain, and the Eurosystem should continue to help encourage harmonisation of corporate actions and tax regimes across Europe to enable the social and economic benefit initially promised with T2S.”
The November go-live
Looking ahead to what we know is planned to happen, November 2022 will see the current T2/T2S Consolidation Project go-live. This will bring elements of T2 and T2S together, delivering further economies of scope and scale.
The ECB explains that the objective is to “meet changing market demands by replacing TARGET2 with a new real-time gross settlement (RTGS) system called T2 and optimising liquidity management across all TARGET Services”.
The ECB notes that while TARGET2 has been running smoothly for over a decade, ensuring safety and efficiency in European payments, payments have changed significantly in the meantime due to technological developments, regulatory requirements and changing consumer demands.
The new RTGS system will offer the market enhanced and modernised services. The messaging standard ISO 20022 will be used, which is also the case for T2S and TARGET Instant Payment Settlement (TIPS). The new system will also be able to facilitate payments in several currencies, if decided by the respective central bank.
The consolidated platform will feature a centralised tool that will allow participants to steer, manage and monitor central bank liquidity across all TARGET services. The tool will function via a main cash account that participants can open with a national central bank. This account will be linked to the participant’s dedicated cash accounts for the new RTGS system, T2S and TIPS.
The main cash account will also offer a dashboard for a centralised overview of liquidity positions and advanced liquidity management tools, meaning a higher level of automation and optimised use of liquidity. An important feature is that any liquidity held on dedicated cash accounts will be considered for minimum reserve purposes, without the need to transfer the balances back to the main cash account.
In addition, the Eurosystem will introduce a number of components that will be shared across all TARGET Services.
A harmonised interface — the Eurosystem single market infrastructure gateway — will make it easier for participants to access and use the Eurosystem’s services from a single entry point. This should help them optimise performance and deliver time savings.
The interface will support multi-vendor connectivity, allowing for participants to choose between different connectivity options and fostering competition among network service providers.
Common reference data will reduce the effort required to create and maintain multiple copies of reference data, and will centralise the management of user access rights. A common data warehouse will make it possible for participants to access historic information, while a common billing system will help the Eurosystem optimise its operational costs.
November 2022 will be the go-live of the new RTGS T2, the shared components and the centralised liquidity management tool. A large milestone in the project was reached early July when the biggest single software release for T2S, release 6.0, was launched successfully. It prepared the T2S platform for the new T2 system and the shared components.
“T2S is getting bigger,” says Bindseil, picking up the opening theme. “We have a growing community of participant CSDs, custodians and large banks. It drives integration of the post-trade market and brings efficiency.”
Perhaps unusually for a central bank system, T2S charges users for the privilege of using the service, and is run on a full 100 per cent cost recovery basis.
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