Tuesday, 12 May 2015


TARGET2-Securities (T2S) is one of the largest infrastructure projects launched so far by the Eurosystem. It aims to provide a unique platform that facilitates centralized settlements, for transactions in Euros or other currencies. It tries to take advantage of synergies with other facilities of the Eurosystem, particularly with the payment system TARGET2.

T2S is addressed to Central Securities Depositories (CSDs), to which is given the possibility to use a common technical solution, for the implementation of the settlement of securities transactions. CSDs will retain their businesses and contractual relationships with its participants and will continue to provide custodial services and administration of securities (i.e corporate rights management) as well as other value added services.

By grouping securities accounts and cash on the same platform, T2S will offer an integrated service without borders and a highly advanced settlement to the functions.

A recent article by Philippe Ruault, responsible for Product clearing, settlement and custody, and Orla McTiernan, responsible for business development in liquidity solutions at BNP Paribas Securities Services explains the top six benefits of implementing T2S.

   1. Optimization of liquidity and guarantees (collateral)
As explained by experts of the organization, TS2 "Will centralize the settlement of all security transactions for a client in a cash account to the central bank of their choice," eliminating the need to maintain liquidity buffers and Guarantees in different European markets, resulting in optimization and cost savings.

   2. Effect of amplified compensation if customers share custodian
"By using a single custodian, participants will have the option to have trades netted-off with the shared liquidity pool that sits in the custodian’s omnibus account. The larger the custodian, and the bigger the asset pool comprised in the omnibus account, the greater the liquidity netting benefits", the authors notes. 

   3. Auto-collateralisation
The Auto-collateralisation refers to the process of settlement of a transaction, by the automatic provision of intraday credit by the central bank, to its counterpart secured with eligible securities.
T2S will be extended to all markets and will permit participants a feature, that until now was only available in some countries; also allowing the automatic replacement of a value used as collateral, for intraday credit by an eligible guarantee of the participant's account. If necessary, first used for the settlement of other operations. "The advantage is that this sophisticated automatic process, will minimize the need to maintain cash balances and improve the efficiency of the settlement process," refer Ruault and McTiernan.

   4. Optimization of intraday liquidity
No doubt the implementation of the T2S platform for clearing and settlement of international securities will be harmonized and in time will have a very positive impact on intraday liquidity needs of market participants. In addition, experts say that "If you add the benefits of utilising an agent bank to access T2S, – bringing an additional “cross customer” netting effect – intra-day liquidity requirements will be reduced to an absolute minimum."

  5. More options for bond issuance
The international bond market is also evolving, and in this sense, new rules such as CSDR (Central Securities Depositories Regulation) will establish a pro-competitive framework, in which T2S stands as the ideal platform for the international distribution of emissions in primary markets.

   6. Growing importance of international debt instruments
So far, the development of T2S has focused mainly on the settlement of domestic equities and fixed income. However, experts suggest that international debt instruments (such as Eurobonds) gain increasing weight on the platform, which will require new operational and regulatory changes that are already underway, such as those relating to clearing and collateralization of OTC derivatives.

The implementation of the T2S platform started in 2007, when the Governing Council of the European Central Bank (ECB), took into account the feasibility study conducted by the Eurosystem which concluded that T2S was a viable project. Since then the project has been evolving and is ready to be launched this June. Nevertheless, the T2S doesn’t end there, after its implementation a series of processes will take place known as Migration waves.

·         Migration wave 1 – 22 June 2015
·         Migration wave 2 – 28 March 2016
·         Migration wave 3 – 12 September 2016
·         Migration wave 4 – 6 February 2017
·         Contingency wave – May 2017 - Any CSD that could not go live in its foreseen migration wave will automatically be placed in the contingency wave. This plan has been defined to ensure that a CSD does not jeopardize the strict implementation plan as defined by the ECB.

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