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Taking the Direct Route to T2S: the Industry View

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Taking the Direct Route to T2S: the Industry View Taking the Direct Route to T2S: the industry view Taking the Direct Route to T2S: the industry view 421 Introduction Isab e Head of CleClC earing and Settlemenentnt EMEA, SWIFT W FTT AS THE 22 JUNE 2015 DEADLINE LOOMS FOR THE FIRST WAVE OF MIGRATION TO THE EUROPEAN CENTRAL BANK’S (ECB’S) TARGET2-SECURITIES (T2S) SETTLEMENT PLATFORM, ACTIVITY AMONG MARKET PARTICIPANTS THAT HAVE CHOSEN TO DIRECTLY CONNECT TO THE PLATFORM IS INTENSIFYING. TOGETHER WITH THE CENTRAL SECURITIES DEPOSITORIES REGULATION (CSDR), T2S WILL TRANSFORM THE EUROPEAN POST-TRADE LANDSCAPE AND AFFECTS EVERY PARTICIPANT IN THE POST-TRADE SPACE. COMPETITION AT THE CSD AND CUSTODIAN LEVELS WILL BE STRENGTHENED AND GREATER EFFICIENCIES WILL BE INTRODUCED IN EUROPE. T2S will provide delivery versus payment for securities against central bank money. CSDs will maintain their relationships with intermediaries, investors and issuers, as well as their asset servicing functions (such as the management of corporate actions). T2S will become a key component of the European market infrastructure and is designed to address the costly fragmentation of securities settlement market infrastructure. Put simply, the core intention of T2S is to enable effi cient and integrated securities settlement in Europe. There are two options for connecting to T2S: direct or indirect. Those institutions that choose to become directly connected participants (DCPs) will be able to send instructions directly to T2S. Through individual contractual relationships DCPs have with their CSDs, each CSD can defi ne additional conditions under which they will accept a participant to become a DCP for each part of the service they offer. CSDs will grant access rights to the DCP specifying exactly what the participant is permitted to do on T2S. Indirectly connected participants (ICPs) will send their settlement messages to a CSD or a DCP, which will be responsible for managing the connectivity with T2S. Becoming a DCP requires high levels of investment and work for the institutions that have chosen this path; business models are being reviewed and networks optimised. However, the anticipated benefi ts and opportunities are substantial. Settlement operations will be rationalised and standardised across Europe, domestic markets will be opened up and there is hope that settlement costs will fall. DCPs not only have to ensure their internal processes are adapted for T2S, but they also must ensure that their clients – the ICPs – are prepared for T2S. Many DCPs have chosen to shield their clients as much as possible from the impact of T2S, but there are still changes and adaptations that ICPs must make in order to operate in the T2S landscape. The focus of solutions for ICPs is on minimum adaptation and smooth transitions to T2S. 2 Taking the Direct Route to T2S: the industry view Transforming European settlement To be or not to be a DCP Migration to T2S will be phased, with the fi rst wave For those institutions that have opted to become DCPs, the scheduled for 22 June 2015 and the fourth and fi nal choice was compelling. wave set for 6 February 2017. The objective of a phased migration is to enable a smooth and successful transition to the usage of the T2S services for the CSDs, central banks and their communities. In the lead-up to T2S, a large number of operational issues are being tackled by all market stakeholders. Some institutions have adopted a ‘wait and see’ approach to T2S, preferring to assess their response to the initiative once it is under way. On the other hand, not everyone is waiting as evidenced by the fi nancial institutions and market infrastructures BY BEING A DCP WE CAN that have unveiled their strategies to take full advantage of the RATIONALISE, SENDING OUT ALL OUR opportunities within T2S. “ INSTRUCTIONS FOR SETTLEMENT The cost of direct participation is not insubstantial but for those TO THE ONE PLACE. WHILE IT IS institutions with large volumes, the return on investment is TRUE WE WILL HAVE TO MAINTAIN expected to be worthwhile. An alternative for other institutions with cash accounts in TARGET2 will be a similar arrangement CONNECTIVITY WITH EACH CSD in T2S, but with a slimmer connection and processing left to FOR ASSET SERVICING, WE CAN another organisation, such as the larger custodians and CSDs. NEVERTHELESS RATIONALISE A GREAT A technical group has been set up within the T2S governance DEAL AND IMPLEMENT A DIFFERENT structure called the Directly Connected Parties Group (DCPG). ORGANISATIONAL APPROACH. Its aim is to track and monitor the resolution of general concerns ” Dario Locatelli, BNP Paribas Securities Services that are of importance for DCPs. The group comprises representatives of DCPs, CSDs, central banks and the T2S Programme Offi ce. It reports to the steering bodies (T2S Board, CSD Steering Group) and continues the work of the informal Hugh Palmer, Product Manager, Financial Institutions & Brokers gathering of DCPs in the DCP Forum. The DCP Forum is at Societe Generale Securities Services (SGSS) says the an informal group of entities that are interested in becoming decision to become a DCP was strategic and technical; strategic DCPs. Established in February 2013; it is focused on dialogue because a growing number of CSDs are joining the T2S platform with CSDs on topics specifi cally relevant to DCPs. By working and technical because the advantage of being a DCP will be in collaboratively the Group hopes it can help to achieve the the ability to amortise the investment in the T2S technology. “We maximum level of standardisation across the T2S CSDs, thus will develop only one infrastructure that will connect us to all T2S increasing the effi ciency of T2S implementation for the market markets. This is a signifi cant improvement on the situation today, as a whole. where we have to connect to CSDs in a different manner market by market.” Citi was one of the founders of the DCP Forum, which Keith Berrett, Director at Citi describes as “a group that enables Direct connectivity underpins Citi’s existing Direct Custody and market participants to evaluate shared areas of concern and Clearing Services and the picture will be the same under T2S. speak collectively to the market infrastructures about them.” Says Berrett: “Only by being directly connected to the platform He points out that it is better to present a common view on how can we offer our clients fi rst-hand information, the sharpest migration should work in Italy, for example, as a group of 13 deadlines and the most up to date information possible.” The institutions, rather than as 13 individual institutions. Once best bank will be a direct participant in T2S in the 14 markets in practice is established, it can then be proposed across the other which it already offers DCC services and will add Denmark and T2S markets. “A consistency of view and strength of opinion in Finland. This will extend the bank’s direct coverage to more than one market should in turn assist across all of the markets. It was 95% of its T2S volumes. always the intent of the ECB that market participants should play a role in how T2S is developed,” he says. Taking the Direct Route to T2S: the industry view 423 T2S has the potential to “really upset the traditional global custody value chain”, says Tom Casteleyn, Managing Director at BNY Mellon. As participants choose to connect to market infrastructures directly, T2S will generate more competition from sub-custodians and CSDs. The bank is direct in the Netherlands and Germany and will continue to be so under T2S. It plans to also be direct in other markets such as France and Belgium (in order to cover the ESES markets), Italy and potentially Spain as that market reforms. EUROCCP ALWAYS OPTS TO BE “A DIRECT PARTICIPANT IN CSDS AND TO USE CENTRAL BANK ACCOUNTS, WHICH WE BELIEVE INCREASES THE ROBUSTNESS OF OUR OPERATIONS. BEING A DCP WILL BRING SIMPLIFICATION AND HARMONISATION, MAKING OUR LIVES MUCH SIMPLER. ” T2S WILL ENABLE US TO BE MORE Albert-Jan Huizing, EuroCCP “ COMPETITIVE IN THE EUROPEAN CUSTODY SPACE; BY BEING A DIRECT PARTICIPANT, BNY MELLON WILL HAVE Similar thinking was behind LCH.Clearnet’s decision to become BETTER ACCESS TO MARKETS AND BE a DCP. Says Anne Mairesse, Director Market Infrastructure ABLE TO OFFER BETTER DEADLINES. Repos and Exchanges, Head of Brussels Branch. WE ALSO WILL BE ABLE TO MORE QUICKLY REACT TO ISSUES THAT MIGHT OCCUR WITH A TRANSACTION. THERE ALSO WILL BE LIQUIDITY BENEFITS AS WE WILL BE USING A SINGLE CASH ACCOUNT FOR ALL MARKETS IN WHICH WE ARE DIRECT, ENABLING US TO BETTER MANAGE LIQUIDITY AS A GLOBAL CUSTODIAN. ” Tom Casteleyn, BNY Mellon BY BEING A DCP, WE WILL BE CLOSE “TO THE SETTLEMENT ENGINE, WHICH The ability to continue to offer clients “the best possible IS CONSISTENT WITH OUR OBJECTIVE deadlines” was also a driving factor in Deutsche Bank’s decision AS A CCP TO MONITOR AND TO to become a DCP. In addition, says Mike Clarke, Director, Global REDUCE AS MUCH AS POSSIBLE Product Management, Deutsche Bank, early indications are that participation as a DCP may be more cost effective than as an THE OPERATIONAL RISKS. BEING ICP. For example, he says, Monte Titoli’s fees will be lower for AS CLOSE AS POSSIBLE TO THE DCPs than for ICPs. SETTLEMENT ENGINE AND RECEIVING For central counterparty EuroCCP, becoming a DCP is a “logical IN REAL TIME THE RESULTS OF OUR extension of our strategy to have the most robust settlement SETTLEMENT IS MORE APPROPRIATE arrangements wherever possible and economically viable”, says FROM A RISK VIEWPOINT. Albert-Jan Huizing, Chief Technology Offi cer, EuroCCP. ” Anne Mairesse, LCH.Clearnet 4 Taking the Direct Route to T2S: the industry view The DCP service is designed as a specifi c connectivity service The work of the DCP Forum provides an example of how for clients of CSDs and national central banks to access all complex the changes required by T2S will be for these eligible securities via a single technical channel.
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