1 14 Spotlights The DCP Group Corporate Actions: Compromising Harmonisation T2S Perspectives 1 Issue Country watch A View from the Ground: Greece 12 Migration watch Migration Challenges 14 THE WATCH LIST Keeping an Eye on What Matters in the Next Quarter T2S Perspectives Issue Markets and Securities Services
2 T2S Perspectives Issue Contents 2 INTRODUCTION 4 Spotlights The DCP Group Corporate Actions: Compromising Harmonisation 1 Country watch A View from the Ground: Greece 12 Migration watch Migration Challenges 14 THE WATCH LIST Keeping an Eye on What Matters in the Next Quarter 15 Abbreviations
3 2 T2S Perspectives Issue Introduction Welcome to T2S Perspectives Richard Scavetta T2S Program Director, Direct Custody and Clearing, Citi Welcome to the second issue of T2S Perspectives, the publication that brings you the latest developments on major topics and a local view, directly from our expert team in Athens, on its journey to launch. The industry is now entering a critical phase in the T2S project: that of testing and migration planning. Beginning in March 214 with the launch of Eurosystem Acceptance Testing (EAT), a wave of testing will spread across the market as participants seek the green light at each stage to migrate successfully. In this issue, we will explore the challenges that have to be met now and that will have to be met along the way, from noncompliance with Corporate Action (CA) standards by several major markets, to the impact of the migration schedule on business model considerations. In the meantime, we encourage you to let us know what you think at Key 214 milestones met 3 March: 13 institutions declared their binding intent to become Migration Wave (MW) 1 DCPs in T2S on the securities side, with 23 institutions as cash DCPs. 31 March: 4CB delivers T2S system for EAT. 1 July: Pilot testing began with the Bank of Greece Securities Settlement System (BOGS), Monte Titoli (MT) and SIX SIS, and a further six National Central Banks (NCBs). Upcoming 214/15 milestones 19 September 214: Deadline for MW2 binding declarations of intent for DCPs. 3 September 214: EAT will conclude. 1 October 214: T2S system will be delivered to the CSDs and NCBs for user testing. November 214: The final version of the Manual of Operational Procedures (MOP) will be submitted to the Governing Council, consisting of a detailed operational framework that defines the roles and responsibilities of all stakeholders in T2S live operations and the formal procedures that will need to be followed in standard and non-standard situations. 19 June 215: The MW1 weekend will begin. 22 June 215: The start of T2S operations will begin.
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5 4 T2S Perspectives Issue Spotlights The DCP Group Marcello Topa Market Policy and Strategy EMEA, Securities Services, Citi. Directly Connected Parties (DCPs) represent the largest, most active segment of the T2S community. Though removed from legal arrangements under the Framework Agreement, the importance and success of recent informal DCP-CSD interactions led to the formation of a new DCP Group. Adopting the DCP model, especially given the unknowns surrounding the first round of T2S migrations, is a considerable commitment. The steps that must be taken to enable participants to directly connect to T2S are demanding: significant time and investment; a series of mandatory testing phases to be performed in order to obtain the DCP certification from the ECB; and various authorisations to be obtained from each CSD under which the DCP has chosen to operate. Firms opting to connect to T2S in this manner will typically be ones with large settlement volumes and, in most cases, ones that have relationships with multiple CSDs, such as large international custodians and central counterparties. Despite the significant challenges in the implementation of such direct technical interfaces, a large number of firms have expressed an interest in becoming DCPs under one or more CSDs. Given this interest, there was a need to establish a specific channel of communication with the group of participating CSDs, whereby various topics specific to DCP activity could be productively discussed. Led by a few large international custodians (including Citi), the DCP Forum was launched for this purpose in February 213.
6 5 T2S Perspectives Issue February 213 The DCP Forum was established. October entities make a non-binding intent to become a DCP. June 214 The ECB T2S board recognises the DCP Forum as an official Group under the formal T2S governance structure. May 213 The DCP Forum distributes the first CSD questionnaire. March entities make a binding intent to become DCPs in MW1. The collaborative spirit established within the DCP Forum and with CSDs proved to be the most important ingredient for the success of the Forum s initiatives. The initial focus of the DCP-CSD dialogue was on the definition of common aspects in the CSD service description to DCPs, setup configurations, technical interfaces, certification and authorisation criteria, and the practical details of testing and migration activities. The quest for clarification, harmonisation and detailed information was formalised in May 213, where the DCP forum distributed a questionnaire to all participating CSDs with the objective of defining the broad scope of the DCP service offering by CSDs. Subsequently a series of workshops were organised by the DCP Forum alongside CSD representatives to discuss various items that were not sufficiently clear in the T2S documentation or in the information provided by each CSD. Such items included, for instance, the legal and contractual arrangements between CSDs and DCPs, and the functional, technical and legal arrangements for liquidity and collateral management activities using Dedicated Cash Accounts (DCAs). Such deliberations enabled around 3 entities to make their non-binding declaration of intent in October 213 to become DCPs. This was followed by the binding declarations of 13 entities in March 214 to become DCPs in MW1. The collaborative spirit established within the DCP Forum and with CSDs proved to be the most important ingredient for the success of the Forum s initiatives. This attracted the interest of the ECB T2S Board, which recognised the value of dedicated dialogue on topics of relevance to the DCP community. The T2S Board, therefore, proposed the establishment of a new group within the official T2S governance structure, where DCPs, DCA holders, CSDs, NCBs and the T2S Program Office could continue this dialogue with full transparency. With the agreement of the CSD Steering Group, the new DCP Group was established in June 214, with a mandate to facilitate the analysis of DCP topics of concern and escalate necessary issues to other relevant groups within the T2S structure. The decision to establish the DCP Group is a very important and progressive step for the T2S project, confirming the importance of 36-degree collaboration between interested stakeholders in the interests of clarification and harmonisation. The DCP Group proves that the journey to T2S is not a race: success is the product of teamwork, where all parties contributions and support are crucial.
7 6 T2S Perspectives Issue Spotlights Corporate Actions: Compromising Harmonisation Dean Little Asset Servicing, Direct Custody and Clearing, Citi. The long-awaited Corporate Action Sub-Group (CASG) Harmonisation Report was published in June 214, highlighting that many major CSDs would not be fully compliant with T2S CA standards. Years of collaboration and negotiation have not eradicated all bespoke market processes, which will result in direct participants having to invest in technical and/or manual solutions to accommodate such deviations. The latest status of CSD CASG standards is highlighted in the chart below. Evidently there is much work to be done, but there is still time for change and it is possible that post- MW1 CSDs may comply between now and their migration. Our focus and concern is on ensuring MW1 CSDs migrate to T2S seamlessly. However, asset servicing and the accompanying market nuances remain a major challenge for participants. Common deviations to T2S CASG standards While there are a range of deviations to the T2S standards across CSDs, there are two common deviations that seem to be developing, but they should not be confused by market nuances stemming from the adaptation of the standards: The point in the transaction lifecycle at which claims are settled continues to be a major source of deviation despite seemingly clear guidance from the T2S standards. All CSDs (with the exception of Iberclear) have opted against managing the buyer protection process themselves, so CSDs are implementing different processes for transformations on optional events. Some CSDs will offer the cancellation and rebooking of trades for optional events in line with the default option; others will simply cancel and leave the rebooking solely at the behest of participants. Alternatively, there will be a mix of the two depending on event type. Market nuances To help highlight these changes, we are placing the spotlight on major MW1 market nuances for CAs on flow and the resulting challenges on participants. Some of these specifics are linked to the standards themselves, while others stem from CSDs adoption of the standards, which create challenges in their own right. Italy MT are adopting claim and transformation processes for the first time, representing a significant change, with new processes for the CSD and participants to manage. Italy s overall compliance status currently stands at 22%, although, as with most other CSDs, it plans to be much closer to the 1% mark at migration in June 215.
8 7 T2S Perspectives Issue Market claims (%) Transformations (%) Buyer protection (%) Overall (%) OeKB (Austria) Euroclear (Belgium) NBB SS (Belgium) 4 Euroclear (France) Clearstream (Germany) BOGS (Greece) 43 2 KELER (Hungary) Monte Titoli (Italy) Euroclear (Netherlands) Interbolsa (Portugal) Depozitarul Central (Romania) CDCP (Slovakia) Iberclear (Spain) SIX SIS Ltd. (Switzerland) CSD has an agreed implementation plan and states compliance by MW. CSD will not be fully compliant by the MW. The main Italian market nuances are as follows: Italian standards state that claims resulting from off- and on-exchange non-ccp cleared transactions should not settle before the parent transaction, which is in stark contrast to the T2S standards. MT will not manage this, and it will be left to participants to manage the release of claims for settlement. MT will not manage split security claims for its participants; instead, participants will have to manage these themselves and instruct relevant transactions into the T2S platform. MT will not reverse markets claims for its participants should the event get withdrawn from the market. This is understandable for settled claims but for unsettled claim participants would expect the instruction owner to cancel. It is still unknown as to how the market will treat cash claims from a tax perspective. Will the withholding tax agents have to debit tax or will they be exempt from tax treated as a cash movement and not an income payment? Switzerland Currently marked as 34% compliant, SIX SIS has stated that it will be 1% compliant with all standards by June 215. The main market-specific challenge for DCPs will be how to manage the two different processes for EUR and CHF trades and balances.
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10 9 T2S Perspectives Issue The T2S functionality for CAs on flow will only be applicable for EUR versus payment transactions and settled positions. This poses its own difficulties, as participants may have to manage T2S and CSD processes within the same event within their systems while SIX SIS announces two events per security. Greece Like Italy, Greece s claim and transformation processes are being adopted by the market for first time. At present, Greece is only 2% compliant with the T2S CASG standards, but, like Switzerland, it states that it will be compliant with the standards by June 215. With BOGS being the only CSD in Greece to migrate to T2S, the number of CA types will be limited to fixed-income event types. BOGS is currently on track, and we see no deviation from the standards. But, as with all CSDs, there is still a lot to be done. Conclusion Overall, despite slow progress, T2S markets will finally be adopting claim and transformation processes and improved centralised payment processes via the issuer CSD, all of which make for a more harmonised approach and in turn, should ultimately benefit end investors and intermediaries in the chain. One must ask: had it not been for T2S, would all CSDs have adopted these processes? We do not believe this to be the case. So while we still have not seen the level of harmonisation we had hoped for, there has been some significant headway. Crucially, Citi clients will be protected from significant technology costs and investment, which will help to make the staggered implementation as seamless as possible. According to the oxford dictionary, to harmonise, is to make consistent or compatible. Having failed with consistency, let us compromise and work towards making the CA market nuances as compatible as possible. Key takeaways Many of the major CSDs will not be fully compliant with T2S CA standards by their scheduled MW. Some have not indicated expectations to be fully compliant. MT and BOGS are adopting claim and transformation processes for the first time. In Switzerland, the T2S functionality for CAs on flow will only be applicable for EUR versus payment transactions and settled positions. Greece and Switzerland plan to be 1% compliant by June 215, while Italy does not. Overall, despite slow progress, T2S markets will finally be adopting claim and transformation processes and improved centralised payments processes via the issuer CSD, all of which make for a more harmonised approach, which should ultimately benefit end investors and intermediaries in the chain.
11 1 T2S Perspectives Issue Country watch A View from the Ground: Greece Menelaos Demetriou Greece Securities Country Manager, Direct Custody and Clearing, Citi. Drawing on the strength of our leading footprint across T2S markets and our representation in market forums, we bring you insights from debates taking place across the region. In this edition we focus on Greece and its journey to launch. What key discussions are taking place? Citi has been impressed throughout the program with the level of consultation and discussion between market participants regarding options, preferences and changes to local market practices. We hope that this degree of interaction will be displayed in future migration waves. There are two clear cases of how this ongoing interaction has benefited local participants in the short term, and this has an onward benefit to our clients. First, on the subject of Market Specific Attributes (MSAs), it appears that there may continue to be several local market practices that will need supporting by the T2S platform in many other markets. In Greece, however, not only are the number of MSAs limited, but they have minimal impact in terms of scope of transactions or impacted parties. This is a very welcome approach in the interests of standardisation and harmonisation, two of the key objectives of the T2S program. Second and of greater impact is in the area of CAs. BOGS has taken a pragmatic approach to embracing the recommendations of the CASG since the very beginning. Currently, it is anticipated that the market will be wholly compliant with all recommendations in time for the launch of MW1. This is a tremendous benefit to Citi as a provider in multiple markets, but also to our clients, who will benefit from the advantages that the harmonisation of CA processing will bring. In Issue No. 19 of the T2S Online Project Review, published by the ECB in July, there were two questions posed regarding preparations. Vassiliki Dellopoulou, from BOGS, was one of the respondents. When asked how BOGS has prepared for pilot testing, Vassiliki responded: The adaptation of our system for T2S, at least for the major part of our business, has already been completed. Being a wave 1 CSD, bilateral testing is a challenge, considering that the official bilateral testing period will last only three months. For this reason, we have decided to fully exploit the pilot testing period and to distribute our test scenarios between the pilot and the bilateral testing period, i.e. to use the whole six-month period for testing. Of course, we have taken into consideration the existing restrictions from the T2S platform side. Our intention for pilot testing is to mainly start with the more simple test cases and to proceed accordingly, based on the progress of our tests.
12 11 T2S Perspectives Issue We intend to focus on our current domestic settlement business first and then to continue with the new functionalities provided by T2S which do not currently exist in our market, such as intra-position movements, partial settlement and linking of instructions. This perspective is typical of the approach that we have witnessed locally. The theme of thorough preparation represented in these comments is characteristic of dayto-day interactions that we have experienced, and we hope that this approach is repeated in preparations for future MWs. What is Citi Greece doing to prepare? Citi Athens has been engaged in all aspects of Citi s program in the region, from operational analysis to technical developments and client communications. Citi is the most affected local participant in terms of transaction volume, and therefore we have an important role to play on behalf of our clients to ensure that we and the market as a whole are well prepared. Citi has well established relationships with colleagues at BOGS at all levels. These relationships have been instrumental to our preparations for T2S. We have direct and open dialogue whenever there are requests for information on behalf of our clients, and these avenues of contact have been used bilaterally many times during the course of the past two years.
13 12 T2S Perspectives Issue Migration watch Migration Challenges Keith Berrett Director, Direct Custody and Clearing, Citi. Over the past six months, there has been greater focus on migration preparations. While the emphasis has been on MW1, a lot of simultaneous planning is also underway across subsequent MWs. Citi is aware of the challenges that each MW can bring and consistently working to ensure we are appropriately prepared in all eventualities. One such challenge is the sheer duration of the migration period from start to finish. The migration period commences with community testing in March 215 and runs through to March 217 with a potential to end in June 217 should the Contingency Wave be utilised. During this time, the industry will undergo significant disruption as we work our way through the migration period. We will look to draw on our experiences from each MW and apply best practices to future MWs to minimise this disruption. When we analyse the published timelines, with all the intricate stages involved, we see a very constricting
14 13 T2S Perspectives Issue schedule. There is a two-month period between MW1 and MW2 that could potentially be utilised for clients to execute wholesale changes to their business models. However this would require meticulous planning in advance to take advantage during this brief period. The actual phases of MW2 and MW3 will also pose some challenges due to the fact that there is an overlap. This means that before the end of the testing phase for MW2, the initial stages of testing for MW3 are already underway. Many market participants that are directly affected by both migrations will have to manage test environments and data to cope with this. This will have an impact on all market participants with regards to introducing changes to the impacted CSDs. As the migration window looms, MW1 CSDs have set up working groups with declared DCPs in their markets to work through the practicalities of undergoing a smooth transition to T2S. Citi is participating in four such working groups for MW1, and we are using our participation to ensure that we can both influence a consistent approach to testing and migration activities where appropriate and monitor preparations for a successful migration. This will enable us to keep our clients informed of the readiness of those markets. At the same time as preparing for the T2S platform changes, many CSDs are undergoing a parallel exercise of having to change their technical platform as a prerequisite. Currently, there are nine CSDs that will undergo a degree of change either prior to or as part of their migration to T2S. We at Citi will manage these challenges in the background, using our participation and influence in various market forums, leaving clients to only manage the relevant market mandatory changes in preparation for migrations as we or their agents communicate and advise. What is becoming clearer, however, is the need for our clients to consider desired changes to their business models in light of the tight migration schedule set out by the Eurosystem. T2S Migration Schedule March 215 March 216 March 217 MW1 MW2 MW3 MW4 TOTAL
15 14 T2S Perspectives Issue The watch list Keeping an Eye on What Matters in the Next Quarter Published CSD pricing, testing and migration schedules CSDs are very much playing a cat-andmouse game with regards to pricing, waiting to see who moves first with regards to post-t2s settlement pricing. Richard Scavetta Citi T2S Program Director Eurosystem Acceptance Testing The T2S Board has confirmed that the Eurosystem is ready to start user testing as scheduled on 1 October 214. The decision was made at the meeting of the T2S Board on 29 August. It was based on, among other things, an assessment of the results of
16 15 T2S Perspectives Issue Eurosystem Acceptance Testing. The purpose of this testing phase was to ensure that the T2S platform is of the required quality and compliant with the scope-defining documents. European Central Bank The defects identified during Eurosystem Acceptance Testing were not considered critical and their resolution is being pursued with full dedication. Jean-Michel Godeffroy Chairman of the T2S Board The impact of T+2 on T2S preparation To be candid, we were taken a bit by surprise when the ESES markets (France, Belgium and Netherlands) announced relatively soon that they were going to move on 6 October 214 and then most markets decided they would also move on 6 October. We spent some time in the task force on the risks of a big bang compared with migrating in waves and concluded that it would not be a big problem if everybody were to move at the same time. [If] something bad were to happen on 6 October, the market and the authorities would have time to adjust. Paul Bodart Chairman of the HSG Task Force on T+2 Abbreviations 4Cb Four national central banks of Germany, Spain, France and Italy BOGS bank of Greece Securities Settlement System CA Corporate Action CASG Corporate Actions Sub-Group CCP Central Counterparty Clearing House CSD Central Securities Depository DCA Dedicated Cash Account DCP Directly Connected Participant EAT Eurosystem Acceptance Testing ECb European Central Bank MSA Market Specific Attributes MT Monte Titoli MW Migration Wave NCb National Central Bank T+2 Shortening of Settlement Cycles T2S TARGET2-Securities Naturally, T2S Perspectives will continue to provide you with key updates as we gear up to T2S launch in less than one year s time, including key project news, harmonisation initiatives and on-theground outlooks in various T2S markets. But if you would like more details on the content of this edition or if you would like to tell us about what you would like to read about in a future edition, we d be happy to hear from you. Just reach out to your Citi relationship manager or us directly at
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