1 maximises settlement efficiency in the European securities market Department Payments and Settlement Systems Martin Barraud George Doyle
2 Page 2 Definition and classification of TARGET2-Securities TARGET2-Securities T2S for short is the name of the Eurosystem project to offer a new, harmonised and centralised method of settling securities in central bank money. The European settlement market is currently predominantly nationcentric and highly fragmented. Despite the many central securities depositories (CSDs), there is also no active competition in Europe in the field of securities settlement. Some of the main objectives of T2S include improving cross-border settlement in central bank money, overcoming market fragmentation and promoting greater competition. With these objectives, the project will play a role in creating an efficient, single European capital market and is entirely in keeping with other European initiatives such as the European Code of Conduct for Clearing and Settlement and the removal of the Giovannini barriers. The harmonisation effect of T2S will also extend beyond the euro area, as the use of other currencies will be permitted in addition to securities settlement in euro. Participation in T2S is voluntary for all CSDs. At all events, the custody of securities and value-added services will remain in their hands. T2S should not, therefore, be viewed as a new pan-european CSD, but rather as a provider of settlement services for CSDs. The concept of T2S is based on the integrated model, which is an amalgamation of central bank money and securities settlement into one platform in delivery versus payment mode. The basis for this is the Eurosystem s Single Shared Platform (SSP), on which the real-time gross settlement system (TARGET2) is already operated. On 17 July 2008, the T2S project was officially started by the Governing Council of the European Central Bank. The Deutsche Bundesbank, Banque de France and Banca d Italia (3CB), which are already responsible for developing and operating TARGET2, were instructed by the ECB Governing Council to develop the new service jointly with the Banco de España (becoming 4CB) and to run it on the SSP. The official go-live of T2S is 22 June 2015.
3 Page 3 T2S functionality The securities accounts of the connected CSDs and the accounts of the participating central banks are integrated on the T2S platform. Central bank money is fed in flexibly. For euros this comes from TARGET2, and for other currencies it comes via the respective central bank s real-time gross payment system. This ensures the separation of payment settlement and securities settlement. T2S functionality Settement Instructions TARGET2 Securities Money Money CSD A CSD A T2S Settlement Engine A A A CSD B CSD B B B B CSD C CSD C C C C T2S Non- RTGS Source: T2S user requirements, Eurosystem Communication with T2S is based on ISO messages. A graphical user interface (GUI) is also available. Instructions are validated and matched upon entering the T2S platform; this is followed by a simultaneous booking of central bank money and securities using complex optimisation algorithms. This takes place continually throughout the day in real-time, and in several settlement cycles at night. To increase settlement efficiency, T2S also has an auto-collateralisation function, which means that a transaction can be settled despite an initial lack of liquidity due to automatic refinancing by the central bank.
4 Page 4 The role of a central bank in securities settlement Particularly at the beginning of the project, the question was posed as to whether taking over settlement services is actually the role of a central bank. The Eurosystem has always responded openly to this issue, maintaining a dialogue with market players. Under the integrated model for securities settlement, either the central bank money accounts are outsourced to the individual CSDs, or the CSDs securities accounts are grouped together on a central bank platform. The Eurosystem has a clear preference for the second option. Central banks pay close attention to safeguarding financial stability as an essential precondition for fulfilling the functions of the financial sector of an economy, also and especially in stress situations. Maintaining full control of their central bank money accounts, on which both monetary policy operations are carried out and intra-day credit is provided, is essential in order to ensure that they are able to act discreetly and without any third-party involvement in times of crisis. Settlement via the central bank an insolvency-proof institution also promotes confidence and security. Consequently, outsourcing central bank money settlements would be both politically undesirable and fraught with legal problems. An integration of central bank money and securities into one platform can therefore ultimately only be offered by the Eurosystem itself. Effects of TARGET2-Securities on market players T2S is provided by the Eurosystem for the European market. Developed and operated as a not-for-profit project, T2S is designed and will be run with the explicit aim of full cost recovery. The possibility of the Eurosystem displaying profit-oriented monopolistic behaviour can therefore be ruled out. On the contrary, competition among CSDs is encouraged, which means that lower settlement prices especially in cross-border securities trading can be expected. Market involvement has played a major role since the beginning of the project. All market players agree that a project as complex as T2S can only be created with the constructive participation of all stakeholders. The user requirements were drawn up in close cooperation with the market, in order to cater to the needs of future users. CSDs and their customers are actively involved in the creation and further development of T2S through numerous bodies. As the system owner, the Eurosystem will only have a contractual relationship with the CSDs, which will continue to organise their contractual relationships with their customers independently, just as they do today. Securities accounts will also legally remain with the CSDs. Until now, more than 20 European CSDs have signed the so-called Framework Agreement with the Eurosystem that marks the contractual basis for the use of the common settlement platform. With this, more than 99 % of the settlement volume of the euro area will be settled on T2S. T2S was primarily designed for euro settlements, but it also expressly enables settlements in other currencies. As T2S conducts settlements in central bank money, the respective central bank must, of course, be prepared to make its money available to T2S. Danmarks Nationalbank will make the Danish krone available for settlement in T2S as of 2018.
5 Page 5 Timetable for TARGET2-Securities The project consists of four phases: preparation, specification, development, and testing and migration. During phase one, the basic feasibility of T2S was investigated and the user requirements for the platform were established in collaboration with central banks, CSDs and credit institutions. Phase two saw these user requirements feeding into specifications. In addition to the General Specifications (GS), General Functional Specifications (GFS) and a General Technical Design (GTD) were established. These were then being used as a basis for drafting detailed user-oriented specifications and concepts for the development. On this basis, work on development could begin in phase three. Before operations could start, the service had to be thoroughly tested. This took place in phase four. After these tests had been successfully completed, the migration of the CSDs securities accounts and the NCBs dedicated cash accounts to the platform could begin. CSDs and NCBs together with their markets will migrate to T2S in four waves between June 2015 and February Timetable for TARGET2-Securities Phase 1 Preparation Phase 2 Specification Phase 3 Development Phase 4 Testing Migration Start of T2S operations June 2015 Fasibility study Public consultation process for the user requirements Creation of general specifications (GS, GFS, GTD) Detailed specifications (UDFS) Sofware development Hardware procurement Internal system testing Eurosystem tests User tests CSD, NCB and market participant migration Further Information For more information, visit C Tasks C Payment systems