T2S roll-out: opportunities and challenges for users (part 4)
December 2017
Over the past few months we have invited different end-users to share their views with us on how TARGET2-Securities (T2S) has transformed the post-trade ecosystem, focusing in particular on the challenges and benefits. If you missed our earlier interviews, take a look at what Stephen Lomas, Head of Market Policy Global Transaction Banking at Deutsche Bank; Marcello Topa, Director EMEA Market & Policy Strategy at Citi; and Alex Dockx, Executive Director at JP Morgan, had to say. For the latest interview in the series we talked to Alain Pochet, Head of Client Delivery at BNP Paribas Securities Services, to find out how BNP Paribas Securities Services views the transformation of the post-trade industry in Europe following the arrival of T2S.
Our first question to you, Mr Pochet, is if T2S has triggered any change in your business model?
The main features of T2S are the access to a single platform for securities and a single account to settle cash and securities in central bank money. This has brought about major organisational improvements such as the pooling of collateral between entities – thanks to our direct connectivity to T2S – and the set-up of a single European settlement operating platform.
The management of our intraday liquidity has been improved and rationalised as it is now possible to centralise all the flows in a single tool. It dramatically reduces the risk stemming from liquidity fragmentation and the need for a collateral buffer. We have full control of liquidity: a single treasury team is operating the dedicated cash account (DCA).
Consequently, the liquidity burden, operational costs and IT costs are reduced, while organisational aspects and procedures are simplified.
The other main changes are directly linked to our services: collateral is key to fixed income market operations. Innovative services, such as connectivity solutions and “asset servicing only” facilities, were developed and new products (in the repo market) have been created.
We have now been able to move from a multi-local set-up to a truly regional one, creating operational and cost efficiencies for our clients. However, we believe maintaining a local presence is key as we need to keep close links with the local infrastructures (legal and fiscal issues have to be addressed locally) and local authorities to continue passing on our global market expertise to customers.
If you were to highlight one benefit of T2S, what would it be?
T2S brings many benefits to a pan-European bank like BNP Paribas, but harmonisation is certainly the most important one, as described before.
Cross-border transfers of collateral are simplified because of the internal and external circulation of collateral. T2S improved the management of the pool of Banque de France’s eligible collateral.
Treasury management is safer: the risk of liquidity fragmentation is mitigated as there is one single account to settle cash and securities. Auto-collateralisation means less liquidity is needed for securities settlement, especially as collateral held in one country can cover the settlement of a security bought in another. To give an example, before T2S, if we were buying French securities we essentially had to cover them using other French securities. Now, with T2S, if we buy French securities we can easily use Italian, German or any other T2S eligible securities to achieve the relevant purchasing power.
Globally, it has also had a positive impact on the management of other payments. And, last but not least, it has reduced the size of the collateral buffer needed to secure intraday risk management.
The T2S project also drove harmonisation in other areas, such as corporate actions, and created a unified framework for central securities depositories (CSDs) and its participants by means of the Central Securities Depositories Regulation (CSDR). It also made it possible to review the operating set-up on a wider scope, allowing a greater return on investment when transformations are necessary. Finally, it enabled a number of further improvements to be made in market infrastructures, such as the ECB projects for T2/T2S consolidation and the Eurosystem Collateral Management System, among other things.
Another important item to mention is the increased IT security brought about by T2S. Indeed, one single system monitored by the Eurosystem (through the 4CBs – the Deutsche Bundesbank, Banco de España, Banque de France and Banca d’Italia) is clearly an important asset at a time where we are investing a lot collectively to prevent cyberattacks from various sources.
T2S has played an important role in helping to transform and harmonise the post-trade industry in Europe. However, we often hear that T2S has not been able to trigger an increase in the level of cross-CSD settlement in Europe. We asked Alex Dockx, Executive Director at JP Morgan, if he sees this as a challenge to its success (his answer can be seen here) and we would also like to hear your views on this issue. So, Mr Pochet, despite the existence of T2S, the level of cross-CSD settlement in Europe still seems to be relatively low. What are your views on this? Do you see it as an issue for T2S and the market in general?
T2S has led to many improvements and innovations in organisation and in the relationships with our clients.
First of all, the full T2S migration was only completed in September. Therefore, a number of market participants are yet to change their operating set-up to guarantee a smooth transition. Also, investor CSDs have not, or only partly, rolled out their investor CSD services. Despite regulatory changes, issuers still seem to favour domestic issuance, for the most part to remain close to a key portion of their investor base. Finally, cross-border transfers are also very closely linked to collateral movements. As such, they primarily occur between T2S CSDs and international CSDs. Establishing a European debt issuance service and increasing bi-party or tri-party collateral management across the T2S landscape could be a way to further leverage T2S capabilities.
It is important for T2S to foster its current features in order to build on what exists today and increase volumes, currencies and funds settlement on this unique platform.
Nevertheless, the set-up still has room for improvement, mainly in terms of harmonising collateral management practices and connectivity .There is a clear need to standardise practices between market infrastructures and market participants, and among market participants. The circulation of collateral has to be smooth and easy: a customer has to be able to manage their account, regardless of the local markets in which they are investing. That is the best way to create a transparent and efficient European debt market that will become even more open to non-EU investors.
This could be achieved by creating a European CSD for fixed income products, managed by the ECB (access to central bank money).
Enhancements to the platform will also come from the T2/T2S consolidation process, which is a major topic for the Eurosystem. TARGET Instant Payment Settlement (TIPS) will also benefit greatly from the efficiency of T2/T2S.
Connectivity, harmonisation and diversification are the key to improving the current set-up.