After nine years of preparation, the TARGET2-Securities (T2S) platform pioneered by the European Central Bank (ECB) welcomed the first participating markets to the platform on 22 June 2015 with a relatively seamless launch.
The new process, aimed at harmonising the settlement of securities across Europe, has proven to greatly increase efficiency and promote the availability of more diverse sources of funding for the real economy.
There has been consensus from the industry that migration to T2S so far has been ‘as smooth as silk’ with financial institutions (FIs) and technology providers in agreement that the transition has been overwhelmingly positive. Adaptation from settlement custodians to the new structure has also moved ahead with minimal difficulty. With T2S still in its infancy and further integration ahead, FIs must be mindful of what this new status quo means for the management of cash and securities across Europe, and what the future holds for harmonisation throughout the Eurozone.
T2S in practice
Following the first wave of the four participants to join the platform – Romania (Depozitarul Central), Malta (Malta Stock Exchange), Switzerland (SIXSIS) and Greece (BoGS) – the Italian market (Monte Titoli), soon followed suit, joining T2S in late August. Since Italy’s accession, there has been a marked increase in the total number of settlement transactions per day, and is expected to rise exponentially as more participants connect to the platform. However, at this early stage, the functionality of T2S has taken precedence to ensure that the harmonisation structure has been well established.
One of the defining aspects of T2S contributing to its success is its identity as a tool rather than an objective, thereby providing participants extra time to test T2S platform functionality before feeling certain enough to join, hence the ‘waves’ of migration.
Additionally, the benefits for participants joining T2S have so far seemed cumulative, rather than immediate. For example, one of the initial intentions for T2S was to consolidate Central Securities Depositories (CSDs) across Europe. Though this is yet to occur, there is expectation that as further markets join the platform in March 2016 and February 2017, the ECB will have further scope to develop functionality as the volume of settlements carried out increases, enhancing the cross-border links between CSDs.
Target2 and T2S – the perfect partnership?
The initial success of T2S has demonstrated the willingness of financial markets to achieve deeper integration on a European scale. As such, it was perhaps unsurprising that at this year’s Sibos, The ECB’s Yves Mersch revealed plans for a merger of the Target2 payment system and T2S, providing a single platform for the processing of cash and securities across Europe.
Target2 is one of the largest payment systems in the world, and the main real-time gross settlement system for the EU. With a foundation for payments established, the ECB has now turned its attention to streamlining the process for securities. In terms of a comprehensive audit trail across asset-types linking the underlined movement of securities to payments, this integration between the two systems is a positive step for the payments and securities industries alike.
Additionally, the proposed merger would benefit Delivery Versus Payment (DVP) and Receive Versus Payment (RVP) processes. The T2S system ultimately leads to an efficient clearing and settlement of any financial assets simultaneously with the movement of cash funds. As such, the synergy of these two platforms will provide participants with an extremely efficient system, which can manage both security and payment priorities.
For FIs, increased integration within the European market provides an important opportunity to ensure that technology platforms are at the cutting edge of the payments and securities industries. As financial markets become more harmonised both in the wealth and payments space, a solution which can work in synchronisation with these developments is vital to ensure the most efficient and cost-effective management of cash and securities alike.
As T2S develops, there are many visions across the industry for the future of the platform. We’re now entering an exciting stage in the journey towards a more fiscally harmonised Europe, but echoing the thoughts of ECB President Mario Draghi, the story is by no means coming to an end. The true impact of the platform will not be evident until 2018 when T2S is fully engrained in the European market infrastructure. Throughout these stages, FIs should focus on how the system works in reality, and how market practice can develop.
Kashyap Kapasi is director Strategic Solutions, Investment Services, at Fiserv