Are you ready for T2S? - Euroclear

Are you ready
for T2S
Edwin De Pauw looks at
the many questions firms
are facing and how best
to prepare for TS
Edwin De Pauw,
Director, T2S Product Management, Euroclear

Euroclear considers
the options that market
participants are considering in
the run-up to T2S.
Are you ready
By Edwin De Pauw, Euroclear
Target2-Securities (T2S) is scheduled to go live in about two years, with the first migration
wave for central securities depositories (CSDs) planned for June 2015. Information from the
ECB regarding the timing of the waves is common knowledge. However, banks and other
financial institutions have yet to take many T2S-related decisions that could have a significant
impact on how effectively they will work in the changing post-trade environment in Europe.
Making the most of T2S
T2S offers opportunities to centralise liquidity and reduce the cost of cross-border settlement.
Along with T2S, removal of the repatriation rule for collateral mobilisation to central banks will
allow firms to post collateral from any qualifying CSD to a central bank of their choice.
As if preparing for T2S was not enough, new regulations will also have an impact on
financial institutions. Basel III, EMIR, AIFMD/UCITS are but a few examples. Meeting these
challenges while confronted with continuous cost-containment pressures will force some
in the securities industry to either exit the business or develop new business models. Some
will go up the value chain, while others will turn to partners to deliver part of their service
portfolio. We also expect further consolidation among CSDs, although we may see the
arrival of new CSDs initially.
The right way forward
So, how should a financial institution approach T2S The first and perhaps most obvious
assessment to be made should be how T2S is likely to impact their day-to-day business. The
conclusions will, of course, differ depending on the current business and operating models
of the financial institution. However, we believe thinking should focus on three areas.
First is to assess the impact of mandatory changes generated by T2S such as mandatory
trade matching and settlement lifecycle management in some markets following the
introduction of a ‘hold and release’ mechanism. Second is to evaluate the impact of the
timing and breadth of the various harmonisation initiatives encompassing corporate actions,
market claims and the like. Last but not least is to consider the opportunities created by T2S
to centralise liquidity, review/rationalise the firm’s network strategy, extend services to cover
more markets, exit non-profitable markets, among other possibilities.
Institutions that have direct CSD relationships today may choose to make the mandatory
changes now and consider how best to access T2S once they can assess the true benefits of
T2S. They may wind up paying twice, but they will manage the uncertainties of T2S better.
Another option is to anticipate the benefits of T2S and make the necessary changes up front to
access T2S in all or some CSD-direct markets, with the risk that the benefits will not materialise
at the same pace as the investments. This option, we believe, will be most relevant to firms that
have direct relationships with multiple CSDs as it will reduce the need for multiple adaptation
projects. A new option that may be appealing to these firms is to work through a single ‘investor
CSD’ to access all or some T2S markets, rather than maintaining multiple CSD relationships.
2 Are you ready

An ‘investor CSD’ enables its clients to hold
pan-European assets on its books based on
links established with the CSDs where the
securities have been issued. The option of
selecting an investor CSD removes a large
part of the operational burdens associated
with maintaining multiple CSD (or multiple
custodian/agent) relationships. It can also
eliminate the need to develop in-house
expertise to provide collateral management
and other asset services for client holdings
of foreign assets.
The thinking process will be different for
firms that have indirect CSD relationships
today. Clearly, the introduction of T2S is
an opportunity to review and potentially
rationalise their current network of service
providers. Perhaps one of their current
providers can shield them from having to
make the changes associated with T2S,
thereby limiting the need to make changes.
Success will depend on the firm’s ability to
capture the right business opportunities while
keeping costs under control to profit from
them. Let’s not underestimate this important
part of the decision-making process.
Here, T2S poses a considerable challenge.
T2S implementation costs will be huge.
Market infrastructures, for example, will
spend €1 billion in addition to the €1 billion
to be spent by the European Central Bank.
Thus, the balance between pursuing the
T2S business case versus other business
objectives, such as cost containment, will
be an individual firm decision.
Key decision criteria
Firms considering how best to connect to
T2S and work with a partner to service
multi-market T2S-eligible assets will need
to match their business needs with their
capacity and internal resources. The
thinking process also will be influenced by
cost and risk issues, the firm’s perceptions of
T2S benefits, underlying client expectations
and central bank requirements.
When considering the best approach,
including the choice of a partner, the key
criteria to consider during the thinking
process are as follows:
• Service level/market coverage: What
service/support levels do you expect
from the partner Which markets do
you wish to cover Where are your
counterparties likely to be located
Can the provider meet your settlement,
asset servicing, liquidity and collateral
management obligations for your
domestic and cross-border activities
• Access to liquidity: Do you have access
to euro central bank money or do
you want to rely on a commercial
credit provider Can the provider give
you access to liquidity in each of the
markets you want to cover
• Risk protection: Which type of business
partner will provide the best and most
comprehensive asset protection to
enable you to comply with increasingly
strict regulation Which provider will
best meet your liabilities requirements
• All-in cost: Does the provider offer
fee-related economies of scale and
have low running costs Which
provider can best shield you from
current and future investment costs
Firms that already work with ICSDs, agent
banks and other intermediaries have a head
start on others that need to begin a due
diligence study to select the right partner.
Time-to-market
management
Time-to-market will be critical when
considering the above questions. Financial
institutions will need to have made all the
mandatory T2S-related changes - or have
appointed a partner to share the burden
- to be able to keep their ‘licence to
operate’. Equally important, they will need
to be ready to defend their competitive
position and take advantage of business
growth opportunities.
These challenges are intensified by
uncertainties relating to the timing and
breadth of market-practice harmonisation
initiatives and the timeline for removal of
the remaining legal and fiscal barriers.
Roughly speaking, during the summer of
2013, firms will need to propose budgets
for 2014 to start their T2S development
work, even though insufficient information
will be available to take final decisions on
market coverage, precise service offerings
and pricing.
We expect that most critical decisions will
need to be taken in 2014/2015. By then,
most information will be available for firms
to decide definitively if and how they intend
to evolve their business model and service
portfolio. They will also know what budget
will be necessary to fulfil their ambitions.
Flexibility in this changing environment will
be important as we expect more technical
and operational changes to come before
the first T2S ‘go-live’ date.
Is outsourcing an option
As settlement becomes a commoditised
service, more firms may consider selfsettlement.
However, partnering with
experts in asset servicing and collateral
management can be a wise decision.
On the asset servicing side, it is fair to say
that except for the Belgian, Dutch and
French markets, which already operate on
a single platform with harmonised market
practices, other European markets have yet to
harmonise to a common European standard.
Many financial institutions already work
with agent banks, multiple CSDs and
ICSDs to bridge these market practice
gaps. As said earlier, T2S will provide the
Are you ready 3

opportunity to rationalise and examine
the need for large intermediary networks.
That said, we are convinced that many
banks and other financial institutions will
continue to appoint an agent or ICSD
to help them access multiple European
markets and beyond because it simply
makes good business sense.
Market infrastructures are opening their
architecture to extend their platforms and
operational expertise, to eliminate the need to
create what already exists. Market participants
benefit from additional economies of scale
and cost mutualisation opportunities.
Where are you
Let’s look at how different business
segments could consider their options.
Custodian businesses may want to hold
securities in or as close to the ‘issuer
CSD’ as possible and want to centralise
their central bank money liquidity for all
T2S markets. Those custodians might
be looking for a provider that offers
direct access to CSDs and central bank
money liquidity, and highly competitive
settlement, asset servicing and collateral
management services.
the options for their own activity and
assets, but for their underlying clients as
well, some of which are already insisting
on segregated account structures. Global
custodians and ICSDs have worked handin-hand
for decades and we suspect this
will continue in a T2S environment. In fact,
we are seeing many partnerships between
global custodians and Euroclear Bank for
collateral management services in the
run-up to T2S.
Broker-dealer businesses will require a
top-class service to ensure high settlement
efficiency, very rapid turn around time,
wide access to trading counterparties
and seamless access to financing through
efficient collateral management services.
Depending on settlement activity scale and
breadth, inhouse expertise and capacity,
self-settlement at the launch of T2S or
thereafter may be appealing.
It may be necessary to have direct CSD
access for certain markets, with a provider
that can manage CSD relationships you
choose not to manage yourself. It would
be important to select a partner that can
evolve with you, without imposing sizeabe
transition costs, to manage T2S-related
uncertainties, such as the level of CSD
interoperability that will need to evolve.
to benefit from T2S. Nevertheless, there
are some crucial decisions that are already,
or should be, under consideration by
securities professionals.
We are confident that Euroclear can
accommodate any T2S scenario that
securities professionals decide is the best
for them in this changing environment.
There is no other group of CSDs in Europe
that will be as connected to T2S as you
will find at Euroclear, as Euroclear Belgium,
Euroclear Finland, Euroclear France and
Euroclear Nederland will all be migrating
to T2S. Each of them will provide entry to
T2S, with a range of relevant services. Easy
access to non-T2S markets, such as the UK
and Eurobond markets, also need to be
brought into the picture.
T2S time-to-market is fast approaching.
Deciding your way in, and how much
effort it will take, is clearly an agenda item
for 2013.
This article is reprinted with the kind
permission of International Securities
Services magazine.
Global custodians will be attracted by the
largest pools of liquidity. T2S is unlikely to
change this fact, although it remains to be
seen whether T2S will - drastically - change
the location of liquidity pools for some
domestic securities.
For example, in certain T2S markets such
as France, liquidity is to be found locally,
encouraging those firms that are active in
French securities to have direct access to
the local issuer CSD. In other cases, such
as German bunds, a significant part of
Bund trading activity settles on the books
of Euroclear Bank, the ICSD.
Global custodians will not only consider
Firms that today specialise in a given
domestic market and look to target
non-domestic business growth
opportunities will want to leverage their
domestic CSD relationship in order to
access and service other T2S market
securities. While not wanting to have
direct CSD relationships in all markets, they
may consider an ‘investor CSD’ approach.
Partnering on the T2S
journey
With differing business objectives and
priorities, there is no ‘one-size fits all’
solution for the many avenues of approach
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