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Inside magazine issue 12 | Part 02 - From a regulatory perspective The issuers select a CSD to issue their instruments to the market (“issuer CSD”). The issuers, when they issue several different instruments, may select different issuer CSDs for different instruments. Investor CSDs hold accounts in one or more issuer CSDs so that they can offer instruments for which they are not the issuer Investor themselves. Key characteristics T2S will be a state-of-the-art settlement engine with sophisticated technological features: •• Advanced optimization algorithms to enhance settlement efficiency •• Autocollateralization mechanisms leading to considerable liquidity savings •• A variety of liquidity management services through dedicated cash accounts Roles of the players and interactions with T2S T2S will be at the center of all settlement processing across Europe, working directly or indirectly with all market players. T2S operates via a platform known as the integrated model, which allows both cash accounts and securities accounts to be on the same platform. Thus, there will only be one interface between the CSDs and T2S. This interface will connect participating CSDs to both the T2S settlement system for securities (T2S) and to the TARGET 2 System for cash (TARGET 2). Custodians are connected to the CSD of their choice (“investor CSD ”) and any participant may choose to connect to more than one CSD. Custodians and participants must also maintain a connection to the TARGET 2 system through a central bank of their choice. As clients of the custodians, the agent banks hold their securities and cash accounts with their chosen provider. •• Direct network connection to the platform for banks with large settlement volumes Other note-worthy features of T2S are the following: •• T2S imposes a uniform set of rules across all markets, which will affect custodians/ CSD participants as well as clients of custodians •• The CSDs are obliged to comply with stringent operating rules and a connection to TARGET2 for settlement in central bank money is compulsory •• T2S creates a level playing field, ensuring that all CSDs compete with one another •• Custodians are now able to select a single CSD for all markets •• Custodians and other CSD participants must maintain a connection to the payment system in central bank money. They will be obliged to provide central bank money for clients that are only using commercial money at present 2. Investor CSD: An investor CSD opens an account in another CSD (the issuer CSD) so as to enable the cross-system settlement of securities transactions 3. Issuer CSD: A central securities depository (CSD) in which securities are issued (or immobilized). The issuer CSD opens accounts allowing investors (in a direct holding system) and/or intermediaries (including investor CSDs) to hold these securities 70
Inside magazine issue 12 | Part 02 - From a regulatory perspective Impact on the wider market Until now, the focus has been on system development, implementation and testing between the participating CSDs and the T2S platform. The participating CSDs have reached out to their clients to inform them about changes to interfaces and processes so that they are adequately prepared. New market rules and behavior Settlement calendar and schedule All CSDs will follow the same settlement calendar, with harmonized opening days as well as opening and closing times, and will observe the same daily schedule, e.g., instruction deadlines. Now that T2S has become a reality and the wider European markets will migrate in 2016/2017, it is the right time for other market participants to assess the impact T2S will have on them. While T2S will facilitate a more streamlined and efficient settlement system, there will also be a number of new system and processing requirements that will need to be carefully managed. On the one hand, T2S will create new opportunities, but on the other hand, there is a considerable risk of it threatening existing business. This impact is multi-faceted and driven by a number of factors. New competition landscape Custodians will be able to offer securities settlement services for all participating markets by using a single “investor CSD.” Custodians will select one or more investor CSDs, a decision largely dependent on the level of services offered by the CSD in question. This will result in agent banks having a considerably larger choice of custodians and gives them the opportunity to consolidate their custodian network. With the unprecedented level of market access resulting from this new network, agent banks would be able to compete for clients with asset portfolios that they were not able to serve until now. In general, T2S facilitates and catalyzes the evolution of the current multiple market form into one more efficient and coherent market. In this new competitive landscape, technical access through systems and processes will become less important, while offering consolidated and valueadded services will become the leading differentiator between different players in the market. Settlement cycles Participating markets have already migrated to T+2 as the standard settlement cycle. Matching fields T2S will introduce a set of matching fields for transactions. If the content of the matching fields from both sides of the transaction do not match, the transaction will not be settled. Finality CSD will introduce common rules defining when a transaction can no longer be revoked. Once a transaction is entered into T2S, unilateral cancellation (i.e., by one side only) is no longer possible. When the transaction is settled in T2S it is unconditional, irrevocable and enforceable. Settlement discipline All participating CSDs will introduce a settlement discipline regime. This will include penalties for late settlement and buy-in rules after a short period. The defaulting party will be charged with the buy-in costs. Consequences The rules and processes introduced by T2S will facilitate smoother settlement across all participating CSDs. This will allow participants to rely much more heavily on the anticipated settlement results as a basis for connected transactions such as usage as collateral or on-delivery. It does, however, require the stringent and efficient preparation of each settlement transaction. Counterparties will be much less able to accept settlement delays. As the effort required moves from the reconciliation and repair function to the preparation function, a revised arrangement on the distribution of activities along the custody chain is necessary. 71
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Inside Triannually insights from De
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Inside magazine issue 12 | Contents
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Inside magazine issue 12 | Foreword
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Inside magazine issue 12 | Part 01
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Inside magazine issue 12 | Contacts
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Our expert authors, who are brimmin
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