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Inside magazine issue 12 | Part 02 - From a regulatory perspective A very important component of this process is the requirement on both the custodian side and the client side to drive the change, as they both depend on each other. Centralization of security and cash positions T2S will allow the use of a centralized securities position (at a participating CSD) and a centralized cash position (at a national central bank) for settlements in any of the participating CSDs. The centralized securities position will facilitate the rapid transfer to any counterparty (e.g., for collateralization). The centralized cash position will reduce the need for realignment transactions and credit facilities to bridge misaligned cash positions. Central bank money—the only cash that can be used for T2S—must however be available in an account at the national central bank. It cannot be “created” (e.g., by drawing on a credit line at a commercial bank). An arrangement between the agent bank and the custodian is needed to determine the securities and cash services provided. An agent bank may decide to use multiple custodians and to decouple the cash function from the securities function. Omnibus and segregated accounts T2S will allow custodians to hold omnibus accounts at CSDs (for all or part of their business) as well as segregated accounts for individual clients. When the agent bank fulfils its requirements as a CSD participant, it may open its own account operated by the custodian. As a result, each agent bank has to determine the best segregation approach to pursue, while also ensuring that the requirements of its clients are aligned. An operationally viable balance will need to be found between full segregation into separate accounts and full aggregation in an omnibus account. An arrangement is needed between the agent bank and its custodian to determine the account segregation and the corresponding operational set-up. Perceived benefits of implementing the T2S model Opportunities With T2S High cross-border settlement costs •• Currently, the settlement process needs at least two CSDs and often several custodian banks •• Little or no competition, i.e., monopoly conditions Non-homogeneous settlement procedure across Europe •• No harmonization on legal, technical and fiscal levels •• Unlike the US, no centralized clearing and settlement infrastructure Lower settlement costs, especially cross-border costs Harmonized processes and a single IT platform Optimized competition Risk sharing and diversification Safer financial markets Higher attractiveness for the euro area High risk Positive impact on financial stability 72
Inside magazine issue 12 | Part 02 - From a regulatory perspective What happens now Since the announcement of the T2S platform, CSDs and large global custodians have all installed programs and processes to connect to the platform. Moreover, they have also re-positioned themselves strategically by adapting their business model design and service offerings to reflect the incoming change to the T2S platform. The next, but equally important, stage in the process of preparing for implementation is in the hands of the agent banks. A very important component of this process is the requirement on both the custodian side and the client side to drive the change, as they both depend on each other. There is no doubt that the implementation of the T2S platform will require preemptive thought and action in order to ensure seamless transition. These actions include: •• Custodians will need to carry out a selfassessment to identify the gaps present and hence, the necessary amendments required to adapt to the changes driven by T2S •• Related to this, the changed nature of securities settlement across the EU will require the re-development of old services to fit the new model and hence, successfully offer competitive and consolidated services •• Similarly, clients of the custodians must also adapt and comprehend the changes being brought in by the implementation of T2S to assess its effects. This will allow them to make the necessary changes ahead of time •• In lieu of the changed nature of service offerings, clients must also be able to readapt their strategies and demand for the new consolidated services Rather than being reactive and waiting for various external influences to force a change, agent banks must take proactive actions and reposition themselves favorably ahead of time. These changes need careful curation to ensure effective implementation. The changes include: •• The analysis of the impacts that will be caused by the implementation of T2S on legacy systems and processes, in terms of both scope and depth •• The reassessment of the current arrangements with their present custodian network to identify gaps and inefficiencies and as a result, create a plan of action to identify the required adaptations •• As for custodians and their clients, implementation will require a natural evolution in the nature of service offerings to reflect the new system • • In relation to the above points, agent banks may find that their old go-tomarket strategy and position is made obsolete by the new system and requires a thorough review, not only to service existing clients but also to evaluate and search for new opportunities. 73
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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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