Last week, I discussed TARGET2-Securities (T2S), a platform in the European Union that aims to reduce post-trade inefficiencies. This week, I would like to highlight three of five key questions for market players to consider in a post-T2S world.
1. Is T2S really going to decrease Europe-wide settlement costs and foster competition?
At its inception, the aim of T2S was to reduce the cost of settling delivery-versus-payment (DVP) transactions through higher volumes and economies of scale. However, the poor economic outlook, plus the refusal of the UK, Nordic and Swiss markets to join T2S, has resulted in lower settlement volumes than the European Central Bank (ECB) estimated in 2007. Furthermore, the current Eurozone crisis brings new challenges.
Market players should consider this uncertainty as they define their post-T2S business models. Banks that must settle via these market players need to determine how to evaluate and identify intermediaries that can deliver reduced costs due to T2S.
2. Will T2S act as a powerful catalyst to harmonization post-trade practices in Europe?
T2S has already led to a single operational day schedule with common cut-off times for different markets, and will likely have many beneficial effects on post-trade services in the Eurosystem. However, as T2S focuses solely on settlement, major steps are still needed on corporate actions processing and harmonized processing among National Central Banks.
Banks should evaluate the impacts to system and processing changes due to harmonized rules and tools.
3. Will T2S make cross-border transactions as simple as domestic transactions?
T2S has the potential to enable cross-border settlement in a fully automated, straight-through processing (STP) manner. This is because if two investor Central Securities Depositories (CSDs) are connected to T2S, they can automatically conduct cross-border settlements between themselves. However, the presence of multiple International Security Identification Numbers (ISINs) for the same security in different markets might limit the effectiveness of T2S as a fully automated securities settlement system.
Banks should evaluate their assets and markets with which they do they most business. Consequently, they should determine which intermediary will provide the best service and leverage T2S in the most efficient and effective manner.
Join me next week as I highlight two more questions that industry players should consider in light of the T2S initiative.
To learn more, download TARGET2-Securities: Are You on Target? (pdf; opens in a new window).