In my previous post on TARGET2-Securities (T2S), I touched on top-level highlights from a recent Accenture survey of Europe-based banks. That survey also revealed interesting results regarding access models and asset servicing—two topics I’ll be exploring further in this post and the next.
Access model options
How a bank chooses to access T2S can have a significant impact on savings and business benefits achieved. When it comes to T2S access, there are four main options:
- An issuer CSD model, where banks access each central securities depository (CSD) individually
- An investor CSD model, where banks connect to T2S via one or two CSDs
- An ICSD or custodian model, where banks use an international central securities depository (ICSD) or a custodian to gain indirect access to T2S
- A hybrid model, where banks use some combination of the approaches outlined above
Based on our survey results, here’s what we know.
Most banks are adopting more than one access model for T2S.
Sixty percent of survey respondents are adopting models that mix access paths—and the mix varies considerably from one organization to the next. These results are consistent with the “wait-and-see” approach we discussed last time, whereby banks are hedging their bets while they wait to see which operating model emerges as the new industry standard.
Nonetheless, there is a trend toward consolidation.
On the securities side, 90 percent of survey respondents are including some form of CSD access in their models and 40 percent have shown an interested in consolidating their access through one or a few investor CSDs.
On the cash side, 75 percent have indicated a preference for settling in central bank money using one or more dedicated cash accounts (DCAs) in their own name. Of those, 67 percent plan to centralize liquidity through a single DCA for optimal cash and liquidity management.
Consolidation has the potential for significant cost savings.
Banks can simplify network management and lower costs by: reducing the number of settlement intermediaries required, connecting to market infrastructure directly through a small number of investor CSDs, reviewing their sub-custody networks and/or using a single DCA in their own name to manage liquidity. At this point, the main barriers to consolidation are cost and risk aversion.
For more on the advantages and disadvantages of each T2S access models, read “Evolution or Overhaul? How Banks Are Adapting to TARGET2-Securities in Europe.” Or, if your bank is currently exploring access model options and you’re interested in a second opinion, get in touch with me directly via email.