[ I N
D E P T H
|
T 2 S ]
T
here are some things in this world
that should be left alone. A classic
example of this is the Ark of the
Covenant in the first installation of the
Indiana Jones movie series, whereby
the opening of an ancient chest releases
a vortex of flames which subsequently
melts a crowd of Nazi soldiers seeking
immortality. That’s a huge spoiler alert
for anyone who has spent the best part of
40 years trying to avoid the ending, but
it’s an important message: somethings are
best left untouched.
When deciding whether to write our
first in-depth TARGET2-Securities (T2S)
feature in 12 months or not, we had to
weigh up this conundrum. Has everything
already been said and written about T2S
and its achievements, possibilities and
pitfalls? Or is it time to dig up the subject
again and see what we can find. Despite
the risk of the aforementioned vortex
of flames, we decided to open the chest
and look inside. We wanted to discover
whether T2S should quite simply be
classed as a ‘failure’ or not.
Here’s a quick bit of background for
those of you unfamiliar with the project,
or a refresher if like us you’ve taken a bit
of a break from tedious T2S hot-takes.
Initially proposed in 2006, the T2S initia-
tive was designed to create a harmonised
European settlement platform to remedy
many of the barriers and inefficiencies
hindering EU cross-border clearing and
settlement.
For each transaction, settlement instruc-
tions from the central securities deposi-
taries and the central bank are matched
by T2S when they enter the system. T2S
then settles the transaction on a deliv-
ery-versus-payment (DvP) basis.
Through five waves of implementation,
23 CSDs across Europe were onboarded,
and two currencies have been linked to
the platform – the Euro and, more recent-
Whichever way you look at it, the
project took a long time to complete and
suffered a number of setbacks on pro-
posed timelines, this opened the door for
widespread criticism and debate around
the worthwhileness of the initiative.
The caveat to any condemnation of the
project is that it was conceived pre-fi-
nancial crisis and then realised post-fi-
nancial crisis, where the capital markets
and financial services world was tipped
upside down.
On 18 September 2017 though, the
landmark moment occurred for European
market infrastructure occurred with the
end-point of an arduous 11-year pro-
gramme to harmonise Europe’s post-trade
settlement activities as the final Eurozone
markets went live on TARGET2 Securi-
ties (T2S).
What defines a ‘success’?
“Rome was not built in a day and nor was
T2S. It has come with some delays and as
we know it’s not entirely there yet. But
has it failed? Not at all. Has it delivered?
The promises have delivered, you could
argue it hasn’t reached 100%,” says Thilo
Derenbach, general manager of the Clear-
stream Banking UK Branch.
When assessing whether T2S should
be classed as a failure let’s look at the
dictionary definition of the word: “the ne-
glect or omission of expected or required
action”. Ultimately, if the primary objec-
tive was to harmonise the European mar-
ket then T2S has been successful. How-
ever, the proposed benefits went deeper
than the infamous harmonisation tagline
used to justify the project. Cost reduc-
tions, increased volumes, real cross-CSD
settlements, improved corporate actions
and collateral management processes,
liquidity benefits and lower safekeeping
fees were all touted as positive side-ef-
fects. Some of these objectives have yet
“If it wasn’t for T2S we wouldn’t be where we are to
standardise on Europe.”
TOM CASTELEYN, HEAD OF PRODUCT MANAGEMENT FOR CUSTODY,
CASH AND FOREIGN EXCHANGE, BNY MELLON
ly, the Danish Krone. Costs following the
completion of the project were proposed
at a maximum of 15 cents per settlement.
42
Global Custodian
Spring 2019
to be met, and given the time and money
spent on the initiative, frustrations have
been voiced frequently. The definition
of success is “the accomplishment of an
aim or purpose”, so right now we cannot
herald T2S as an undisputed triumph.
Derenbach believes however, that T2S
was a facilitator for some of these benefits
as opposed to them being primary objec-
tives of the project.
“Either people were misrepresenting
what T2S was able to do or expecting
things from an infrastructure that it
wasn’t supposed to do,” he explains.
“T2S is a conduit. It facilitated the
foundation for us to be able to do some of
these things. For the prime broker, for the
global custodian, they want to see more.
It’s not something T2S can deliver but it’s
something it can facilitate.
“Let’s use this harmonisation and build
these services on top. One of my state-
ments has been to say ‘build it and they
will come’ but with my slight modifica-
tion to make it ‘enhance it and they will
come’.”
Have we come too far?
Across the securities services industry
there remains a “we’ve come too far to
go back” mentality whereby most of the
stakeholders in the project have to stand
by the initiative. But the evidence they
present to support the project speaks for
itself, the costs per settlement are now
lower and there is market harmonisation,
but plenty of participants have footed the
bill so far, without a return on investment
just yet. Whether it’s a success or failure
might depend on which angle you are
assessing it from.
“Whether it was a success or not really
depends on what you are judging it on,”
says Virginie O’Shea, research director
at Aite Group. “From the perspective of
the ECB - it works and it does what it is
supposed to do to some extent. It brought
some markets into alignment with each
other, so it didn’t come out as much of a
cost saving, but more of a harmonisation.”
BNY Mellon says from its own perspec-
tive, T2S has fulfilled its promise and
benefitted both its own business model
and the industry.
“T2S has largely delivered on its prom-
ise and when I say that I mean its promise
for us,” explains Tom Casteleyn, head of
product management for custody, cash
and foreign exchange at BNY Mellon.
“Firstly, the standardisation of settlement,