Target2-Securities (T2S) were developed to encourage cross-border settlements between European countries and to homogenize post-trade settlement by putting it on the same platform.
Unlike other European-wide regulatory initiatives, such as the Single Euro Payments Area (Sepa), it has not been implemented in a single push. And although there have been some minor setbacks, implementation has not seen substantial changes to the original deadlines.
By comparison, Sepa was pushed back by six months after it was found few institutions would be ready in time.
The process is being implemented in four waves; it began in June 2015, with the final wave slated for September 2017.
Graham Ray, global head of product management, global securities services, at Deutsche Bank, says the approach has been beneficial, adding: “The collectiveness and collaboration of the industry is helping to overcome the challenges that you would expect from a programme of this size and scale.”
There has been rigorous testing at each point to ensure systems are working properly, and to make changes when they are not.
“During the dress rehearsals for the implementation of wave four and in relation to the point of no return, some delays were experienced, but nothing that is making us concerned at this stage about wave four being unsuccessful,” says Ray.
Having the processes implemented in stages across Europe has helped to segment issues and tackle problems on a smaller scale.
Henry Raschen, HSBC
Henry Raschen, head of regulatory engagement, securities services, at HSBC, says: “There was no need for a big bang approach to T2S implementation. Having a staggered approach to implementation has reduced the migration risk. Starting off with some smaller markets has allowed for any problems to be ironed out early on.”
Although the move has not encountered difficulties, it does not mean each participant in the process has moved swiftly.
Diane Nolan, global lead for T2S, capital markets, at Accenture, says: “Some have been initially a bit slow to move, but have significantly accelerated as their respective deadlines were approaching and have been very successful in adapting and delivering on time.”
Despite it being mandated by the European Central Bank (ECB), there was some dissent over the benefit of introducing T2S.
Deutsche's Ray says: “In the marketplace there has been some noise around T2S, some pessimism about if it is a positive move for the market. It is a long programme of implementation, but everyone is getting a return on the cost of investment. It is a very positive initiative for Europe.”
The cost itself has raised concerns.
Raschen at HSBC says: “The stated cost of implementation is around €450 million, borne so far by the ECB and the national central banks.”
However, looking at the long-term picture demonstrates where savings could be made. Raschen says there will be immediate savings on cross-border settlements, and reduced fees.
Banks are looking into how they can consolidate their operations to reduce costs. The Accenture report Evolution or Overhaul? How banks are adapting to Target2-Securities in Europe questioned banks on whether they are planning to use the implementation to rationalize other areas of their business.
Although the majority of respondents stated they had no plans, 25% stated they are planning to rationalize at the same time as their connection to T2S. A further 10% said they would rationalize before it was implemented.
Ray says: “Clients need to look at their business inclusive of a front-to-back operating model to create value. Fee reductions alone will not give them the potential maximum savings from the initiative; liquidity and collateral are paramount opportunities to optimize the benefits.”
Those who migrated in earlier waves might already be seeing some cost reductions.
Ray says: “What needs to be recognized is even before there has been a complete migration of all waves, it is possible to optimize components to benefit from the initiative.”
Respondents to the Accenture report identified liquidity management as being the primary benefit of implementation, ahead of settlement processing and collateral management, providing further financial incentive.
Accenture's Nolan says: “There is easy access to intraday liquidity for leverage on T2S transaction settlement, which is an appealing service encouraging adoption of T2S, we expect to see full leverage once all implementation waves are completed.”
However, Nolan warns it will take time for the real benefits to be felt, adding: “There is the expectation there will be a reduction of transaction costs through the harmonized and streamlined services that T2S brings. That said, these reductions have for a large part not yet been applied. Pricing strategies are not yet adapted because there is still further investment to come.
“There is an expectation of a long-term cost reduction and lower transaction fees. Running costs need to be optimized. The cost savings will be seen after the process is completed.”