ECB to Examine Closer Target2 and T2S Integration

Europe took a deep breath on September 19 when the Spanish, Lithuanian, Latvian and Estonian central securities depositories (CSDs) announced their successful migration to the Target2–Securities (T2S) settlement platform. It was the final wave of migration that concluded the planned implemented phases of an ambitious European project, orchestrated by the European Central Bank (ECB).

Envisaged as a single, cross-border platform for the settlement of securities in central bank money, T2S went live with its first migration in June 2015, but had been years in the making before that. Mehdi Manaa, head of the market infrastructure development division at the ECB, tells WatersTechnology that T2S was a huge project for market integration in Europe, one that took a lot of time and effort to implement. “We are going to need a few weeks to realize the magnitude of this achievement,” he says. This, however, is not the end of the project, which has future expansions planned and a possible link with another major Eurozone settlement system.

“The journey of T2S is not over yet,” says Manaa when asked what the ECB is thinking of doing with the platform, now that the planned initial migration waves are over. 

“First of all, the Finnish market hasn’t migrated to the platform yet,” he says. “Then we have the Danish krone migration next year, which will make T2S a multi-currency platform and some of the other European markets may migrate as well after Denmark.”

Besides, T2S is not a one-off project, designed to serve the business strategies of market participants. When the European Central Bank conceived the idea of a pan-European settlement platform some 10 years ago, it was meant to become the system that would unify market activity across the continent. Indeed, T2S is often mentioned in the context of capital markets union as one of the primary methods by which the Eurozone has broken down the so-called Giovannini barriers in post-trade—the legislative, operational and financial obstacles to achieving a true single market in cross-border securities settlement within the European Union.

“You have to bear in mind that T2S is a platform that offers services to the market and they can’t be in a standby mode,” Manaa says. “There needs to be an evolution of these services depending on both business needs, and of course, regulation, which requires regular updates of the platform.”

Long before the conclusion of the final migration wave, the ECB started thinking about the next steps of the platform and how a post-T2S world could prove beneficial for Europe. 

There were lots of ideas, but so far one has been put forward as a possible, practical outcome: “We are looking into bringing T2S and Target2 closer together,” explains Manaa. Target2 is the Eurozone’s real-time gross settlement system for large-value payments, with 1,076 direct participants, 701 indirect participants, and 5,072 correspondents, according to the latest ECB numbers.  

“We are still doing the technical analysis, and if we have a convincing case then we will make the proposal by the end of the year,” Manaa says. “This is something that we have been considering for over a year now and which we would continue in close collaboration with the market.”

The ECB, Manaa says, thinks that there are two key benefits deriving from this synergy. “We believe that this consolidation will reduce the operating costs for both T2S and Target2, and it will modernize Target2,” he says. 

Intense Preparations

The final migration wave for T2S also saw three CSDs in the Baltics merge into one entity, under the aegis of Nasdaq, the operator of the businesses. Indars Ascuks, head of the Nasdaq Baltic Market and CEO of Nasdaq CSD, said in a previous interview that the merger was a result of an increasingly demanding technology environment in the settlement space. 

“New technology demands for the CSDs in Europe and globally, the regulatory requirements such as CSD Reg and the re-authorization of CSDs in Europe, as well as Nasdaq’s ambition to build a strong and unified market infrastructure in the region [prompted the move],” Ascuks stated. 
 
Manaa says the merger created a challenge for the Baltics and that the ECB was well aware of the difficulties it caused in terms of the migration. “Combining the merger with the T2S migration was a challenge as they had to consolidate the difficulties of migrating and the complexity of the merge itself,” he says. “Fortunately, everything went smoothly in the end.”

Spain’s Iberclear, the CSD for the fourth-largest market in Europe, migrated alongside the Baltics and had its own issues to contend with. The migration was undertaken against the backdrop of general regulatory reform in the post-trade environment, prompted by its accession to T2S, which the Spanish government had initiated two years ago. 

Jesus Benito, CEO of Iberclear, explains that this reform was accomplished in three steps: “The first step was to change post-trading for equities. It took place in May last year, with the introduction of central counterparty (CCP) clearinghouses, and the migration of the equity settlement system to our Arco platform,” Benito says. “The migration to the T2S platform was the second step of the reform, for the fixed-income instruments to migrate to the Arco, and then Arco migrating to join T2S.” 

Adapting to new legislation made the migration challenging, and difficulties experienced by the previous waves regarding technical issues with the T2S platform and testing created concerns around the possibility of a migration failure. However, Benito chalks up Iberclear’s success to thorough and intense preparation.

“We started in October last year, opening our testing environment well in advance, and in this year we made four migration test rehearsals,” he says. “We did one additional test compared to the others, and although we were very good in the testing, we thought that the more you test, the better the results will be.”