Target2-Securities: Wave Two on Course for Launch as Precursor to Arrival of Euroclear

T2S launched its first migration wave in June last year as the Romanian, Maltese, Swiss and Greek markets joined the European Central Bank (ECB) project to harmonize Europe's securities settlement landscape through a unified platform.

At a BNP Paribas Securities Services event this week, a panel of speakers outlined what has been learned from the first migration wave and where the main challenges lie ahead of wave two on March 28.

"To ensure the migration is a true success, we collectively need to leverage past experiences and learn from past issues, with much more focus on Standard Settlement Instructions (SSIs) and cross-border requirements," said Jean-Marc Baudot, head of Euronext CCS product management at BNP Paribas Securities Services, during an opening statement.

State of Play

Mehdi Manaa, T2S program manager at the ECB, said that at present, the platform is experiencing around 20 percent of the total estimated settlement volumes expected after the final migration wave, which is line with the ECB's anticipations. "We have, for the time being, just 20 percent of the result but we have done at least 80 percent of the work," he said.

"The content of the SSIs will change; there are new fields that have to be filled accordingly. If we fail to do that we will have at launch trades that remain unmatched on the first day of settlement."

Wave two will see Portugal (Interbolsa) and Belgium (National Bank of Belgium Securities Settlement Systems) join T2S, but it is the absence of settlement giant Euroclear's three central securities depositories (CSDs)—Belgium, France and the Netherlands—that is the most notable.

Euroclear announced in October last year that it would not meet the March deadline, requiring more time to "ensure a safe and stable migration," in a move similar to Italian CSD Monte Titoli prior to wave one.

Now scheduled to join T2S in wave three in September this year, alongside VP Lux (Luxembourg) and VP Securities (Denmark), Euroclear will bring the bulk of settlement volumes that will be the true test of the platform's stability and functionality.

Manaa said the platform is largely stable and, to date, had experienced 21 incidents that required the intervention of various T2S program managers, without major impacts to the system.

Forward Focus

As migration wave two approaches the focus is to iron out existing wrinkles that caused disruptions during the first wave and easing the transition ahead of September's wave.

Stephen Burton, director post-trade at the Association for Financial Markets in Europe (AFME), said that following the Italian market's migration, one very important issue was discovered that was affecting both buy-side and sell-side institutions: SSI, the datasets—such as cash account, CSD information and agent information—required to settle transactions with a counterparty.

"SSI is probably the biggest single aspect that caused the most problems," said Burton. "There was plenty of information in advance, there were a few changes and challenges that we came up against in the Italian market that we thought we had overcome, but then we found that trades just weren't matching—going from around a 90 percent match rate to nearer 70 percent just after the migration of the Italian market."

Burton said there needs to be common understanding and clear communication between all participants about what SSIs will be required during the upcoming migration waves, because it is "inevitable that they will change in some shape or form."

It was a point also raised by Marc Tibi, head of infrastructure and regulatory projects at BNP Paribas Securities Services, who described SSIs as "critical."

"The content of the SSIs will change; there are new fields that have to be filled accordingly," he explained. "If we fail to do that we will have at launch trades that remain unmatched on the first day of settlement. So it is important that we all understand that the SSI database is already recorded."

In an effort to avoid SSI's being modified at a late stage, Tibi said there is a push to freeze modification of the datasets before the third migration wave. Although there is no fixed date in place yet, Tibi said he hopes it will occur sometime before summer.

Prior to the addition of Euroclear to T2S in September, there will be further extensive testing carried out between the launch of wave two and July. Alex Dockx, T2S program director at JPMorgan, said while lessons from previous efforts need to be learned, there is still a lot of work ahead.

"Apart from all the preparations for wave two, we have wave three to look forward to," Dockx said. "That is the next big test, it's really about September. It's a very busy schedule and every delay will compress the other waves. It's better to delay and to be prepared, rather than rush and live with the consequences."

The Bottom Line

• The second migration wave for T2S occurs on March 28, 2016, and will indicate what lessons have been learned from last year's first wave, prior to Euroclear bringing a large volume of settlements to the platform in September this year.