“TARGET2-Securities (T2S) is not A project – it is THE project”, because of its size and strategic implications. It is a mistake to view T2S as a technical project only: market participants of all types must decide what they want to be “when they grow up”. If they ignore the strategic aspects, they will end up outside the train, watching it move away – and the T2S train WILL leave the station so all players, including indirectly connected participants (ICPs), must be on board.
These were among the key messages delivered by an impressive line-up of senior expert speakers during a recent conference on T2S hosted by SWIFT in Milan, attended by 120 participants. The agenda was based on the premise that T2S will profoundly change the post-trade securities world – or, as Bernhard Stricker, T2S Client Relationship Manager at the European Central Bank (ECB), put it, “in the post-trade world T2S will be like being born a second time”.
Discussions during the one-day conference explored the current state of readiness of the T2S platform and different types of market participant, as well as looking to the future to ask how the Italian securities markets will develop post-T2S. They reflected the especial urgency for Italian market participants to be ready for T2S - and to deal with the strategic implications of the new platform – since the market will join in Wave 1 next year.
We fear that some players are putting too much emphasis on the IT aspects. We think it is important to have a wider vision and have developed a clear strategy before making any decisions.
Delegates heard that T2S is on track to go live on time in 2015 and that most directly impacted players are also on time, although the project has been huge, has required significant investment (both money and resources) and has not been without challenges due to a high number of change requests, which has created concerns about the stability of the platform. In addition, it was clear that users still have many questions about the offerings of their providers – for example about pricing of new services.
One of the biggest potential pitfalls identified during the discussions is the tendency to view T2S as a technical rather than a strategic project. As Dario Locatelli, Head of Product Management, Direct Clearing, Settlement & Custody, BNP Securities Services, said: “During the project we have certainly looked for efficiency gains at the system and technology level, but we fear that some players are putting too much emphasis on the IT aspects. We think it is important to have a wider vision and have developed a clear strategy before making any decisions.”
The ECB too confirmed that T2S cannot be considered as just an IT project, but has evolved over the years to encompass process review and also harmonisation in a fuller sense. The advice to those participants less impacted and just kicking off their T2S projects was to “think well on both the strategic and technical impacts” before pressing ahead.
When it comes to the benefits T2S will bring, settlement cost reduction will not necessarily be one of these – at least not in the short term, due to the time it will take to amortise the project costs, delegates heard. That said there are opportunities for cost reduction through more efficient liquidity and collateral management. In the view of Paolo Cittadini, CEO, Monte Titoli, “the best has yet to come” in terms of the benefits of T2S for the market, which will play out over a longer period of time. Paolo Tadini, Head of Securities Services, Istituto Centrale Banche Popolari Italiane, confirmed that “T2S wave one is only the starting point of a project that will become much bigger”.
BNP Securities Services’ Locatelli told delegates that while very large clients are keen to capitalise on the benefits of T2S as soon as possible and are asking for more information about new products and services, many others are asking one question: what is the minimum I have to do? “Not all the options and benefits have to be taken up tomorrow,” he said – “they can be further analysed and evaluated at a later time”.
Danila Bernardi, Head of Direct Securities Services Italy, Deutsche Bank, agreed that it is not appropriate to talk about one new service model applicable to all customers. “Our clients are all different, and have different needs, and we therefore need to offer tailor-made services to them.” This view was echoed by Mario Recchia, Local Custody & Broker Dealer Solutions, Intesa Sanpaolo, who said it was necessary to perform “a lot of interactions with customers to understand their needs”.
The audience heard a mix of views on how far T2S will enable true securities market harmonisation. According to Marcello Topa, EMEA SFS Market Policy & Strategy, Citi, T2S is neither a starting point nor an end point – but rather “a point of evolution” for the market. It brings the potential for harmonisation, on which the industry must work together. As Gaël Nicora, Business Executive Asset Servicing, BNYM T2S Steering Committee member, BNY Mellon, pointed out, T2S does not make any intervention on registration or asset servicing, saying: “It would have made sense to have done this all on one platform.” Instead, providers will still have to accommodate local specificities for asset servicing, said Cristina Belotti, Head of Product T2S, Societé Générale Securities Services. Labelling standardisation as both an opportunity and an obligation, she told delegates that “T2S helps in harmonisation”, but questioned when the market would reach “full harmonisation”.
In the post-trade world T2S will be like being born a second time.
The impact of T2S on the shape of the securities markets in the future will be significant when it takes full effect, delegates heard. While Claudio Anfossi, Senior Partner, BeConsulting, pointed out that the impact on competition and the number of players in the market will be “uncertain until the system starts”, the ECB’s Stricker confirmed that competition for settlement services will be higher in the future – and that not all central securities depositories (CSDs) and custodians can survive. Cittadini from Monte Titoli too said in the longer term he expects a significant reduction in the number of CSDs, while BNY Mellon’s Nicora predicted a reduction in the number of custodians from 50 to 25 by 2020.
The competitive pressures it creates does make T2S a “catalyst for innovation”, Michele Bernardi, Executive Director, Southern Europe & Benelux, Clearstream Banking, told delegates. Indeed, innovative responses are already apparent – such as the creation by BNY Mellon of a new CSD to protect and grow its collateral business, which, according to Nicora, ranks among the investments the bank is making “today, to be in the market tomorrow”.
Reinforcing the importance of viewing T2S as a strategic and not just a technical project, Citi’s Topa echoed this view, reminding delegates that “to be able to implement some strategies in the future, some choices must be made today”.