Putting the back office in the spotlight: the widespread impact of T2S
Europe’s post-trade infrastructure is undergoing significant change, driven by the implementation of the single settlement platform Target2-Securities and the forthcoming CSD Regulation (CSD-R). As a result, market participants need to review their current back office system capabilities, writes Harry Newman, head of market initiatives EMEA at Swift.
As independent analyst Celent states in its recent report, The European Post-Trade Ecosystem under T2S: Dealing with Complexity, despite the ‘sea change’ that is coming, there are some “major discrepancies among market participants in terms of their readiness for T2S implementation”.
Unsurprisingly, the central securities depositories and large custodians are furthest along the curve. This makes sense because it is these players that will likely connect directly (investing between €7 million and €27 million to do so, depending on the route they choose, according to Celent).
And it is at the market infrastructure level that the biggest direct competitive impact of T2S will be felt. The level playing field created by CSD-R in tandem with the commoditisation of settlement driven by T2S will change the game for CSDs. We’re already seeing banks such as BNY Mellon enter their territory, and this competitive pressure will require them to look for new sources of revenue.
As Celent confirms, there are “opportunities to develop additional sources of revenue” – but, the analyst adds, “these opportunities mainly seem reachable to a handful of market players that have the scale and reach to reap the benefits of the future changes”. In other words, CSDs that have differentiated themselves by providing settlement in local markets are likely to face an uncomfortable time.
It makes perfect sense then that the CSDs and other market participants planning to connect directly and likely to be most significantly impacted are already some way along the road to preparing for T2S from both strategic and technical standpoints.
But it is not only those planning to connect directly that will be impacted by T2S. Those (financial intermediaries such as custodians, agent banks and broker/dealers) with the luxury of choice about whether to connect directly or not still need to make the choice – and this means they must assess the pros and cons for their businesses and plan the back office changes they will make as a result.
In addition, while it is not completely clear how yet, T2S will herald change for all players involved in settlement in Europe to a greater or lesser degree. So the ‘discrepancies’ identified by Celent – the fact that those less impacted are “still navigating the complexity of T2S” and “do not have a clear strategy regarding the future of their European post-trade infrastructure” – is a cause for concern.
Indeed, since T2S could present opportunities for better service for many of these players, fuelling industry debate about the wider market impact of T2S and assessing its strategic and technical implications for non-directly connecting players sooner rather than later has to be a priority.
Detailed discussions on the wider impact of T2S are starting to happen, and already some important issues are being raised. For example, buy side firms may well be able to get better information from T2S to control risks around securities settlement. In theory, there should be a lot more data available from T2S – about how settlements are progressing, current status and more – over and above the information that is available today. To what extent will direct users of T2S make this data available to indirect participants? And what technology solutions will the providers and consumers of this information need to take advantage of it?
It seems increasingly likely that, over time, there will be types of direct user – those who join to process transactions, and others who join in a lighter fashion to manage their own liquidity more directly but not process transactions. But are players looking at this option and the opportunities it will provide?
The sooner these questions are answered, the more rapidly the benefits of T2S will be felt across the market as a whole.
Clearly, market participants most impacted by T2S and set to connect directly already need to be – and typically are – tapping into sources of market expertise to help them assess how to reshape their business models and their back offices and to evolve their post-trade environments most efficiently and cost-effectively.
But it is also clear that the wider community of market participants will be impacted by T2S as well, and therefore it is also time for these firms to work with expert providers to determine exactly what that impact will be. They can then formulate their strategic responses – and budget and plan in good time for any process and technology changes they need to make to take full advantage of the evolution of securities settlement in Europe going forward.