T2S aims to integrate and harmonise Europe’s settlement processes and infrastructure. However, its chances of success will significantly increase if key elements of this harmonisation take place before the first wave of migration. Here we outline five of those harmonisation issues.
1. Moving to T+2 will be challenging
Reducing settlement times is likely to prove more complex than is often thought, since it affects the whole settlement chain, from retail investors to central securities depositories (CSDs). Early adoption of T+2 will avoid the complications of introducing faster settlement while also implementing a major new system.
However, only Germany is currently at T+2 and it will probably need a mandate from Europe to drive the rest of Europe’s markets towards T+2.
2. Smooth cross-CSD settlement
The first wave of migration will see three CSDs using T2S. The issue is how the many CSDs ensure they effectively handle cross-border trades.
CSDs will need to be able to route to the T2S system and make sure that cash and securities change hands. In addition, CSDs will need connectivity to each other from the start of the first wave until they have all joined T2S.
3. Harmonising communications
Effective cross-border settlement requires a standard set of information to be gathered and matched. The market has become much more complex since the last message standard came into force and this has led to the proposed introduction of ISO 20022, which will govern all communications between CSDs and T2S. It is likely to result in more information being reported but the precise specifications and implementation date are not yet clear.
Matching fields also need conforming. At the moment, each CSD determines the matching information it requires and there are different ways of pairing trades. There are also varying tolerances for minor differences between fields, so T2S needs a standard list of fields and a defined set of tolerances so trades can easily be matched.
In addition, it is critical – for both reputational and financial reasons – that CSDs handle corporate actions correctly. Across Europe, there are many variations in the way they are communicated and a standard reporting format needs to be found.
4. We need a common understanding of ‘settled’
T2S’s success requires agreement on the settlement discipline regime – the rules and regulations that govern how CSDs and market participants must act. A single approach across all markets will minimise the chances of failures.
We also need clarity on what is meant by ‘settled’. In some countries, a transaction is settled when cash and securities are exchanged. In others, there are additional steps such as registration.
5. A single process for tax collection
A single process for collecting transaction taxes will do a great deal to support the introduction and success of T2S. While local governments will continue to decide how they calculate these taxes, CSDs need clarity about how to gather them, so that collection works properly whatever country the trade takes place in.
Early harmonisation will help realise the benefits of T2S
Harmonisation is difficult and complex and will require investment. The upside will be greater efficiencies and a significantly easier introduction for T2S. It requires the support of everyone involved and will be key in realising T2S’s success, breaking down national monopolies and stimulating competition. The question is how much harmonisation will be possible in advance of the project and how we might integrate further harmonisation initiatives in a post-T2S world.
Head of Sales & Relationship Management, Post Trade Services, London Stock Exchange Group