The first T2S meetings took place in Frankfurt and were primarily fact-finding missions. Since those meetings took place, ECB has utilised many experienced specialists to rapidly develop T2S. Although there were a few delays, T2S will inevitably drastically change the European settlement landscape.
In the future, we will see many different models of adapting to T2S. T2S gives an advantage to multi-market players, which raises the question, "Will we see single-market providers in the future?" - and the mosty likely scenario would be a continuous decline in their numbers. However, this development will be driven not only by T2S, we also recognise the increased regulatory efforts to consolidate the number of providers.
Benefits and threats of T2S
The main purpose of T2S has always been to create a single European platform that enables more efficient settlement. Will this become reality? I, personally, have my doubts. Observing the players which can access T2S, it is easy to recognise it is generally the larger ones that have connected to T2S via multiple CSDs - the model of using one investor CSD does not appear to prevail. Cross-border settlement seems to be an effective eye-catcher for retail investors; however, looking at the networks of the majority of the banks, as long as the set-up is correct, cross-border settlement already functions fairly efficiently.
What makes T2S so attractive?
Is it the price? How attractive is 15 euro cents per transaction? 15 cents is just a fraction of the T2S costs, there are also many additional costs associated with the settlement of a transaction that will increase the transaction price charged by ECB.
- When discussing with our peers, our general impression is that we will not see a dramatic price drop. Some also predict the market price will rather increase (it depends on whether you ask a network manager or a subcustodian provider). The reason is simple. T2S has and will incur huge implementation costs for most CSDs in Europe so there will be no price decrease in the immediate future.
- The number of transactions has not increased as expected since the project's launch. Of the non-euro currencies, only the Danish Krone will join T2S. ECB has reserved the right to increase settlement prices if certain criteria have not been met - and its decision on whether or not to do so will most likely be political.
The market point of view
| Streamline opearations | Liquidity management |
| In the future, there will always be ways to easily streamline operations, at least for settlement, as market entries will all become harmonised, regardless of whether one accesses the market directly or via an agent. For directly-connected participants (DCP) we will see full alignment of all settlement processes, however the majority of users will still resort to an indirect approach (ICP), via an agent, and thus settlement will not be fully aligned as there will be residual differences on the agent's side or on the CSD's side. However, I believe that we will see further harmonisation in this field and that we will gain increased inhouse operational efficiency via T2S. | Managing liquidity will be more crucial as it will provide immediate benefit. One of the main advantages of T2S is that it allows for the possibility to book all European settlements on one central bank account. It, therefore, allows netting across Europe in an overnight batch. This is good news for cash optimisation; however, it is burdened by a lot of internal challenges. The benefit can outweigh the cost, but it needs a complex and efficient cash management tool for all trades within Europe. Presently, cash management inefficiently takes place within each market but the risk of failed trades purely because of that is relatively limited. |
UniCredit's response
| Efficient adaptation | Operational efficiency |
| The volumes in Austria, Slovenia, Slovakia, Romania and Hungary are very low. For the four smaller markets, we do not see any major need to adapt as the required liquidity is low and the costs associated with the adaption would be much higher than the benefits gained. In Austria, however, we do see a benefit of netting, which is provided to all of UniCredit's clients. We still provide free of charge intraday and overnight liquidity for settlement and during the day there is no necessity to maintain free cash for settlement. Clients will still be able to manage their accounts with us through regular correspondent banking payments. | UniCredit aims to fully align with all T2S standards, which will allow clients to increase their operational efficiency. Our current model, which was developed together with our clients through open dialogue in the last several years, would require only limited changes from them. We will adopt certain SWIFT messages according to T2S standards, which will allow the use of all benefits T2S has to offer: hold and release, additional matching fields, prioritisation, etc. |
The way forward
We expect further customisation in the use of T2S and, therefore, will continue to adapt to these changes and maintain the dialogue with our clients.
We see potential in the following models:
Operator model
The implementation of the operator model might be supported by the efforts of regulators as well as by the increased risk apprehension of depository banks. The benefit is clear - if the depository bank contracts directly a CSD, then it is not liable. There has been a tendency to shift the risk of loss of assets towards the agent banks, although even in this case the liability of the depository bank towards the asset manager is not completely eliminated. Under AIFMD, there is a possibility to shift liability but only if certain criteria have all been met. Under UCITS though, shift liability towards agents is not possible, any such shift that occurs between the depository bank and its agent bank is strictly contractual and does not affect the asset manager. However, such contractual shift of liability will not result in complete mitigation of agent bank risk, as bankruptcy of the agent will have profound impacts on the depository bank.
Asset servicing model
The asset servicing model requires the most efforts and is a viable alternative only if the volumes are relatively high. The model requires access to a CSD, either via a DCP or an ICP link. The asset servicer provides services for corporate action, income collection, etc. There is more than one way to achieve this goal. The most secure, as well as the most expensive, is to mirror all transactions at the asset servicer level. The alternative would be to provide information via automated SWIFT messaging based on a regularly updated list.
Integration of Austria and CEE
For us at UniCredit GSS this is our core region and we believe we will see a slow but constant migration towards T2S in the coming years. As we are present on the ground in these markets, we are in the position to fully concentrate on them, with Austria acting as a hub for the GSS business.
Günter Schnaitt
Head of Global Securities Services Austria
Member of the ECB T2S Advisory Group