How technology can improve the management of liquidity in T2S

By Roberto Bruschi | 28 June 2016

Target2 Securities is in the middle of its migration phases right now. The first two waves were successfully completed in June/August 2015 and February 2016. The next one due by September, will carry significant volumes. By February 2017, following the fourth wave, approximately 95% of the post-trading European markets will operate on the new European settlement platform.

T2S is one of the most complex projects ever undertaken by the financial industry in the last 30 years. The industry has questioned the balance between real cost and benefits of the migration, especially as a comprehensive assessment will be available only in the future years.

As a software vendor, we would like to share the lessons learnt during the first migration waves and describe the winning aspects in the participants’ T2S implementation projects.  

According to our experience, working in three European countries with FIs participating in different connection models (DCP, ICP, Mixed model or using a Global Custodian), the following considerations can be seen regardless of connectivity and “securities business configuration” (using one or more CSDs, ICSD or Global Custodians).

Project stakeholders

The initial approach to the project was to consider T2S as an evolution of the previous settlement system. Consequently, the general line of action was to allocate all business analysis and project implementation activities to the back office department of the Financial Institutions.

The role of the cash management area was still very marginal and limited to collecting minimum requirements for the management of the new Dedicated Cash Accounts (DCA). This approach allowed the Securities Back Office to achieve their requirements, but limited other business areas such as risk, liquidity and collateral management in acquiring the desired level of information and features.

On a later stage, it emerged that treasury played a predominant role in the reorganisation of their cash and liquidity management model according to the new settlement deadlines, systems and format upgrades.

Data availability and connection model

On the securities settlement side the choice between a direct and an indirect connection was mainly driven by the volume of transactions and number of CSDs holding securities accounts in T2S. A single technical connection to manage settlement activity delivers significant benefit especially in the case of high volume of transactions and multi CSD participations. The greatest benefits include:

  • Cost reduction (less intermediaries in settlement chain and reduction of technical interfaces to CSDs)
  • Standardisation of operations and IT architectures (instructions life cycle is similar for all the markets and managed through a single technical interface).

On the cash side, the connection mode to T2S as a Direct (DCP) or an Indirect (ICP) participant largely depends on what degree of visibility and level of interaction the user wishes to get from the platform to manage their Dedicated Cash Account.

The set of functionalities vary considerably between the two configuration schemas, as ICPs cannot access to most of T2S features.

The functional gap for ICPs relate to advanced tools such as settlement restrictions on cash (useful to segregate liquidity within the same Cash Account), Client Collateralisation mechanism (allows T2S to select automatically collateral from customers exceeding their limits) and additional features such as internal liquidity transfers between two DCAs, real time cash notifications and intra-day/end-of-day statements/reports.

A direct connection mode to T2S delivers the ultimate degree of visibility and high flexibility in interacting directly with the platform. However, once all T2S functionalities are accessible, there are additional tasks to take into consideration to fine-tune the messages configuration and enabling internal application workflows.

The new T2S infrastructure interacts with the settlement platform on cash side, ensuring data quality but the high volume of the messages exchanged (notifications, queries and reports) can bring significant running costs. The management of liquidity in T2S requires an additional effort to optimise operational requirements, such as reducing the number of messages exchanged with the platform.

Winning Approach (which, how to and why)

As a software provider for both cash and securities settlement, we have built up a number of value-added services emphasising the importance of applying an “integrated approach’’. Collecting all information of cash and securities legs of a transaction allows the ultimate consolidation of data in a centralised monitor (and database) for all T2S activities, both for DCP and ICP participants.

In our experience, the capabilities required to speed up this process comprise:

  • Managing status updates of Settlement Instructions and Corporate Actions flows affecting the cash side, valuation prices and Securities Position (updated in real time using settled operations)
  • Acquiring and reconciling all information (forecast, transactions and statements) delivered by T2S, CSDs and/or Bank Back Office applications on a real time basis

Accessing a common source of information and activating simultaneously real-time enrichment and reconciliation processes will improve significantly the daily management of liquidity on DCAs. Some of the key benefits achieved with an integrated approach are:

  • Real-time and full visibility of intra-day and medium/long term forecast
  • Embedded calculation of collateral on stock and on-flow positions
  • Reduced cost of interactions with the platform by limiting the number of queries made to T2S (Balance, Collateral, Limits), as information can be enquired only twice or three time a day by critical cut-off
  • Consolidated settlement information (enhanced reconciliation process by using cash and securities legs)
  • Improved accounting: the individual settlement notifications are missing key information such as ISIN, counterpart, client reference
  • Monitoring of credit exposure extended to customers on intraday and end of day basis, also for FI’s customers using an omnibus account.

From the back-office user’s perspective, centralising data in two different repositories may generate concerns. However, data is stored and managed separately for two different purposes. Back-office will remain in charge of managing all operational issues, whilst treasury will include data information mainly for intraday and next days’ forecast purposes.

Based on the ongoing dialogue with our customers, our experience highlights the importance of having an integrated system managing both securities and cash. The benefit of a common database is the foundation for an efficient and cost-saving liquidity management that enables a further degree of transparency.

Moreover, data integration is not only a T2S issue. In the past few years, other business areas are analysing a similar approach, for example in the projects implemented to meet the Basel3 requirements (LCR and Intraday Liquidity) or in collateral and risk management desks.

Implementing this model for T2S allows for the capture of all its advantages, the testing of the model and then, when successful, the extension to other areas.

By Roberto Bruschi, Product & Business Development Manager – Capital Markets & Treasury, TAS Group.

Register for TAS Group's webinar on T2S: Technology, Cash & Securities Management, Maximise Liquidity Savings coming up next week here.

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