Implementation of the Target2-Securities (TS2) single settlement platform by the European Central Bank (ECB), coupled with the impact of the central securities depository regulation (CSDR) proposed by the European Commission (EC), will require financial market participants to conduct a thorough review of their back office system capabilities, but a Celent/SWIFT report indicates “major discrepancies” in the readiness of individual firms.
The report entitled ‘The European Post-Trade Ecosystem under T2S: Dealing with Complexity’, and produced by Celent in conjunction with SWIFT, is based on detailed interviews with major participants in the European post-trade environment and custodians. It finds that the post-trade providers most impacted by T2S – central securities depositories (CSDs) like Euroclear or ClearStream – are the most advanced in their preparation despite the upheaval to their traditional business. However, other market participants that will be impacted to a lesser extent by T2S, such as banks and broker/dealers, are still navigating the complexity of moving towards the single securities settlement engine in Europe. The recent announcement of the T2S implementation delay until November 2016 illustrates the struggles the industry is having with this project.
“We have found that while most market participants have a good high-level understanding of the T2S platform, there are some significant gaps in the industry’s T2S adaptation plan,” said Axel Pierron, the author of the Celent/SWIFT report.
Although the long-term benefits of the T2S European securities settlement engine in improving the efficiency of the European capital markets are clear, the report considers the short-term challenges that banks, CSDs and custodians face and estimates that the level of investment required to adapt a back office to the T2S ecosystem will range from €7m for a market player that modifies its existing system using a communication hub plus adaptation layers, to €27m for a player that decides to revamp its back office systems for both settlement and custody.
Much of IT the investment for T2S will be driven by communication complexity, the report finds. “Market participants will have to operate in an ecosystem that relies on disparate messaging formats, and where many local specificities remain,” states the report. “This situation not only generates additional cost but also raises some concerns about the operational risk incurred by market participants in case of communication failure and mismanagement.”