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This document was produced for the client's internal use. Circulation, citation or reproduction aiming for deployment outside of the client’s organization is therefore prohibited without the prior written approval of Be Consulting, Bluerock Consulting or targit GmbH. This material was provided as written support for oral presentation: It is therefore not exhaustive without the accompanying verbal commentary.
T2S: NEW STANDARDS ON ASSET SERVICING AND LIQUIDITY MANAGEMENT Claudio Anfossi, Director, Head of Securities Competence Center, Be Consulting, Milan Peter Peschek, Managing Consultant, targit GmbH, Vienna
Post-Trade Forum, Vienna, September 11th, 2014
BE CONSULTING & TARGIT GMBH 2
T2S: NEW STANDARDS ON ASSET SERVICING AND LIQUIDITY MANAGEMENT
• Impact on Global and Local Custodians
• Changes on Asset Servicing
• Liquidity Management will not be the same anymore – an Overview
• Securities and Cash Financing becoming strategically important
BE CONSULTING & TARGIT GMBH 3
WHO? - MAIN T2S STAKEHOLDERS
12 ottobre 2012 Copyright © 2012 Claudio
Anfossi
CSDs (Global)
Custodians (Local)
Custodians Asset Managers Investors
CSDs CCPs Trading Venues Brokers/Dealers Investors
Custo
dy
Sett
lem
en
t
Custody & Settlement Value Chain
BE CONSULTING & TARGIT GMBH 4
KEY EXPECTATIONS
Key Issues Key Expectations
IMPROVE LIQUIDITY
MANAGEMENT
REDUCE SETTLEMENT
COSTS
HARMONISE SETTLEMENT PROCESSES
•Enable financial intermediaries (banks, investment firms, etc.) to settle all securities transactions performed in the Eurozone by using a single account, with significant advantages in terms of liquidity management
•Significantly reduce the settlement costs for cross-border transactions and align the cost of domestic transactions
•Harmonise practices and standardise the settlement processes in the different countries, by fostering innovation and competition
•Create a technical standard (based on a new platform), for the settlement of securities transactions, both at a domestic and at cross-border level
•The new T2S platform will be managed at a European level and will interact with local CSDs (Central Securities Depositories) and single intermediaries
•The first T2S “clients" are CSDs
•T2S is not mandatory, but offers strong business and operational opportunities to "first movers"
BE CONSULTING & TARGIT GMBH 5
FROM EXPECTATIONS TO IMPACTS
Expectations
Reduce the current fragmentation of securities settlement infrastructure in
Europe
Harmonize settlement services in Central Bank
Money (CeBM)
Reduce costs of cross-border securities settlement to
domestic level
Increase competition among providers of post-trading
services and break up monopolies
Support to EU Financial Services Action Plan and contribute to removal of
Giovannini Barriers
Reduce risks
Promote lower overall collateral requirements,
reduce collateral costs and improve liquidity
management
Impacts
BE CONSULTING & TARGIT GMBH 6
T2S: CHANGE IN BUSINESS MODEL?
It is widely believed that the introduction of T2S, as a single shared platform (SSP) that provides outsourced settlement services to national CSDs, will mainly impact the latter and, in particular, to the ones that decided to join it.
There is a large consensus on the fact that T2S would affect the current market positioning of all intermediaries currently operating in the Eurozone: global custodians but also local agent banks as well as Central Counterparties (CCPs) not to mention trading venues and asset managers.
In order to remain competitive they should all take critical decisions as if to stay in the securities business or not and, if yes, how to comply with the new business framework.
In brief, they should assess their current business model in relation to the new scenario and, if necessary, think about adopting a brand new one.
12 ottobre 2012 Copyright © 2012 Claudio
Anfossi
BE CONSULTING & TARGIT GMBH 7
GLOBAL CUSTODIANS
12 ottobre 2012 Copyright © 2012 Claudio
Anfossi
All potential models have pros and cons. All of them imply investments costs in addition to those already planned. All of them lead to a shift of the current structure of costs and revenues.
As the majority of them work through local entities that offer them agency services, they will be geared to reduce the number of current local providers; this solution will imply that they have to plan additional
costs to insource skills and know-how.
The few large operators that can be considered as truly global (i.e. those that act directly in any, single, financial center with their own organisation) will probably plan, in the long term, to rationalise the
number of CSDs they work with. In the short term, they would probably decide not to change the current business model based on direct membership.
As for CSDs, T2S represents a mix of opportunities and threats for global custodians. So we can state that there will be a number of different business models able to fit with the various different scenarios that
can be drafted. Some of those models may also overlap with the ones of other T2S actors.
BE CONSULTING & TARGIT GMBH 8
LOCAL CUSTODIANS
12 ottobre 2012
T2S could have significant implications on the sub-custodians (or local custodians), smaller local operators which normally act as a local agent for global custodians. Even in their case, it could be necessary to rethink/refine the business model in order to keep the current competitive position. This will imply new investments and their operating costs will rise in the medium term.
In addition, not all sub-custodians will be able to cope with the new challenge: they are fully aware about this issue that explains why a high percentage of sub-custodians expressed a negative opinion on T2S. The fragmentation of European markets was, in fact, the key to their success so far.
Concerns also arise from the fact that there is a significant probability that the national CSDs in T2S may extend their operating scope to local custody services (in particular in the field of management of corporate actions, taxation, etc.) .. Such an event would hardly be counteracted by the local custodian who would lose not only revenue but also the fundament of their business.
In fact, there would be space for only a few operators who can aspire to the role of single point of access to a country involved by T2S and the ideal candidate is surely represented by the national CSD. The most likely consequence is, in the medium term, a consolidation of local operators or their conversion to the role of traditional commercial banks.
BE CONSULTING & TARGIT GMBH 9
T2S: NEW STANDARDS ON ASSET SERVICING AND LIQUIDITY MANAGEMENT
• Impact on Global and Local Custodians
• Changes on Asset Servicing
• Liquidity Management will not be the same anymore – an Overview
• Securities and Cash Financing becoming strategically important
BE CONSULTING & TARGIT GMBH 10
ASSET SERVICING - WHERE DO WE STAND RIGHT NOW?
The CASG has noticed that as we move closer to T2S migration, the situation becomes clearer and implementation problems (expected and unexpected) have emerged in some markets, moving their status from YELLOW or GREEN to RED.
how many implementation problems are still undiscovered ?!?
BE CONSULTING & TARGIT GMBH 11
SPECIFIC MARKET ATTRIBUTES (1/2)
What are Market Specific Attributes - MSA’s: Defined by the CSDs on their static data object that can be added to following objects: - Securities account - Party - Security
The CSD can apply following actions - Accept - Reject - Put on hold
These rules will be applied to following transactions: - Settlement Instructions - Settlement Restrictions - Realignment Instructions - Auto-collateralization instructions
BE CONSULTING & TARGIT GMBH 12
SPECIFIC MARKET ATTRIBUTES (2/2)
Without sufficient knowledge of each CSD’s rules it is difficult to ensure that T2S cross-CSD settlement will be smooth (T2S Programme Office, April 2013)
CSD A CSD B
Client X at CSD A
Client Y at CSD B
Investor CSD
Client X at CSD A
Client Y at CSD B
CSD A CSD B
DVP Transaction
Realignment
RVP Transaction
MSA rule on Investor CSD level
• Client X and Client Y are sending instructions to CSD A and CSD B
• T2S matches these instructions and sends status advice
• On settlement date, T2S attempts to build the realignment chain and hits the rejection rule
• T2S cancels the instructions
What’s the impact on market claims and transformations?
BE CONSULTING & TARGIT GMBH 13
CASH DISTRIBUTIONS
Due to T2S CA Standards, all cash distributions should be handled via dedicated cash accounts – DCAs. As of today, we already know that not all markets will fully comply with this rule when T2S goes live. Example Germany:
• Cash distributions for Government bonds will be booked to DCA’s at the beginning of the overnight batch
• All other cash distributions will be booked to T2 accounts in batch mode (netted payments)
• Payments could be forwarded to DCAs via liquidity bridge
BE CONSULTING & TARGIT GMBH 14
BUYER PROTECTION
All T2S markets have indicated that they will implement manual buyer protection in their respective markets. This means the responsibility lies with buyers and sellers and not the CSD. Local market groups have to assure that respective procedures will be defined.
but there is still a long way to go!!
BE CONSULTING & TARGIT GMBH 15
MULTIPLE TECHNICAL ISSUER CSDS
Securities from non-T2S markets could have different technical issuer CSDs which requires realignments outside T2S
T2S
Technical Issuer CSD A
Technical Issuer CSD B
Subcustodian A
Client A Client B
Subcustodian B
NON-T2S CSD
Realignment
Realignment
• The client instructs a technical issuer CSD
• Each technical issuer CSD could have different sub-custodians in the local market which needs to be instructed
what are the consequences to - Corporate Action processing? - Creation and processing of market
claims and transformations?
BE CONSULTING & TARGIT GMBH 16
T2S: NEW STANDARDS ON ASSET SERVICING AND LIQUIDITY MANAGEMENT
• Impact on Global and Local Custodians
• Changes on Asset Servicing
• Liquidity Management will not be the same anymore – an Overview
• Securities and Cash Financing becoming strategically important
BE CONSULTING & TARGIT GMBH 17
LIQUIDITY MANAGEMENT IN T2S KEY FEATURES (1/2)
T2S is a securities settlement system in central bank money only; this means that it exclusively relies on the cash settlement platforms managed by national central banks that, in the case of the Eurosystem, is represented by the TARGET 2 platform (T2)
The model adopted by the Eurosystem for the delivery-versus-payment (DvP) settlement of securities and cash is called "integrated" in the sense that both securities and cash positions are managed on the same platform (T2S); in regards to the cash positions, they will be handled through special accounts called T2S Dedicated Cash Account (or DCA)
Therefore, DCA are considered as central bank money accounts opened in the books of a national central bank (CB) to banks settling cash positions on their own behalf and/or on behalf of other entities
A DCA holder shall be allowed to hold one or several T2S dedicated cash accounts in Euro or a non-Euro currency. Every DCA can exist in one currency only and T2S shall not perform/facilitate any currency conversion
T2S acts as an ancillary system to the RTGS system and a DCA shall start with a balance of 0 at the start of the business day and repatriate all the remaining balances at the end of the same day through a process called "automated cash sweep“
BE CONSULTING & TARGIT GMBH 18
LIQUIDITY MANAGEMENT IN T2S KEY FEATURES (2/2)
Sophisticated Credit Limit Management
Central Bank Auto-collateralisation
Client Auto-collateralisation
Multiple Liquidity
Provider tool
Liquidity Monitoring
BE CONSULTING & TARGIT GMBH 19
LIQUIDITY MANAGEMENT IMPACTS
While the impacts of T2S on settlement processes were largely stressed and analysed, the ones on liquidity management are very often underestimated
In fact, T2S will dramatically change the way cash is managed by banks for securities settlement purposes and, in general, will affect liquidity management policies and processes of banks’ treasurers
The new scenario will have business, organisational, operational and technological impacts on many areas of banks and the extent of these impacts is influenced by a number of key factors:
Geographical perimeter of a bank’s business (local vs. global)
Clients typology and dimensions
Level of process automation
National CSD decisions related to corporate actions management (in vs. out of T2S platform)
Access strategy to T2S (DCP vs ICP)
Etc.
BE CONSULTING & TARGIT GMBH 20
LIQUIDITY MANAGEMENT KEY BUSINESS AREAS IMPACTED BY THE IINTRODUCTION OF T2S
Treasury
Settlement
Custody
Reporting / Compliance Static Data Risk & Control
Custody Administration
Liquidity
Management
Client Service & Support
Corporate Actions
Tax
Claims & Comp.s
Proxi Voting
Trading
Services &
Client
Support
Core Middle-
& Back-Office
Ancillary
Middle- &
Back-Office
Other
Trading On-Exchange
Instr
uctio
n -
Report
ing
Trading OTC
Collateral
Management
Securities &
Cash
Financing
ILLUSTRATIVE
Business will be significantly impacted by the new scenario:
On one hand, pushing for changes in organisations and operations and for service offer enlargement
On the other hand, creating new opportunities
BE CONSULTING & TARGIT GMBH 21
Custody & Settlement
Reporting / Compliance Static Data Risk & Control
Client Regulator
y
Audit Tax
Securities Currencies
Parties Accounts
Risk Mgm Credit
Control G/L
Market Ops
P&L Acc.ng
Position
Management
Clearing &
Settlement
Collateral
Management
Exceptions Management
Transaction Management
Cash
Management
Margin
Management
Reconciliatio
ns
Treasury
Funding
FX Mgm
Client Service & Support
Sales CRM Help Desk
Asset Servicing
Corporate
Actions Tax
Claims &
Comp.s
Research &
Portfolio
Analysis
Securities Lending
Cash Financing
Proxi
Voting
Pre-Matching
Security
Trading
Services &
Client
Support
Core Middle-
& Back-Office
Services
Ancillary
Middle- &
Back-Office
Services
Other
Services
Trading
Com
munic
atio
n Inte
rfaces
LIQUIDITY MANAGEMENT MAP OF MAIN T2S IMPACTS ON A STANDARD IT ARCHITECTURE ILLUSTRATIVE
Where the bank uses market standard applications and the vendors are committed to adapt them to T2S, the economic impact of the investments will be substantially the same in all cases (DVP vs. ICP)
What will determine the major impact differences will be the update/development of “custom applications" interfacing those of 'external' parties (CSD, NCB, custodian, Eurosystem, etc.)
BE CONSULTING & TARGIT GMBH 22
T2S: NEW STANDARDS ON ASSET SERVICING AND LIQUIDITY MANAGEMENT
• Impact on Global and Local Custodians
• Changes on Asset Servicing
• Liquidity Management will not be the same any more – an Overview
• Securities and Cash financing becoming of strategically importance
BE CONSULTING & TARGIT GMBH 23
SECURITIES AND CASH FINANCING BECOMING OF STRATEGICALLY IMPORTANCE
“At the moment, the buzzword in the market is ‘collateral’.
• We are seeing considerable growth in secured borrowing. Also the future legislation on CCPs and OTC
derivatives (EMIR) will require more margining. All regulatory initiatives point to the greater demands for more
high-quality collateral. T2S will enable banks to make very significant savings in collateral when settling securities
transactions.
• T2S will eliminate the need for banks to hold multiple buffers of collateral in depository systems across Europe.
Banks will have the possibility to have a single buffer based on their entire European business. A single pool of
assets and liquidity automatically nets the short and long positions between various countries. A single
settlement engine, central bank auto-collateralisation, a harmonised schedule, and many other features of the
T2S platform, will also enable banks to reduce the amount of collateral that is left idle.”
• Gertrude Tumpel-Gugerell’s keynote speech at the ECB’s conference on “Securities settlement in 2020: T2S and beyond”,
Frankfurt, October 4th, 2011
In July 2013, J.P. Morgan announced that its collateral management business has selected London Stock Exchange
Group (LSEG) to provide settlement, custody and asset servicing services through a new CSD that LSEG established in
Luxembourg.
J.P. Morgan confirmed that this development is in response to EMIR, which requires margin and default
contributions posted to CCP to be held, when possible, with a securities settlement system. CCPs will be
expected to comply with this requirement when they obtain authorisation under EMIR.
12 ottobre 2012
BE CONSULTING & TARGIT GMBH 24
Total value of securities used as collateral in the financial system worlwide was estimated to exceed €10 trillion
However, this value represented only a small portion of total assets of global banking system which is estimated to be around € 70 trillion
COLLATERAL: A HUGE MARKET …
12 ottobre 2012
3%
49%
2%
44%
2%
Trading with CCPs
Market-securedfunding
OTC derivativesmargining
Settlement
Central-banks-secured fundings
BE CONSULTING & TARGIT GMBH 25
… OF A MORE AND MORE PRECIOUS RESOURCE …
12 ottobre 2012
Retail and wholesale payment systems (within SEPA and
Target 2 contexts) will necessarily evolve and
unsecured (i.e. not collateralised) interbank
deposit markets would be gradually replaced by
guaranteed ones. Financial institutions aiming to keep their competitive
positions in the new scenario will have to define strategies aiming to integrate cash and
securities in order to optimize risk and profitability
management.
Banks will look for more efficient collateral and risk
management tools that, being integrated with payment and
compliance processes, are able to work in a proactive
way instead of simply reacting to market inputs.
The recent financial crisis has exacerbated the relation
between efficient management of collateral and its impact on capital adequacy
needs of European banks.
Following completion of a capital exercise, the European
Banking Authority (EBA) determined in 2011 that the
aggregated shortfall - corresponding to a minimum
Core Tier 1 ratio at 9% - exceeds over € 100 billion
In T2S, thanks to its auto-collateral functionalities, banks may be able
to reduce their average daily cash or credit requirements during peak
settlement periods
BE CONSULTING & TARGIT GMBH 26
… THAT IS BECOMING MORE AND MORE SCARCE …
12 ottobre 2012
On September 6th, 2012, in order to increase collateral
availability for the Eurosystem’s liquidity-providing operations,
the ECB Governing Council decided to suspend the
application of the minimum credit rating threshold in the
collateral eligibility requirements.
The suspension applies to all outstanding and new assets of marketable debt instruments issued or guaranteed by the
central government, and credit claims granted to or
guaranteed by the central government, of countries that
are eligible for Outright Monetary Transactions or are under an EU-IMF programme.
The Governing Council of the ECB has also decided that
marketable debt instruments denominated in currencies
other than Euro, namely US-Dollar, Pound Sterling and the Japanese Yen, and issued and
held in the Euro area, are eligible to be used as collateral
in Eurosystem credit operations.
BE CONSULTING & TARGIT GMBH 27
… DUE TO MANAGEMENT INEFFICIENCIES
Current way of managing collateral shows some inefficiencies both internal (i.e. related to the specific business model of each market actor) and external (i.e. determined by the fragmentation of markets and platforms): these inefficiencies are estimated at about € 4 billion per year, of which about 10% originating from processes of over-collateralisation.
12 ottobre 2012