With centralised infrastructure comes a risk of central failures. The full-trading-day outage on Thursday 27 February of T2 and T2S – Europe’s central platforms for respectively wholesale bank payments and settlement of securities transactions – served as a stark reminder.
“A slowdown and subsequent unavailability”, from 8:07 in the morning and onwards on the continent’s securities settlement backbone Target2-Securities (“T2S”), formed the start of a day of spine shivering for financial market operationals. Two hours later, the equivalent for interbank payments (Target2, “T2”) would nosedive too.
The systems are operated by the European Central Bank under the Eurosystem – its collaboration with authorities in the member states. Its operational note, from the day after, puts the blame on a malfunctioning piece of hardware, not specified closer. “As a consequence of this outage, no settlement instructions, payment, ancillary system instructions nor liquidity transfers between TARGET Services could be processed for several hours.” On an ordinary day, the T2S engine moves securities worth about €800 billion euro or so, as per reported 2023 averages. The wholesale payments platform T2 is at around 2 trillion.
Opened at closing time
Only after 18:00, the time that they normally close for the day, did they come back into operation. With a 6-hour extension of the processing deadline, until midnight, queues were eventually crunched through, leaving most end investors and their trades largely unaffected by the obstruction to the process deeper in the system, although “[a]s a result of the incident, a number of T2 and T2S instructions were rejected and had to be resubmitted by participants”.
The experience could form input to the ongoing industry plans for a European move to T+1 settlement from October 2027. If there had been a full day less for the whole settlement process, would the time margin have been there to avoid massive end-user impact?
Trust or rigour?
As quoted by Reuters, Alistair Milne, professor of financial economics at Loughborough Business School in the UK, reckoned that “[i]f it had lasted until Friday, there would have been big risk-management questions for banks”. “Bank risk managers would have to decide: Are we willing to credit the customer account on the trust that the money will eventually turn up?”
Reuters also quoted Markus Ferber, a member of the European Parliament who sits on the committee that oversees the ECB, who slapped the central bank for its lack of a backup: “A hardware failure is excusable, but not having a backup that can kick in instantaneously in case of problems is not.”
