Eight years after the initial launch of Target2-Securities (T2S), Dirk Loscher, head of custody and investor solutions at Clearstream, takes a look at how the platform has evolved. The title of the analysis, “The best of T2S is yet to come”, summarises his stance: some expectations of the platform were too optimistic and not all goals have been achieved. Work remains to be done if the EU were to fully leverage the benefits of T2S.
Dirk Loscher describes EU’s current settlement market as remaining “ineffective and fractured”, even though T2S was supposed to increase cross-border settlement efficiency within the region. He writes that the introduction of settlement fail penalties in the Settlement Discipline Regime (SDR) “has so far not shown a notable impact on settlement efficiency”. Systemic and operational barriers remain that deter market participants from fully realising the cross-market potential of the platform.
Challenges to tackle
The Basel Committee on Banking Supervision (BCBS) has identified high inflation, low growth and geopolitical tension as risks to the banking sector, cites Dirk Loscher. When it comes to the post-trade sector, he believes that sources of inefficiencies can be categorised across three areas: operations, funding, and capital. He comments that “in an ever-changing macro environment and the apparent entry into a new monetary era, these areas are increasingly challenged by a high interest rate environment, collateral scarcity, and ever-increasing regulatory scrutiny of capital and risk management”.
What’s stopping us?
According to Dirk Loscher, there are three main reasons “keeping market participants from shaping their processes towards adopting the advantages envisioned by T2S”:
• Unrealised potential on the market participants’ side regarding the benefits of adaptations, or being unsure how to adopt them.
• Operational issues and cost considerations complicating the implementation by clients into their operating model and IT infrastructure.
• Structural issues of T2S and incomplete adoption of the T2S functionality by CSDs, market participants, and service providers, which limit the realisation of potential benefits.
Eye on post-trade
The T+1 settlement cycle “would not only put immense pressure on post-trade operations, potentially increasing the risk of settlement fails, but would also require collective industry effort and a broader harmonisation across markets,” Dirk Loscher points out. The post-trade sector may not always be a strategic priority, he says, but through “regulation and ever-stronger requirement for value creation”, can serve as “a source of long-term profitability” and is “quickly becoming a strategic pillar for any market participant”.