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Deutsche Bank: Targeting opportunities
03 March 2014
Achieving a shorter settlement cycle and single harmonised platform will not be easy, but the post-implementation environment after Target2-Securities will provide a number of opportunities, argue Graham Ray, Director, Product & Technology Management, Deutsche Bank, and Angus Fletcher, Head of Market Advocacy, Global Transaction Banking, Deutsche Bank
How far will Target2-Securities (T2S) implementation be
affected by the move to T+2, and when can we expect the shorter
settlement cycle to be in place?
Angus Fletcher (pictured): With the exception of
Spain, it seems that most European markets will be looking to
move to a T+2 settlement cycle on October 6 2014, in other
words before the January 2015 deadline set by the CSD
regulation (CSDR). A relatively short testing phase –
currently about three months – for T2S will start at
some point in Q1 2015, before the first wave of T2S begins. For
market participants there is a lot to complete in a relatively
It is worth noting that precisely what is included and excluded
from T+2 isn’t yet entirely clear: individual
markets will determine their own scope based on their
interpretations of CSDR. This amplifies the testing and go-live
challenges that the industry will face prior to T2S.
Secondly, CSDR stipulates penal settlement fines and a new
buy-in regime that also raises questions. Who will drive
buyins, who will implement the fines and on what basis, and
will these be brought in by markets for the October 6 go-live.
Graham Ray: Both the range of market
interpretations and general implications, such as fines, means
that there will be opportunities from the implementation of
T+2. Firms like ours will leverage the solutions we can offer,
notably through fail-efficient settlement solutions.
When T+2 is rolled out, fails will occur in some places and
providers must provide mechanisms to reduce their impact. With
the cycle more compressed, all participants – whether
on the buy side, the sell side or from the custodian community
– will need to analyse their processes.
What role is the debate about asset protection playing
in the implementation of T2S?
Ray: In the first case, the question of account
structures carries important questions of legal ownership,
which may be more complex than they appear on paper. Does the
proposed legal documentation cover appropriate liability
management to ensure a clear ownership, accountable and a
responsible party matrix is in place for each function within
T2S, for settlement and all activities impacted by settlement?
The asset protection question is particularly important because
of the serious reputational risks if things go wrong. There has
been a significant increase in regulatory focus on the
liability chain – who is responsible for ownership of
assets and who can be counted on to return them in case of
severe market stress or a default.
All of the above points need to be considered when reviewing
how the engagement model between providers and clients is
structured in a post-T2S world.
Fletcher: As usual, ensuring safety comes at a
price. This means there are opportunities for firms in ensuring
that every stage of the trade lifecycle works for participants
both in terms of risk and cost, and any post-trade models being
brought in as a result of T2S will need to cater for both.
Expect to see a number of alternative models explored, many of
which will be tried and possibly discarded in the period
following Wave 1. It will take time for new robust models to