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Shift to T+2

14 August 2014

How are the industry and clients preparing for Target2-Securities and the shift to T+2

Read more: Target2-Securities T+2


  • Alan Cameron, head of relationship management - international banks and brokers, BNP Paribas Securities Services
  • Ulf Noren, specialist and global head of sub-custody, transaction banking, SEB
  • Jason Nabi, head of global broker-dealer services, Societe Generale Securities Services
  • Tim Harris, associate director, alternatives and derivatives, Hermes Fund Managers
  • Hugo Cox, chairman

Chair: What is your strategy for T2-S?

Cameron: We are building a single technical platform across all T2-S locations, which will have a direct connection into T2-S. So we will be a directly connected party (DCP). This will allow us to centralise settlement in Lisbon and leverage the harmonisation that we get out of it to drive down costs. Along with centralising settlement, we will centralise cash and liquidity management.

What we will not centralise is asset servicing. We remain committed to having accounts in each individual issuer CSD and keeping asset servicing local because it is still dominated by the specifics of local markets. The branch network, as people know it, will focus on serving local clients in individual markets. Then the centre in Lisbon focuses on settlements and economies of scale.

Nabi: We will also be a DCP, with the two main entry points of Paris and Milan. We will also take the approach of having local asset servicing, with local custody experts where we have a local presence. We are also pooling cash and collateral processes, as part of the setup. We are focused on offering flexibility.

If clients want a global or regional set-up, we can support that. If they want a local, or multi-local, custody set-up, we can do that. We are looking to develop a more pure custody arrangement for those clients that just want single market operations. But it is fairly similar to what we are seeing across the industry.

Noren: We have every intention of remaining the leading provider, and the gateway into, those seven markets that might be considered to be the Nordic region. But we have to look at the macro situation. It is a fragmented region for T2-S, in terms of the time schedule, the currencies and the various nations using it. So we have taken the decision to be an indirectly connected party (ICP).

We will mirror the functionality of the respective CSD but we will provide very strong access provision to both cross-border and domestic clients in those seven markets, in very small doses and in various levels of granularity. The reason for that is that we actually have no market in the first or second wave of T2-S implementations.

Chair: How are clients viewing the transition to T2-S?

Cameron: The vast majority of clients just want stay alive through the whole thing. If they can work with the custodians to use T2-S to drive down costs then they are probably going to be happy enough. A very small handful of really top-tier clients are looking at changing how they will operate once T2-S comes in. It is very hard to make final decisions now because we do not know the prices the CSDs will charge.

In fairness to the CSDs, even if they did try to put their prices up now, they do not really know what their business is going to look like in three years’ time. So, even the big clients, which know their direction of travel for T2-S, are finding it hard to finalise a decision.
Nabi: Ten years ago I think there were about 50 securities services or custodian type firms operating. The number is, realistically, half that today and it is probably going to be half that again in the next 10 years. As a consequence, I think what we have already seen in clearing we will see in settlement, with interoperability across the CCPs and those firms providing clearing services, as general clearing members (GCMs), doing so globally. If you do not need four to five clearers, you can go to one.

The same will happen as a consequence of T2-S. I think this regional approach in Europe will further drive simplification and standardisation across network management. The leaders will be larger sell-side firms appointing regional providers for settlement rather than doing it themselves. The trend is still to outsource – that will not change. I think they will just have fewer agents – doing more and doing it probably for less, which is a challenge for us.

Then there is a very interesting aspect if we look further downstream – what will happen as other regions take a similar T2-S type model, perhaps in Asia or central America. In general, though, the challenge for us service providers is just to make sure we have the right cost model and the right service model. It ought to be a net benefit and, frankly, it will be survival of the fittest.

Chair: How important is the impending shift to T+2?

Cameron: There are a lot of things still undecided despite the fact that it is happening in October. We would like discipline fines to be lighter for the month of October. In general, the best solution will come if the whole industry takes the stance that everything is T+2. Things also need to work better between the sell and buy sides because funds still have subscription and redemption periods that are at odds with T+2.

Noren: We started on T+2 immediately after it was described as a requirement under CSDR. The Nordic markets came together and have been working to it for a year and half. From a Nordic perspective, we feel fairly confident that we have covered most of the pitfalls now, although entities that do inbound business might have a completely different opinion. It is a good reason to be observant on how liquidity will be affected by T+2 because it could get worse, paradoxically. Otherwise, I have few worries.

Harris: T+2 is not going to be a life-changing thing for us but the substitution question is focusing our minds. We will look to T+2 as a best practice for OTCs and other instruments going forward, but it is where we have investment into funds day one and clearing day two that will be challenging. Currently there would be a mismatch in terms of when funds are available if we want to be 100% invested at all times. So we are working through that at the moment.

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