Target 2 Securities and T+2 Settlement
Challenges and opportunities for the European Fund Distribution
The European trade and post-trade landscape has been dramatically reshaped in the perspective of achieving better financial integration and setting up a single market. According to the European authorities, financial integration leads to enhanced competition and reduces the costs of intermediation, while at the same time allowing to better share and diversify the risks. Target 2 Securities (T2S) is at the core of the European harmonisation project.
The T2S project is slowly but steadily becoming a reality with the first wave of Central Security Depositories (CSD) integrating the new European settlement platform by 2015.
As from 2015 to 2017, 24 European CSDs (within or outside the Eurozone) will connect to the common T2S platform in order to facilitate a more efficient and safer cross-border securities market. T2S aims not only to reduce the cost of settling securities transactions, but also to create collateral savings for market participants. These savings are increasingly perceived as a strategic necessity by market participants at a time when the demand for high-quality collateral continues to rise, as a result of both the crisis and the new regulatory developments.
T2S settlement will be organised in central bank money (starting in euro but other currencies may join afterwards) connecting CSDs, national banks and direct connected participants.
Closely related to the T2S project, the CSD Regulation (CSDR) aims to harmonise both the timing and the conduct of securities settlement in Europe, as well as the rules governing CSDs which operate the infrastructures enabling settlement.
The proposed regulation introduces an obligation on market operators to represent all transferable securities in book-entry form and to record them in CSDs before trading them on regulated venues.
The initial impact of the new CSDR will consist of a common settlement date that will not be later than on the second business day after the trading takes place. T+2 settlement is planned to be harmonised throughout Europe from October 2014.
These structural transformations within the post-trade value chain have a direct impact on the organisation and operations of its major stakeholders. Market infrastructures, custodians and asset managers are currently preparing their new business models in line with these developments.
The investment management industry is also making preparations for this new environment. Would T2S and T+2 represent a new business opportunity? Is it a threat for the primary market distribution? What are the main challenges for the industry?