T2/T2S Consolidation – what is it and why does it matter?

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t2/t2s-consolidation-–-what-is-it-and-why-does-it-matter?

Eurosystem, the developers of the TARGET2 and TARGET2-Securities systems, are planning to consolidate the two system. Dubbed Vision 2020, the project will see the consolidation of both systems technically and functionally in order to meet changing market demands. The new system, scheduled to be fully in effect from November 2021, will ensure that all services adhere to the same set of standards while providing them access to all available services through a single gateway. This new system will also integrate the TARGET Instant Payment Settlement (TIPS), which allows for real-time fund transfers.

The new real-time gross settlement (RTGS) system will increase efficiencies, improve usability, tighten security and optimise liquidity management across all TARGET services. The project also foresees the development of new services that will allow it to adapt to the changing needs of the payments community.

New developments being ushered in through Vision 2020 include:

  • the introduction of Central Liquidity Management (CLM), designed to ensure efficient provisioning of liquidity across the different services;
  • the harmonisation of support functionalities for future TARGET services (RTGS, T2S and TIPS);
  • the introduction of ISO 20022-compliant messages for communication; and
  • multi-currency capability, making it possible to settle payments in different currencies at different set times.

We take a closer look at this project by answering key questions and assessing the impact of the consolidation.

What is TARGET2?

TARGET2, or the Trans-European Automated Real-Time Gross Settlement Express Transfer, is the real-time gross settlement system that is owned and operated by the Eurosystem. It is the leading platform for processing large-value payments. The system is used by both central banks and commercial banks to process Euro payments in real time. TARGET2 (T2) enables the free flow of money across borders and supports the implementation of the European Central Bank’s single monetary policy. In 2016, T2 processed 90% of the total value settled in euro, and over a thousand participants settled payments using the system.

What is TARGET2-Securities?

TARGET2-Securities (T2S) allows for investors to buy and sell securities on a safe platform. T2S simplified complex cross-border settlement procedures and laid the foundation for a single market for securities settlement, allowing for greater integration of Europe’s financial market. T2S matches each transaction’s settlement instructions between the Central Securities Depositories (CSDs) and a dedicated cash account with one of the central banks connected to the platform. The transaction is then settled on delivery-versus-payment (DvP) basis, which allows for money and securities to be exchanged simultaneously using central bank money.

What are the key components of the consolidation project?

1. Central Liquidity Management

The new consolidated platform will offer a centralised tool that allows participants to manage and monitor central bank liquidity across all TARGET services and will operate through a main cash account that participants can open with a national central bank. This main cash account will offer a dashboard that is expected to provide more automation and an overview of liquidity positions and advanced liquidity management tools. This tool will also consider any liquidity held on dedicated cash accounts for minimum reserve purposes, avoiding the need to transfer balances back to the main cash account.

2. Single market infrastructure gateway

The harmonised interface will make it easier for participants to access and use the system from a single entry point.

3. Multi-vendor connectivity

The new interface will allow participants to choose between different connectivity options and foster competition among network service providers.

4. Common reference data

Centralised management of user access rights will reduce the effort required to create and maintain multiple copies of reference data.

5. Common data warehouse

Using a common data warehouse makes it possible for participants to access historical information when needed.

6. Common billing system

A common billing system centralises and optimises operational costs.

What does the T2/T2S Consolidation mean for the industry?

As the project is complex, and requires the integration and overhaul of the existing systems, industry players are forced to closely examine all related aspects, and ensure that all potential scenarios are addressed and accounted for. This will include messaging, coordination between systems, data access and management, and more.

The consolidation will happen on both the technological and the operational levels. At a technological level, some adaptations to existing hardware and software may be necessary, as well as the identification of new networks and service providers. This will primarily be required to support the migration of payment-related messages to the new XML ISO 20022 standard, as well as the enrichment of related structured information.

At an operational level, the melding of the two systems will naturally create some ripple effects that may force existing processes to adapt, and may even require the establishment of some new ones. Considering the current state of affairs – and the heterogeneity of the different areas, such as IT, compliance, legal, and more – it is necessary that players take a holistic approach to the integration and try to head off any potential disasters this may cause.

This new consolidated system has the potential to revolutionise the industry. New data and information gathered from the ISO 20022 messages can be coupled with data analytics and machine-learning to derive powerful insights. Forecasting based on this could allow treasuries to improve the timing and execution of funding. Better analytics and smarter modelling could also help with optimising cash and collateral and reduce liquidity buffers. Integrating the resulting data and using robotic process automations could potentially simply the account management and payment reconciliation process, freeing up capacity to focus on analysis and decision-making. This would also allow for improved cybersecurity measures, preventing any bad actors from attacking the system.

However, while the upsides are tremendous, the project entirely depends on the participants clearly understanding what’s at stake, and the impact of the change. Recent reports have commented that banks and other stakeholders are not as prepared as they should be at this stage, and without their support, this project may end up missing its scheduled launch date.

Penser provides expert consulting services in the payments and fintech sectors, and therefore, we pay close attention to key changes in regulations and innovations in the industry. We act as advisors to a number of financial clients on their digital transformation journeys, as well as support them with due diligence and strategic planning services. Click here to contact us for more information.