Euroclear delay raises more questions about T2S

Euroclear has announced that its Belgian, Dutch and French CSDs will not be migrating to the ECBs flagship settlement platform, T2S (Target2-Securites) on 28 March 2016 as originally planned. This is the date for Wave 2 migration to the platform, following on from Wave 1 on 22 June 2015 and what some have termed Wave 1a on 31 August.

It is the existence of Wave 1a that has set the precedent for Euroclear’s delay. Monte Titoli, the Italian CSD, was due to go live on 22 June along with the CSDs of Greece, Malta, Romania and SIX in Switzerland. The London Stock Exchange-owned CSD, however, needed more time for testing and working with its clients, so had a postponement approved by the ECB.

The first whispers of unrest actually permeated from the ECB itself in May. Speaking at a conference in May, Paul Bodart, a board member of the T2S project, commented that; “We cannot launch if critical areas have not been addressed properly… (there is) a window to delay the launch by two months, there is a buffer.”

Talk of a delay was quickly quashed by the ECB and attention turned to the 22 June deadline until Monte Titoli announced that it could not make the timeline. It was by far the largest CSD in Wave 1, so its delayed migration was somewhat embarrassing for the project, although it went live within the two month postponement window suggested by Bodart.

Now Euroclear, with three of the five CSDs scheduled to migrate in Wave 2, has stated nearly five months in advance of the deadline that there is no way it can migrate on time. “Euroclear announces that it requires more time to ensure a safe and stable migration of its ESES CSDs to T2S than is currently available, with the March 2016 Wave 2 target,” said the firm in a statement on its website on 30 October 2015. “This delay is due to challenges that Euroclear has itself faced in progressing ESES’ migration to the T2S platform, with such challenges now being under control.”

It then went on to state how committed it is, and always has been, to the T2S project, much like everyone else. There are clearly huge issues inherent within the T2S settlement platform, but no one is willing to put their head above the parapet and publicly criticise the ECB.

The ECB itself has lauded T2S as a “tremendous achievement” in the words of Mario Draghi, its president, on 2 July, after Wave 1 migration. The venue for this self-congratulation was Milan.

The project has been subject to continual delays since its conception in 2006, hot on the heels of the hugely successful Target2, the interbank payment system for processing cross border payments throughout the EU. The idea was to metamorphose this successful single payment system into a successful single settlement system.

Reduced settlement costs, quicker settlement timeframes and a more united European banking system were the headline promises. Settlement across Europe has come in from T+3 to T+2 (although this was not T2S dependant), but the reduced costs have not been realised.

Indeed, the cost of the entire operation is unclear. With problems being faced by the CSDs themselves though, as witnessed with Euroclear and Monte Titoli, it is clear, however, that those costs will be spiralling with more and more testing and fixing of bugs. These costs are not set to be passed onto the end users, either, so it remains to be seen how successfully the CSDs can shoulder these financial burdens.

Industry estimates have suggested that the total cost of T2S implementation and migration will exceed €1 billion. The volumes required to recoup the cost at a price of no more than €0.15 per settlement instruction simply do not exist, either. The pre-crises landscape in which T2S was dreamt up just does not exist. This will threaten the smaller CSDs and those with poor asset servicing capabilities with the twin prospect of CSDR (CSD Regulation) looming on the horizon alongside T2S. CSDR will introduce competition to the settlement landscape, meaning that those CSDs that can offer settlement functionality and good asset servicing will be best placed to survive going forward.

With rising costs and the omnipresent delays, T2S is chugging along in the face of adversity. They say that when you have a dug hole you should stop digging; T2S is in far too deep for the way out to be anything other than keep digging and hope for the best. 

Tags: T2SECBCSDSettlementCSDR