Target2-Securities (T2S) is fast approaching for the 30 European central securities depositories (CSDs) that have signed up to the central settlement system. One of the frontrunners in the new platform is the Italian CSD, Monte Titoli which is set to become one of the first CSDs to move to T2S on 22 June 2015. It will be joined by the CSDs of Greece, Malta, Romania and SIX SIS Ltd in Switzerland.
They are all in Wave 1; the first movers into a new era of European settlement. In order to capitalise on the changes, Monte Titoli has been one of the more forward looking European CSDs, trying to find opportunities in amongst all of the changes. “We will be entering into a new world,” explains Alessandro Zignani, head of sales at Monte Titoli and CC&G, the Italian CCP, both of which are part of the London Stock Exchange Group. “On the one side we are testing with the ECB and our clients to get the system ready, on the other we are positioning ourselves in a different way, offering customers the benefits of early entry.”
To be ready for Wave 1, however, entails a lot of work. It is clear that Alessandro and his colleagues are being kept very busy. “T2S is a strategically important project, not just for Monte Titoli but for LSEG,” he explains. “LSEG is committed to making Monte Titoli a global player. This strategy has been born out of T2S and the need to become a more international facing company. CSDs used to just service their domestic markets but all that is changing.” In the change lies opportunity.
“The new settlement platform can help make this process a lot quicker,” continues Alessandro. “That is why we pushed to be in the first wave of T2S. Monte Titoli is working towards three main streams to be completed by beginning of Wave 1; first is the IT project to move our settlement platform from Monte Titoli into T2S; secondly we are working, together with our clients, to harmonise the Italian market: aligning settlement and corporate actions procedures to European standards and removing specificities. Thirdly we are completing the range of our services and the coverage of all T2S markets as an investor CSD: settlement, custody, asset servicing and collateral management to be offered to banks and brokers. The end target here is offer a single point of entry into all of the T2S markets. We plan to complete the three streams by the beginning of Wave 1.”
The first mover advantage is the key reason for Monte Titoli to be in Wave 1 of T2S implementation. If they can offer the single point of entry into the system on 22 June 2015, then it represents a commercial opportunity to pick up new clients. “We have an opportunity as the largest CSD joining in the first wave and this is the main purpose of wanting to be first in,” says Alessandro. “At the beginning of March, Monte Titoli received declarations from 13 banks and brokers committing to enter in the first wave of T2S. This included three new clients - EuroCCP, BNY Mellon and Perol – who will be using Monte Titoli as the access point for T2S. This was a big success for us and reinforces our decision to enter in Wave 1.”
Educating clients about T2S
One of the many challenges facing Monte Titoli is the preparedness of its existing client base for the change in settlement system. “We need to harmonise the procedures across the markets and remove the vagaries of operations across them in order to be fully prepared for the new settlement platform,” says Alessandro. “We also need to be sure that all of our clients have their IT systems in place and the staff around it in order to be ready for the June kick off.
“In order to do this Monte Titoli has organised a series of events, including workshops and webinars, to educate our clients and to help them understand the implications for them.
“We also began sending out client readiness questionnaires. The first went out last December, and we did not have any particular concerns. We will repeat the process on a quarterly basis so that we can understand our clients’ progress. If we can identify issues early on in the process, then we are better placed to intervene quickly. We have big clients, global custodians, smaller tier one and tier two banks, so they all have different impacts upon them in terms of processes and budget.
“We are assisting our clients to make all of the necessary changes internally. Where possible we will maintain the same procedures and processes in order to minimise the impact and investment upon our clients."
On the flip side, the originally planned reduced settlement cost of T2S will not be realised. This will have an effect on the CSDs entering into the platform and force diversification. “One of the first decisions that we took was not to increase settlement fees before T2S, to cover the cost of implementation, and afterwards in T2S we will see settlement fees reduce,” says Alessandro. “Inevitably, settlement will turn into a commodity with lower margins. However, by enlarging the scope of our services and our geographical reach, we are confident that we will able to attract more volumes and assets under custody. This is the trade-off.”
The capture of new clients suggests that this is a well-aimed ploy. The emphasis then shifts onto new projects. “We are now completing our network of custodians and establishing links with the CSDs in all of the T2S markets,” continues Alessandro. “This helps us to build up our asset servicing as we will be able to receive information straight from the Issuer CSDs with competitive cut-off times. We are also launching a collateral management platform through Monte Titoli.
“In the second half of the year we will launch our tri-party collateral management platform, Xcom, to manage repo exchange and OTC bilateral trading. This is in response to client requests to optimise their funding activity and they will be able to put their assets in Monte Titoli.”
T2S is posing a number of questions of the CSD space. It is a big challenge in itself and will introduce further challenges in the form of competition in the space – something that has been a foreign concept to CSDs which have largely operated as natural monopolies. It is a challenge being embraced by those in Wave 1 (Waves 2, 3 and 4 will finish on 6 February 2017), something that carries its own challenges. They have less time to implement the changes and to educate their clients (see sidebar).
“It is not just a challenge for Monte Titoli but for the market as a whole - a change of mind-set,” says Alessandro. “You will have to be open to competition so will need to build relationships with your clients in a different manner. You need to look at the market and launch new services. These are all aspects that have previously been closed.
“We started this process three years ago when we decided upon this strategy of being in the first wave of T2S implementation. It takes time and we have had good results.”
T2S is the biggest event on the European CSD space’s horizon, but other challenges are presenting themselves; CSDR, T+2 and competition. We will continue our interview with Alessandro next week to explore these topics from the view point of Monte Titoli.