NEW STANDARDS ON ASSET SERVICING AND LIQUIDITY MANAGEMENT

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T2S:
NEW STANDARDS ON ASSET SERVICING AND LIQUIDITY
MANAGEMENT
Claudio Anfossi, Director, Head of Securities Competence Center, Be
Consulting, Milan
Peter Peschek, Managing Consultant, targit GmbH, Vienna
Post-Trade Forum, Vienna, September 11th, 2014

BE CONSULTING & TARGIT GMBH 2
T2S: NEW STANDARDS ON ASSET SERVICING AND LIQUIDITY MANAGEMENT
• Impact on Global and Local Custodians
• Changes on Asset Servicing
• Liquidity Management will not be the same anymore – an Overview
• Securities and Cash Financing becoming strategically important

WHO? - MAIN T2S STAKEHOLDERS
12 ottobre 2012Copyright © 2012 Claudio
CSDs
(Global)
Custodians
(Local)
Custodians
Asset Managers Investors
CSDs CCPs Trading Venues Brokers/Dealers Investors
CustodySettlement
Custody & Settlement Value Chain

KEY EXPECTATIONS
Key Issues Key Expectations
IMPROVE
LIQUIDITY
MANAGEMENT
REDUCE
SETTLEMENT
COSTS
HARMONISE
SETTLEMENT
PROCESSES
•Enable financial intermediaries (banks,
investment firms, etc.) to settle all
securities transactions performed in
the Eurozone by using a single account,
with significant advantages in terms of
liquidity management
•Significantly reduce the settlement
costs for cross-border transactions and
align the cost of domestic transactions
•Harmonise practices and standardise
the settlement processes in the
different countries, by fostering
innovation and competition
•Create a technical standard
(based on a new platform), for
the settlement of securities
transactions, both at a
domestic and at cross-border
level
•The new T2S platform will be
managed at a European level
and will interact with local
CSDs (Central Securities
Depositories) and single
intermediaries
•The first T2S “clients" are CSDs
•T2S is not mandatory, but
offers strong business and
operational opportunities to
"first movers"

FROM EXPECTATIONS TO IMPACTS
Expectations
Reduce the current
fragmentation of securities
settlement infrastructure in
Europe
Harmonize settlement
services in Central Bank
Money (CeBM)
Reduce costs of cross-border
securities settlement to
domestic level
Increase competition among
providers of post-trading
services and break up
monopolies
Support to EU Financial
Services Action Plan and
contribute to removal of
Giovannini Barriers
Reduce risks
Promote lower overall
collateral requirements,
reduce collateral costs and
improve liquidity
management
Impacts

T2S: CHANGE IN BUSINESS MODEL?
It is widely believed that the introduction of T2S, as a single shared
platform (SSP) that provides outsourced settlement services to
national CSDs, will mainly impact the latter and, in particular, to
the ones that decided to join it.
There is a large consensus on the fact that T2S would affect the
current market positioning of all intermediaries currently
operating in the Eurozone: global custodians but also local agent
banks as well as Central Counterparties (CCPs) not to mention
trading venues and asset managers.
In order to remain competitive they should all take critical
decisions as if to stay in the securities business or not and, if yes,
how to comply with the new business framework.
In brief, they should assess their current business model in relation
to the new scenario and, if necessary, think about adopting a
brand new one.

GLOBAL CUSTODIANS
All potential models have pros and cons. All of them imply investments costs in addition to those already
planned. All of them lead to a shift of the current structure of costs and revenues.
As the majority of them work through local entities that offer them agency services, they will be geared
to reduce the number of current local providers; this solution will imply that they have to plan additional
costs to insource skills and know-how.
The few large operators that can be considered as truly global (i.e. those that act directly in any, single,
financial center with their own organisation) will probably plan, in the long term, to rationalise the
number of CSDs they work with. In the short term, they would probably decide not to change the current
business model based on direct membership.
As for CSDs, T2S represents a mix of opportunities and threats for global custodians. So we can state that
there will be a number of different business models able to fit with the various different scenarios that
can be drafted. Some of those models may also overlap with the ones of other T2S actors.

LOCAL CUSTODIANS
12 ottobre 2012
T2S could have significant implications on the sub-custodians (or local custodians), smaller local
operators which normally act as a local agent for global custodians. Even in their case, it could be
necessary to rethink/refine the business model in order to keep the current competitive position.
This will imply new investments and their operating costs will rise in the medium term.
In addition, not all sub-custodians will be able to cope with the new challenge: they are fully aware
about this issue that explains why a high percentage of sub-custodians expressed a negative
opinion on T2S. The fragmentation of European markets was, in fact, the key to their success so
far.
Concerns also arise from the fact that there is a significant probability that the national CSDs in
T2S may extend their operating scope to local custody services (in particular in the field of
management of corporate actions, taxation, etc.) .. Such an event would hardly be counteracted by
the local custodian who would lose not only revenue but also the fundament of their business.
In fact, there would be space for only a few operators who can aspire to the role of single point of
access to a country involved by T2S and the ideal candidate is surely represented by the national
CSD. The most likely consequence is, in the medium term, a consolidation of local operators or
their conversion to the role of traditional commercial banks.

ASSET SERVICING - WHERE DO WE STAND RIGHT NOW?
The CASG has noticed that as we move closer to T2S migration, the situation
becomes clearer and implementation problems (expected and unexpected) have
emerged in some markets, moving their status from YELLOW or GREEN to RED.
 how many implementation problems are still undiscovered ?!?

SPECIFIC MARKET ATTRIBUTES (1/2)
What are Market Specific Attributes - MSA’s:
Defined by the CSDs on their static data object that can be added to following objects:
- Securities account
- Party
- Security
The CSD can apply following actions
- Accept
- Reject
- Put on hold
These rules will be applied to following transactions:
- Settlement Instructions
- Settlement Restrictions
- Realignment Instructions
- Auto-collateralization instructions

SPECIFIC MARKET ATTRIBUTES (2/2)
Without sufficient knowledge of each CSD’s rules it is difficult to ensure that T2S cross-CSD
settlement will be smooth
(T2S Programme Office, April 2013)
CSD A CSD B
Client X at
CSD A
Client Y at
CSD B
Investor CSD
Client X at
CSD A
Client Y at
CSD B
CSD A CSD B
DVP Transaction
Realignment
RVP Transaction
MSA rule on Investor
CSD level
• Client X and Client Y are sending
instructions to CSD A and CSD B
• T2S matches these instructions
and sends status advice
• On settlement date, T2S
attempts to build the
realignment chain and hits the
rejection rule
• T2S cancels the instructions
 What’s the impact on market claims and transformations?

CASH DISTRIBUTIONS
Due to T2S CA Standards, all cash distributions should be handled via dedicated cash
accounts – DCAs. As of today, we already know that not all markets will fully comply
with this rule when T2S goes live.
Example Germany:
• Cash distributions for
Government bonds will be
booked to DCA’s at the
beginning of the overnight batch
• All other cash distributions will
be booked to T2 accounts in
batch mode (netted payments)
• Payments could be forwarded to
DCAs via liquidity bridge

BUYER PROTECTION
All T2S markets have indicated that they will implement manual buyer protection in their
respective markets.
This means the responsibility lies with buyers and sellers and not the CSD.
Local market groups have to assure that respective procedures will be defined.
 but there is
still a long way to
go!!

MULTIPLE TECHNICAL ISSUER CSDS
Securities from non-T2S markets could have different technical issuer CSDs which requires
realignments outside T2S
T2S
Technical Issuer
CSD A
Technical Issuer
CSD B
Subcustodian A
Client A Client B
Subcustodian B
NON-T2S CSD
Realignment
Realignment
• The client instructs a technical issuer
CSD
• Each technical issuer CSD could have
different sub-custodians in the local
market which needs to be instructed
 what are the consequences to
- Corporate Action processing?
- Creation and processing of market
claims and transformations?

LIQUIDITY MANAGEMENT IN T2S
KEY FEATURES (1/2)
 T2S is a securities settlement system in central bank money only; this means that it exclusively relies on
the cash settlement platforms managed by national central banks that, in the case of the Eurosystem, is
represented by the TARGET 2 platform (T2)
 The model adopted by the Eurosystem for the delivery-versus-payment (DvP) settlement of securities
and cash is called "integrated" in the sense that both securities and cash positions are managed on the
same platform (T2S); in regards to the cash positions, they will be handled through special accounts
called T2S Dedicated Cash Account (or DCA)
 Therefore, DCA are considered as central bank money accounts opened in the books of a national
central bank (CB) to banks settling cash positions on their own behalf and/or on behalf of other entities
 A DCA holder shall be allowed to hold one or several T2S dedicated cash accounts in Euro or a non-Euro
currency. Every DCA can exist in one currency only and T2S shall not perform/facilitate any currency
conversion
 T2S acts as an ancillary system to the RTGS system and a DCA shall start with a balance of 0 at the start
of the business day and repatriate all the remaining balances at the end of the same day through a
process called "automated cash sweep“

LIQUIDITY MANAGEMENT IN T2S
KEY FEATURES (2/2)
Sophisticated Credit Limit
Management
Central Bank Auto-
collateralisation
Client Auto-
collateralisation
Multiple
Liquidity
Provider tool
Liquidity
Monitoring

LIQUIDITY MANAGEMENT
IMPACTS
 While the impacts of T2S on settlement processes were largely stressed and analysed, the ones on
liquidity management are very often underestimated
 In fact, T2S will dramatically change the way cash is managed by banks for securities settlement
purposes and, in general, will affect liquidity management policies and processes of banks’ treasurers
 The new scenario will have business, organisational, operational and technological impacts on many
areas of banks and the extent of these impacts is influenced by a number of key factors:
 Geographical perimeter of a bank’s business (local vs. global)
 Clients typology and dimensions
 Level of process automation
 National CSD decisions related to corporate actions management (in vs. out of T2S platform)
 Access strategy to T2S (DCP vs ICP)
 Etc.

KEY BUSINESS AREAS IMPACTED BY THE IINTRODUCTION OF T2S
Treasury
Settlement
Custody
Reporting / Compliance Static Data Risk & Control
Custody Administration
Liquidity
Management
Client Service & Support
Corporate Actions
Tax
Claims & Comp.s
Proxi Voting
Trading
Services &
Client
Support
Core Middle-
& Back-Office
Ancillary
Middle- &
Back-Office
Other
Trading On-Exchange
Instruction-Reporting
Trading OTC
Collateral
Management
Securities &
Cash
Financing
ILLUSTRATIVE
 Business will be significantly impacted by the new scenario:
 On one hand, pushing for changes in organisations and operations and for service offer enlargement
 On the other hand, creating new opportunities

Custody & Settlement
Reporting / Compliance Static Data Risk & Control
Client
Regulator
y
Audit Tax
Securities Currencies
Parties Accounts
Risk Mgm Credit
Control G/L
Market Ops
P&L Acc.ng
Position
Management
Clearing &
Settlement
Collateral
Management
Exceptions Management
Transaction Management
Cash
Management
Margin
Management
Reconciliatio
ns
Treasury
Funding
FX Mgm
Client Service & Support
Sales CRM Help Desk
Asset Servicing
Corporate
Actions
Tax
Claims &
Comp.s
Research &
Portfolio
Analysis
Securities Lending
Cash Financing
Proxi
Voting
Pre-Matching
Security
Trading
Services &
Client
Support
Core Middle-
& Back-Office
Services
Ancillary
Middle- &
Back-Office
Services
Other
Services
Trading
CommunicationInterfaces
MAP OF MAIN T2S IMPACTS ON A STANDARD IT ARCHITECTURE ILLUSTRATIVE
 Where the bank uses market standard applications and the vendors are committed to adapt them to
T2S, the economic impact of the investments will be substantially the same in all cases (DVP vs. ICP)
 What will determine the major impact differences will be the update/development of “custom
applications" interfacing those of 'external' parties (CSD, NCB, custodian, Eurosystem, etc.)

• Liquidity Management will not be the same any more – an Overview
• Securities and Cash financing becoming of strategically importance

SECURITIES AND CASH FINANCING BECOMING OF STRATEGICALLY IMPORTANCE
 “At the moment, the buzzword in the market is ‘collateral’.
• We are seeing considerable growth in secured borrowing. Also the future legislation on CCPs and OTC
derivatives (EMIR) will require more margining. All regulatory initiatives point to the greater demands for more
high-quality collateral. T2S will enable banks to make very significant savings in collateral when settling securities
transactions.
• T2S will eliminate the need for banks to hold multiple buffers of collateral in depository systems across Europe.
Banks will have the possibility to have a single buffer based on their entire European business. A single pool of
assets and liquidity automatically nets the short and long positions between various countries. A single
settlement engine, central bank auto-collateralisation, a harmonised schedule, and many other features of the
T2S platform, will also enable banks to reduce the amount of collateral that is left idle.”
• Gertrude Tumpel-Gugerell’s keynote speech at the ECB’s conference on “Securities settlement in 2020: T2S and beyond”,
Frankfurt, October 4th, 2011
 In July 2013, J.P. Morgan announced that its collateral management business has selected London Stock Exchange
Group (LSEG) to provide settlement, custody and asset servicing services through a new CSD that LSEG established in
Luxembourg.
 J.P. Morgan confirmed that this development is in response to EMIR, which requires margin and default
contributions posted to CCP to be held, when possible, with a securities settlement system. CCPs will be
expected to comply with this requirement when they obtain authorisation under EMIR.
12 ottobre 2012

Total value of securities
used as collateral in the
financial system worlwide
was estimated to exceed
€10 trillion
However, this value
represented only a small
portion of total assets of
global banking system
which is estimated to be
around € 70 trillion
COLLATERAL: A HUGE MARKET …
12 ottobre 2012
3%
49%
2%
44%
2%
Trading with CCPs
Market-secured
funding
OTC derivatives
margining
Settlement
Central-banks-
secured fundings

… OF A MORE AND MORE PRECIOUS RESOURCE …
12 ottobre 2012
Retail and wholesale payment
systems (within SEPA and
Target 2 contexts) will
necessarily evolve and
unsecured (i.e. not
collateralised) interbank
deposit markets would be
gradually replaced by
guaranteed ones. Financial institutions aiming to
keep their competitive
positions in the new scenario
will have to define strategies
aiming to integrate cash and
securities in order to optimize
risk and profitability
management.
Banks will look for more
efficient collateral and risk
management tools that, being
integrated with payment and
compliance processes, are
able to work in a proactive
way instead of simply reacting
to market inputs.
The recent financial crisis has
exacerbated the relation
between efficient
management of collateral and
its impact on capital adequacy
needs of European banks.
Following completion of a
capital exercise, the European
Banking Authority (EBA)
determined in 2011 that the
aggregated shortfall -
corresponding to a minimum
Core Tier 1 ratio at 9% -
exceeds over € 100 billion
In T2S, thanks to its auto-collateral
functionalities, banks may be able
to reduce their average daily cash or
credit requirements during peak
settlement periods

… THAT IS BECOMING MORE AND MORE SCARCE …
12 ottobre 2012
On September 6th, 2012, in
order to increase collateral
availability for the Eurosystem’s
liquidity-providing operations,
the ECB Governing Council
decided to suspend the
application of the minimum
credit rating threshold in the
collateral eligibility
requirements.
The suspension applies to all
outstanding and new assets of
marketable debt instruments
issued or guaranteed by the
central government, and credit
claims granted to or
guaranteed by the central
government, of countries that
are eligible for Outright
Monetary Transactions or are
under an EU-IMF programme.
The Governing Council of the
ECB has also decided that
marketable debt instruments
denominated in currencies
other than Euro, namely US-
Dollar, Pound Sterling and the
Japanese Yen, and issued and
held in the Euro area, are
eligible to be used as collateral
in Eurosystem credit
operations.

… DUE TO MANAGEMENT INEFFICIENCIES
Current way of managing collateral shows some inefficiencies both internal (i.e. related to the specific
business model of each market actor) and external (i.e. determined by the fragmentation of markets
and platforms): these inefficiencies are estimated at about € 4 billion per year, of which about 10%
originating from processes of over-collateralisation.
12 ottobre 2012

BE & TARGIT SUPPORT
OUR CURRENT REFERENCES WITHIN THE T2S AREA

NEW STANDARDS ON ASSET SERVICING AND LIQUIDITY MANAGEMENT

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