Evolution of European Post-Trade Arrangements Under T2S: Competition Spurs New Settlement Strategies

Target2Securities, Europe's planned settlement engine, is closer to becoming reality. Market participants in the post-trade value chain have to rethink and redesign their business and technology strategies to adapt to the post-T2S world.

In the report Evolution of European Post-Trade Arrangements Under T2S: Competition Spurs New Settlement Strategies, Celent discusses the major settlement strategies different market participants are considering in preparing for T2S and how they are likely to reshape the European post-trade industry. Celent breaks down the strategies by type of participant (e.g., custodian, iCSD, broker-dealer) and by market.

The impact of T2S will be greatest for CSDs and custodians. Enhancing service offerings will be key. It will be crucial for CSDs, and even a move up in the value chain by adding asset servicing capabilities may not guarantee survival unless they achieve sufficient scale and market coverage. The same will be true for local custodians; unless they build scale or develop specific capabilities, they may not survive.

Regional custodians and iCSDs are poised to get the greatest benefit. Most of them have already developed their strategies and are now implementing them to get ready for T2S. Along with cheaper cross-border settlement, theses providers are focusing on ability to settle in central bank money, liquidity pooling, financing, and collateral management services.

We see the emergence of a few new models for the post-T2S world: custody “light,” account operator model, sponsored settlement, self-clearing/settlement and execution to custody, and CSD rationalization of settlement.

Global custodians and broker-dealers are waiting for more clarity before deciding if they will become directly connected participants under T2S. “Whichever approach global custodians or regional brokers follow, the transition to the post-T2S world is unlikely to be a big-bang move; it will be a slow and gradual transition, where players will carefully consider all alternatives before making a final decision,” says Arin Ray, Analyst with Celent’s Securities & Investments Group and coauthor of the report. “Contingency planning will be important.”

“Some of the demarcation that existed among market players will increasingly get blurred because of T2S, but also because of CSD R, EMIR, and Basel III,” says Joséphine de Chazournes, Senior Analyst with Celent’s Securities & Investments Group and coauthor of the report. “Thus CSDs and iCSDs will start competing with custodians, especially for the liquidity and collateral of the brokers, while direct connectivity may reduce some differences between global and local custodians, at least for the settlement function. Smaller custodians specializing in a few markets will become niche players because the subcustody market will be dominated by four or five Eurozone regional players.”

This research is part of Celent’s ongoing coverage of T2S developments and was carried out in partnership with SWIFT. This research greatly benefited from detailed discussions with 17 major participants representing the different categories of providers and customers of post-trade services in Europe, including four global custodians, four regional custodians, two subcustodians, two iCSDs, one CSD, one regional CCP, and three broker-dealers.

In this report we first discuss the background of the T2S initiative and the current state of affairs in the European post-trade arrangements. We then analyze how each type of market participant —CSDs, iCSDs, CCPs, custodians, CCPs and broker dealers — is reconsidering their settlement strategies in preparation for the post-T2S world. This discussion includes issues of business strategy, technology strategy, collateral management considerations, and overall cost considerations. In a separate section we discuss some of the new business models and offerings that are emerging as the T2S deadline approaches. Additionally, we carry out a scenario analysis trying to foresee how the European post-trade arrangements are likely to evolve in the next five to seven years under different assumptions and scenarios.