The next big bang?

Regulation

The next big bang?

September 2019

The ongoing T2/T2S consolidation programme promises a ‘big bang’ moment for the industry

Vision 2020 is a serviceable title that has been attached to disparate projects and initiatives from various organisations. For the Eurosystem – comprising the European Central Bank (ECB) and the national central banks of EU member states whose common currency is the euro – Vision 2020 represents the next step of evolution towards a more integrated European financial market infrastructure.

The Eurosystem’s current market infrastructure enables the exchange of securities, collateral and liquidity between financial market counterparties. Liquidity, to quote the ECB, is “the fuel to effectively facilitate the exchange”.

Vision 2020 aims to generate benefits for the system from further integration, including greater efficiency, improved security, full use of technologies and facilitating usability. Currently, fund transfers between the EU’s banks are effected through the second iteration of Trans-European Automated Real-time Gross Settlement Express Transfer, aka TARGET2 (T2). Introduced in November 2007, T2 is used by more than 1,700 banks to effect high daily volumes of euro transactions. A similar dedicated platform for securities transactions, TARGET2-Securities (T2S), was launched by the Eurosystem in July 2008.

As the ECB observes: “TARGET2 has been running smoothly for over a decade, ensuring safety and efficiency in European payments. However, payments have changed significantly in the meantime due to technological developments, regulatory requirements and changing consumer demands.”

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T2S, which is managed by the EU’s central banks and central securities depositories (CSDs), has “settling without borders” as its remit. T2S processes domestic and delivery versus payment transactions in central bank money. The platform is used by the EU’s central banks, retail banks and CSDs. The Eurosystem’s proposed response to the financial market’s transformation over the past decade is to update T2/T2S with a new real-time gross settlement (RTGS) system and liquidity management optimisation across all TARGET services. This will be achieved by consolidating their technical and functional aspects, while harmonising and integrating Europe’s cash and securities settlement services.

 

Launch dates

The new system is effectively a ‘big bang’ approach that changes the way banks and ancillary systems access services for transactions in central bank money. A go-live date of 22 November 2021 is set for the consolidated platform, which will comprise the new T2/T2S services and RTGS.

A second wave, scheduled for 2022, will see the launch of a new Eurosystem Collateral Management System (ECMS) – currently in development – to replace the individual collateral management systems now used by Eurosystem national central banks. Once operational, the changes will mark major progress towards the ultimate goal of a fully integrated European financial market.

Vision 2020 involves various developments ahead of the launches. The new platform also introduces central liquidity management (CLM) to all Eurosystem services. In addition to T2/T2S, they include TARGET Instant Payment Settlement (TIPS), launched by the EU in November 2018, and common components for harmonising functions and services where possible, such as Common Reference Data Management; a Data Warehouse; the new ECMS; and the Eurosystem Single Market Infrastructure Gateway (ESMIG) that will provide access to TARGET services and the ECMS. ISO 20022-compliant messaging will be used for all communications (it was adopted by T2S back in 2015).

Introducing a CLM system will provide participating banks with an overview of their central bank liquidity and the ability to flexibly assign it to individual settlement services. The new structure will also make possible the separation of central bank transactions from individual payments.

“For the Eurosystem central banks and their monetary policy counterparties, [the new] ECMS will be a major step forward because it will create one central point, one set of procedures and one platform to manage all of the collateral,” adds Philippe Leblanc, Banque de France Operational Director for European Market Infrastructures.

Earlier this year, the ECB confirmed that the Eurosystem will permit users to choose from various network service providers (NSPs) when connecting to TARGET Services (T2/T2S and TIPS) and the ECMS via ESMIG.

Banca d’Italia was delegated the task of awarding up to three concessions for the provision of ESMIG connectivity services. Its selection will be based on the lowest price offered to users, provided the NSP satisfies a minimum set of requirements. Under the timetable, users were able to initiate negotiations with the NSPs from mid-July 2019, once the Eurosystem had named those who were awarded the concessions.

"There may yet be a few speed bumps along the highway envisaged in Vision 2020"

By the end of March 2020, the Eurosystem will confirm the final list of ESMIG NSPs selected. SWIFT and Italy’s SIA (provider of SIAnet secure messaging) are almost certain to be chosen – both won the first two rounds of the tender, while SIA was the first NSP to gain Eurosystem certification for TIPS.

In addition to these plans, EBA Clearing is coordinating with the Eurosystem timeframe with the aim of moving its EURO1 large-value payment system for single same-day euro transactions to ISO 20022 in 2021, giving users full business interoperability between EURO1 and T2.

SWIFT announced last December that it will also align and begin migrating all cross-border and many-to-many payments to ISO 20022 from late 2021, and provide a four-year co-existence phase.

 

Will banks be ready?

With this flurry of activity comes the question of the banking sector’s preparedness as November 2021 approaches. The assessment phase places the onus on banks’ operational teams to liaise with legal and business colleagues to devise ways of extracting opportunities for digital transformation from the heavy compliance burden.

The revolution in European retail banking is of course already underway following the January 2018 introduction of the revised Payment Services Directive, aka PSD2, although to date it has proved less wide-reaching than initially envisaged by the European Commission.

Also in progress is the global migration to ISO 20022, which Simon Jones, Global Head of Payments Transformation at Deutsche Bank, describes as the largest change programme to affect the payment business since the 2015 launch of the Single Euro Payments Area (SEPA). An updated edition of the bank’s Ultimate Guide to ISO 20022 Migration is being published in September 2019.

Every Deutsche Bank division that processes payments is affected, so Jones reports that cross-divisional governance, collaboration and architecture have been established to enable the group to manage the multiple migrations. “We’re using lessons learnt and a programme set-up that proved successful both for the Markets in Financial Instruments Directive, aka MiFID II, and SEPA instant payments. With the MT message format so widely used in many of Deutsche Bank’s systems and in clearing systems for more than 30 years, ISO 20022 impacts hundreds of global systems. That requires us to manage changes every month from now until 2021 in Asia Pacific, the EU and the US.”

While this represents a huge planning and resourcing challenge, he also regards it as an ideal opportunity to drive technology and business change. “We’re using ISO to accelerate the rollout of our key strategic components that will enable us to process, monitor/scan and store full ISO messages over the next two years,” says Jones. “We also see major synergies with SWIFT’s global payments innovation (gpi) for corporates (G4C) XML, where systems already need to process ISO, and our surveillance programmes, which we’re using to prepare ahead of ISO 20022.

“It’s exciting to be part of this migration from MT to MX in high-value payment schemes and SWIFT globally. I’m confident close collaboration with clients, the clearing central banks, regulators and SWIFT will make this an extremely valuable programme for paving the way to add new features and controls to global high-value payments flows in the run-up to November 2021 and beyond.”

In the meantime, Europe’s banks were required by 14 June 2019 to have implemented facilities – principally application programming interfaces (APIs) – for enabling third-party providers to test their functionality against a simulated bank environment or ‘sandbox’. The date came three months ahead of the 14 September deadline for PSD2’s Regulatory Technical Standards and was preceded by suggestions that the APIs produced by the industry fell short of the required standard. There may yet be a few speed bumps along the highway envisaged in Vision 2020.

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