Cash in T2S: Putting the Pieces Together
At the inception of T2S it was very easy to imagine that the securities world could become your oyster; and with good reason. Its open architecture and the flexibility inherent in the state-of-the-art settlement platform mean that treasurers, banks and brokers have many possibilities to choose from – not just in terms of securities activities, but also from a cash management perspective.
Until a few months ago, the focus of many firms was very much centred on the securities dimension of T2S. However, in recent months there has been a gradual shift towards the cash and liquidity considerations that are inherent in this market infrastructure evolution. An illustration of this change is the increasing participation of representatives from the treasury, liquidity and funding teams in T2S project and steering committee meetings.
One factor instigating this shift could be that liquidity management has recently moved in to the limelight. In the aftermath of the 2008-09 financial crisis, there is increased awareness that failure to properly manage liquidity can have ominous consequences for any financial business. Particular attention is being paid to the management of intraday liquidity risk, which is part-and-parcel of the securities settlement dimension. Against this backdrop of regulatory attention to liquidity management, it is therefore natural that firms would turn their attention to their liquidity strategy in T2S.
So let’s take a closer look at what’s happening within the cash dimension of T2S.
The First Wave
With only a few months to go before the go-live of Wave 1 – the first of four – on June 22 when the first central securities depositaries (CSDs) are due to migrate (the other three waves follow in March 2016, September 2016 and February 2017), it is common knowledge that with T2S there will no longer be any need to hold multiple euro cash accounts with different central banks in the euro zone. Only one single euro cash account – the dedicated cash account (DCA) – will suffice, with all transactions settled in central bank money.
Consequently, T2S will abolish the need for market participants to hold multiple buffers of collateral and liquidity when settling in different European markets. A single pool of assets and liquidity will automatically net short and long positions in various markets, thus generating significant collateral savings. T2S participants will be able to manage their collateral much more efficiently and optimise their funding costs.
Where does this leave treasurers? From the very start of T2S, they have been faced with a simple choice: either they appoint their bank as payment bank to which they entrust their cash and liquidity management, or they take on the task of cash and liquidity management by themselves. In concrete terms it means choosing between using the bank’s DCA, or opening their own.
Many who choose the first option do so in order to focus their resources on their core securities activities. They do not need to worry about opening a DCA – a mandatory requirement in T2S – and will instead opt to use the DCA of the payment bank. Similarly, they do not have to concern themselves with having a Target2 account; also a mandatory requirement in T2S given that all DCAs must be linked to such an account. As custodian, a bank such as BNP Paribas has the option to leverage its omnibus dedicated cash account as much as possible (which is what we intend) while also opening the possibility of a premium service with segregated dedicated cash accounts, as required in accordance with some clients’ preferences.
Clients may also decide to appoint an agent bank to manage their securities activities. However, an alternative set-up is possible. The flexibility that characterises T2S enables clients with a designated payment bank to have their own securities account in the CSD (see Option 1a in Figure 1 below), which they may or may not choose to operate by themselves. Whatever the securities account set-up chosen by the clients, entrusting their cash and liquidity management to the payment bank is entirely compatible with their desired model. Furthermore, a payment bank such as BNP Paribas enables clients to benefit from auto-collateralisation, a key mechanism of T2S.
Figure 1: Available Options under T2S:
Source: BNP Paribas
Others may choose the second option and decide to open their own DCA in the central bank of their choice. Oftentimes, these firms already have a T2 account, which facilitates this process. Within this set-up, they can maintain their securities accounts with their agent bank and simply link them to their own DCA (as per Option 2 above). This flexibility would enable them to fully take advantage of the auto-collateralisation functionality. However, they also have the possibility of opening their own securities account in the CSD, which they may or may not operate by themselves (Option 2a).
Among the principal attractions of this option is access to central bank money. Some clients perceive this as a clear advantage compared to commercial bank money. Others are conscious of the ramifications of having their own DCA. They realise that the latter option – and thereby benefiting from auto-collateralisation – means having to segregate their securities accounts. The implications are considerable for those firms in an omnibus securities account. For others, the change from an omnibus securities account set-up to a segregated one is worth making, simply because it is in line with their target strategy and business model.
Similarly, while some clients may see central bank money as the better alternative, others are wary of relinquishing access to the pool of funds and credit lines available through their payment bank and that are crucial for their securities activities. Again, it all depends on the client’s perspective and the business model they target.
No Single Answer
What option should treasurers choose? There is no right or wrong answer to this question. T2S is about enabling firms to choose the option that is best suited to their needs and ambitions.
BNP Paribas’ own view – based on meetings with clients – is that we see there is a greater understanding of the different possible set-ups. Nonetheless, most of them have decided to maintain their current operating model – at least for Wave 1 of T2S. It is probable that they will then review the model, and Waves 2 and 3 may prove to be major turning points in terms of the models we see emerging.
Whatever the choice that clients make, banks have adapted their existing offerings and developed new solutions so that they accompany clients on the T2S journey they decide to embark upon. In addition to the auto-collateralisation mechanism extended to our clients, banks will also offer a range of financing solutions tailored to various clients’ needs. This will be a simple extension of the credit and liquidity that are already provided today to support clients’ settlement activities. Current reporting and cash optimisation solutions should complete the payment services offer.
The benefits of T2S are clear for those who engage with the initiative, clearly define their business objectives and choose the right partnership. The opportunity is there for all firms, no matter their business model or operational set up, to make a real difference to their liquidity management. It’s simply a matter of choosing what works for you.