How banks are preparing (or not) for T2/T2S consolidation

In 2020 another seismic upheaval looms on the horizon for the European financial community. This time the main players are the European central and national banks. Vision 2020, as the Eurosystem’s T2/T2S Consolidation project is known, sees the technical consolidation of TARGET2 and TARGET2-Securities and the harmonisation and integration of European cash and securities settlement services.

The Consolidation project is a logical step in the evolution towards an evermore integrated financial market infrastructure in Europe and has as its main objectives increased efficiencies, optimised technologies, tightened security and improved usability. The project also foresees the development of new services that will allow it to keep pace with the changing needs of the payments community. In short: a new consolidated payments infrastructure that fits today’s needs.

New developments being ushered in through Vision 2020 include:

• the introduction of Central Liquidity Management (CLM), designed to ensure efficient provisioning of liquidity across the different services;
• the harmonisation of support functionalities for future TARGET services (RTGS, T2S and TIPS);
• the introduction of ISO 20022-compliant messages for communication;
• multi-currency capability, making it possible to settle payments in different currencies at different set times.

As you might expect, a move of this magnitude necessitates numerous Eurosystem sessions and consultations. TAS Group has been an enthusiastic participant in these sessions. Since February this year its Capital Markets and Treasury experts have been meeting with bank Treasury and IT departments to introduce them to the Consolidation project, explaining the challenges and expected impacts, and helping them identify the best approach.

After nearly 20 meetings with the banks, one thing is clear: the banks are not yet preparing. Some of them are focusing on the new TARGET Instant Payment System (TIPS), while others are planning to start workshops and carry out impact assessments later in the year. What is very apparent though is that a large number of banks, especially second and third tier, are up until now:

• not considering the Eurosystem Consolidation as a strategic project;
• not demonstrating senior management awareness;
• not assigning clear responsibilities and resources.

We believe this is happening for four main reasons:

• Regulatory fatigue and overload. Recent regulatory burden has by now saturated industry implementation capacity. Basel III, T2S, PSD2, to name a few, have recently tested the resilience of the financial community and are still demanding the attention of Payments and Treasury Operations departments, as well as IT and Compliance Officers;
• Ongoing ECB Quantitative Easing has decreased senior management focus on the banks’ liquidity and related issues;
• The migration date, scheduled for 2021, seems far away;
• Previous experiences of Europe-wide implementations, for example T2S and SEPA, have led to a common expectation that European projects are likely to be delayed.

No one can predict if and to what extent current Vision 2020 deadlines will be postponed. What we can see is that where TIPS is concerned – a first step in the new consolidated system – just a few banks are planning to take part from the go-live date, scheduled for November 2018, with many others wanting to participate but not being in any hurry to do so.

With user testing expected to start in 2020, banks have just two years from now to be ready to test with the Eurosystem and the industry. But before this, they will have to review their processes affecting liquidity management and update their systems.

Considering that the big-bang migration is scheduled for November 2021 and the 18-month window for user testing, this gives banks just 28 months to raise internal awareness and commitment, define internal responsibilities, assess migration impact, budget for and plan implementation accordingly, analyze UDFs and internal requirements, adapt or change processes and IT solutions and manage contingency.

Taking into account that during these months Instant Payments are quickly becoming a reality, particularly through TIPS, it’s not Mission Impossible. But it is time to take action. TIPS can be seen as a first step in the new scenario, capitalising on connectivity and implementing instant treasury solutions on the new common platform.

While T2 will be the main focus for the consolidation, it is worth noting that in the new scenario, the marginal cost of adopting a T2S Direct Participation model will be significantly lower. In light of this, T2S Indirect Participants would be wise to take the opportunity to evaluate in advance the option of becoming a Direct Participant, which can now prove a highly attractive route.

The arrival of TAS Group’s latest Bank Liquidity Management platform has come at a perfect time. Designed entirely around the new Consolidation System, processing ISO20022-compliant messages and already managing Dedicated Cash Accounts (DCAs) and their logic, it offers banks a complete, centralised and integrated view of and ability to forecast their liquidity situation, allowing them to manage their settlements effectively while fully complying with the proposed new infrastructure.

One thing is for sure; it’s time to raise management awareness and understand the implications of the migration. New processes, data flows and consequent ISO20022 messages need to be brought into sharp focus and outlined. And quickly.

About the author

Mario Mendia is director, managing capital markets BU and foreign subsidiaries, at TAS Group.