Key highlights of settlement needs in T2S Trading-related settlements

Transcription

1 T2S Key highlights of settlement needs in T2S Trading-related settlements TG3 1st meeting 18th June

2 Agenda 1) General overview 2) Settlement prioritisation and recycling 3) Settlement optimisation procedures 4) Liquidity management 5) Auto-collateralisation 6) Securities and cash booking 2

3 General overview Main stakeholders in T2S settlement Definition of roles is part of the mandate of TG4 Static Data Work conducted by TG4 is still in a preliminary stage Changes can be expected First concepts affecting settlement are presented Account holding structure: Securities accounts are legally held with participating CSDs Cash accounts are held with Eurosystem National Central Banks or other National Central Banks 3

4 General Overview Definition of key roles Settlement banks (SB) Hold cash and securities accounts and can provide cash settlement services to SPs. Settlement participants (SP) Hold securities accounts and rely on SB services for cash settlements. CSDs Settlement participants NCBs Settlement banks Indirect participants (IP) Do not hold securities nor cash accounts but can send settlement instructions. They must rely on SPs or SBs for securities and cash settlements. Indirect participants 4

5 General overview Securities and transactions types Securities and transactions types is part of the mandate of TG1 - Scope and Schedule Securities: all securities with an ISIN code deposited and settled through book-entry in a T2S connected CSD Potentially some specific financial instruments such as mutual funds Transaction types: all securities-related transactions requiring settlement on securities and/or cash accounts including settlement activities relating to the asset-servicing business (but excluding management of corporate actions) includes DVP, FoP, DVD 5

6 General overview Main features of the T2S settlement functionality Key goal: To facilitate centralisation and harmonisation of settlement In particular: - common settlement rules and procedures for all participating CSDs - no difference between intra-csd and cross-csd settlements within T2S (i.e. between 2 T2S participating CSDs) - possibility for settlement banks to centralise all cash settlements in euro with the cash sub-account of their choice - possibility for settlement participants and settlement banks to settle the securities leg of their transactions on the securities accounts held with the CSD of their choice (provided the CSD provides such services) 6

7 General overview Different steps leading to settlement LIFECYCLE & MATCHING Main principles derived from the proposals currently under Public Consultation Settlement is attempted on a gross basis through batch or real-time procedures Optimisation and auto-collateralisation aim at maximising settlement efficiency Successful settlement attempts result in the immediate and final booking of securities and cash movements SETTLEMENT Sequencing Prioritisation Fails recycling Settlement attempt Optimisation Auto-collateralisation Booking 7

8 Agenda 1) General overview 2) Settlement prioritisation and recycling 3) Settlement optimisation procedures 4) Liquidity management 5) Auto-collateralisation 6) Securities and cash booking 8

9 Settlement prioritisation Key features: Prioritisation procedures should be available in T2S and applicable to all participating CSDs In a way which avoids systematic preferential treatment to some participants or CSDs Proposals to TG: 1. To have a level of priority determined individually per instruction either according to the type of instruction (e.g. Monetary Policy Operations) or on demand of counterparties 2. To prioritise according to groups of instructions (Stock Exchange, OTC ) within the batch process 3. To use the FIFO rule for the real-time process except for instructions identified in 1. 9

10 Recycling Key features: Fails should be recycled throughout the day They should be submitted to the optimisation procedures on a continuous basis. Proposals to TG: 1. Failed instructions at the end of the day should be recycled during the following days during a limited period of time (rule to be determined for the length of the period) 2. At the end of this period, they should be purged 3. Fails should keep their assigned priority 10

11 Agenda 1) General overview 2) Settlement prioritisation and recycling 3) Settlement optimisation procedures 4) Liquidity management 5) Auto-collateralisation 6) Securities and cash booking 11

12 T2S Settlement expectations Transforming T2S Key concepts DVP Gross-Settlement in Central Bank Money with real time facility into settlement functionality requirements Need to implement sophisticated optimisation processes 1. Technical netting 2. Liquidity saving features Benefiting from the management of securities and cash on the same platform 12

13 T2S Settlement expectations Technical netting Description: A series of processes involving groups of orders which can settle if considered collectively (but cannot if considered in isolation) Key features: - to reduce securities and liquidity needed for settlement - while allowing booking on a gross basis to ease reconciliation Combining the advantages of pure net and pure gross settlement models 13

14 T2S Settlement expectations Technical netting Example : A 100 securities 200 euro B 100 securities 200 euro C Positions: A: 100 securities B: nothing C: 200 euro Settlement models results: Pure Gross settlement system => No settlement => gridlock A 100 securities 200 euro B 100 securities 200 euro C Legal netting 100 securities => B is no longer involved in settlement A C 200 euro Gross settlement with technical netting => Settlement of all transactions and gross booking A 100 securities 200 euro B 100 securities 200 euro C 14

15 T2S Settlement expectations Illustration of different methods of technical netting The settlement day is composed of batches and real-time periods during which optimisation needs may be different Night time Daytime FOPC CCP? Maintenance FOPC Real-time settlement process CSOC CSOC CSOC CSOC CSOC CSOC CSOC CSOC CSOC F O P C Real -time FOPC Full OPtimisation Cycles (Batch) CSOC Continuous Short Optimisation Cycles ***This graph is purely illustrative and does not pre-empt any decision regarding the future organisation of the settlement day*** 15

16 Technical netting in T2S Full OPtimisation Cycle (FOPC) Key objective: to maximise the volume or value of settlements Key features: Applies to all instructions Batch-type process, no real-time process available Blocking of all account balances during the processing period Optimisation functionality: Control on net positions resulting from a set of instructions Booking of all transactions on a gross basis but in the same process Includes a shaping functionality still to be detailed Question to TG : Are there additional optimisation needs for CCPs? 16

17 Technical netting in T2S Optimisation features in a real-time environment (CSOC) Key objective: To ensure real-time settlement, while allowing optimisation on a subset of instructions CSOC should run continuously in parallel to the real-time settlement process and should aim at detecting sets of instructions to be submitted to settlement Continuous optimisation must avoid disturbing the real-time process (no batch) CSOC to run mainly on fails, e.g. according to time or event-driven detections (e.g. back-to-back detection) 17

18 Agenda 1) General overview 2) Settlement prioritisation and recycling 3) Settlement optimisation procedures 4) Cash and Liquidity management 5) Auto-collateralisation 6) Securities and cash booking 18

19 Cash and Liquidity management in T2S Principle: SBs should be able to manage their liquidity efficiently Main requirements - To be able to segregate liquidity positions according to business needs - Need for flexibility in account set-up - Need for easy allocation, relocation and dedication of liquidity - To have an overall view on liquidity available on CeBM accounts (RTGS accounts + dedicated cash sub-accounts) - To optimise the use of liquidity resources - Introduction of Liquidity saving features (auto-collateralisation) - To be able to manage associated risks properly - Introduction of settlement limits - Real-time information to SB Requirements also need to cover other currencies 19

20 Liquidity management Dedication and segregation of liquidity SB should be able to Dedicate liquidity to securitiesrelated settlements Provide cash clearing services to other T2S participants Segregate liquidity among proprietary and client settlements Allocate liquidity for the settlement of specific operations SB need to Use dedicated cash accounts Be able to settle proprietary and client transactions on separate dedicated accounts Open separate dedicated cash accounts per one or several clients Dedicate liquidity to specific operations Limit credit risks vis-à-vis clients Set limits per dedicated cash account 20

21 Liquidity management in T2S Liquidity saving features Auto-collateralisation 3 sources of collateral: Eligible assets collateralised to the Eurosystem (securities and credit claims) Eligible assets available for collateralisation with the Eurosystem (assets already held by participants) Securities collateral comes from the securities being purchased (collateral on flow ) Collateral will contribute to form a Liquidity Reserve Collateral + CeBM cash balance Liquidity Reserve T2S will verify that sellers hold sufficient securities and buyers hold sufficient Liquidity Reserve as part of its settlement process 21

22 Liquidity management Efficient allocation/relocation of liquidity Liquidity needs Liquidity resources Settlement Bank overview Transfers between dedicated subaccounts of the SB Transfers between dedicated subaccounts and RTGS account of the SB Liquidity transfers on demand of the SB Automated liquidity transfers (time or event triggered) 22

23 Cash management Settlement in euro and other currencies 2 different requirements to accommodate Firstly, T2S shall focus on the euro but shall be technically able to settle in other currencies. Settlement in Central Bank Money Secondly, to enable some CSDs having a marginal activity in Commercial Bank money in non-euro currencies to de-commission their settlement platform 23

24 Cash management Settlement in euro and other currencies Principle: Focus on euro but technically able to settle other currencies in Central bank money (compatible from the start) Main impacts for settlement functionality: Currency should not be a reason to apply a different settlement process for settlement in central bank money Same service-level : Settlement efficiency should be as efficient in other currencies as in euro Impacts on Liquidity Management differ according to T2 status: For T2 countries : functionalities offered for the euro could be replicated For non-t2 countries: up to the local market to build their liquidity management tools 24

25 Cash management Settlement in euro and other currencies Administered DVP for non-euro in commercial bank money Purpose: Allowing CSDs to decommission settlement engines for marginal activity in noneuro CoBM (only possible for low volumes) For these types of non-euro settlements in CoBM, T2S should ensure securities transfers in an administered DVP mode by: Accepting instructions on blocking of securities on the seller s side whilst the CSD arranges a CoBM payment outside of T2S Accepting a FOP transfer of the blocked securities, ensuring the securities transfer to the buyer when the CSD has got a confirmation of the CoBM payment 25

26 Agenda 1) General overview 2) Settlement prioritisation and sequencing 3) Settlement optimisation procedures 4) Liquidity management 5) Auto-collateralisation 6) Securities and cash booking 26

27 Auto-collateralisation Definition Notes: An automated intraday credit operation in central bank money duly collateralised aiming at facilitating the settlement of securities-related transactions and triggered when cash is insufficient on the buyer s side. 1. Auto-collateralisation operations represent only a part of intraday credit provision in CeBM, which also covers intraday credit provision on RTGS accounts in T2. 2. Intra-day credit provision shall comply with Central Banks rules (Eurosystem s rule for auto-collateralisation in euro) Auto-collateralisation should be available To all participating markets During the whole settlement day at zero interest In repo and in pledge environments 27

28 Auto-collateralisation Sources of collateral as detailed in slide 20 Priority: Collateral is used in the following order: Eligible assets already collateralised Eligible assets available for collateralisation and held by the participant If resources are still insufficient, it is complemented by securities being purchased (collateral on flow ) Used to cover Intraday Credit provision in Central Bank Money on dedicated sub-accounts Credit granted should be exclusively dedicated to the settlement of the underlying initial instruction 28

29 Auto-collateralisation Settlement Banks requirements Auto-collateralisation shall be available : on T2S dedicated cash sub-accounts; for the settlement of proprietary and clients transactions with own SB collateral or collateral of its clients (prior authorisation needed) Settlement banks should be able to limit the amount of intraday credit that can be obtained for the settlement of: Their proprietary transactions The transactions of their clients (individual or group limits) 29

30 Auto-collateralisation Closing of operations Settlement banks should have the possibility to : reimburse intraday credit at any moment of the day dedicate liquidity to the reimbursement of their outstanding intraday credit End of day closing is compulsory It should be automatically triggered by T2S Question to TG: is there a need for an automated closing procedure during the day (e.g. above a certain amount of cash available on the SB cash account, or at a certain time)? 30

31 Agenda 1) General overview 2) Settlement prioritisation and sequencing 3) Settlement optimisation procedures 4) Liquidity management 5) Auto-collateralisation 6) Securities and cash booking 31

32 Securities and cash booking The booking of securities and cash should be performed: On a gross basis With immediate finality With the ability to link several bookings together Crucial for technical netting and auto-collateralisation Settlement and booking must be performed directly by T2S T2S must keep the full control of the booking process 32

33 THANK YOU! 33