TARGET2-Securities The Pre-project Phase

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2 TARGET2-Securities The Pre-project Phase Jean-Michel Godeffroy ECB, Director General Payment Systems and Market Infrastructure Meeting with representatives of market participants and market infrastructures ECB, Frankfurt,, December 2006

3 The pre-project phase Decisions of the Governing Council 6 July the Eurosystem is evaluating opportunities to provide efficient settlement services for securities transactions in central bank money leading to the processing of both securities and cash settlements on a single platform through common procedures in cooperation with central securities depositories and other market participants Synergies for the market with other facilities operated by the Eurosystem will be sought, in particular in connection with the future TARGET2 payment system. would allow large cost savings as a result of the high level of technical harmonisation that this facility would entail for all market participants and would represent a major step towards a single Eurosystem interface with the market

4 The pre-project phase Decisions of the Governing Council 20 October The Governing Council invited its Payments and Settlement Systems Committee (PSSC) to prepare a detailed feasibility study on the project by end-february This study will provide the elements for the Governing Council to finally decide to launch the project. A further consultation will take place after the Governing Council has considered the feasibility study.

5 The pre-project phase The consultation process Meetings at the ECB: 19 July 2006 Aug-Sept: Informal questionnaire 27 September December January 2007 Local meetings: National Central Banks: local market participants ECB and consultants: Other international users especially in London After Governing Council decision in February 2007

6 The pre-project phase The Team ECB core team: experts led by Marc Bayle, ex Sicovam Consultants: Anders Reveman: ex CEO of VPC Hugh Simpson: ex CEO of Crest Stephanie Hiddinga-Marelle: seconded by BNP Paribas Markus Glück: seconded by Deutsche Boerse Contributors in National Central Banks

7 The pre-project phase Invitations to the Contact Group CESAME participants European public institutions COGESI participants Others who have expressed interest Ad-hoc Contact Group December 2006

8 The pre-project phase The decision-making process ECB Governing Council Scheduled to decide by end- February 2007 Two members from Eurosystem NCBs Chair: J-M Godeffroy Payment and Settlement Systems Committee (PSSC) October November January One member from Eurosystem NCBs Chair: D Russo Reference Group 22 November 11 December 10 January

9 The pre-project phase The documents Well advanced for comments before finalisation Blueprint In drafting stage Input expected Feasibility Study Legal Operational Technical Economic

10 The pre-project phase Several Actors: one ambition Euro Securities Settlement Giovannini TARGET2-S ESCB-CESR (?) Code of Conduct

11 The pre-project phase The principles Listen to the market Keep it simple No wishful thinking Do not re-invent the wheel

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13 TARGET2-Securities Custody and Settlement Patrick Hess ECB T2S Pre-project Team Meeting with representatives of market participants and market infrastructures ECB, Frankfurt,, December 2006

14 Custody and Settlement EXCHANGE Listing Listing Trading CLEARING HOUSE CCP CCP Clearing CSD CENTRAL BANK Securities Settlement Cash Cash Settlement ISSUER Issuer Issuer CSD CSD Investor CSD CSD BANK BANK & BROKER INVESTOR

15 Custody and Settlement Euroclear (BE, FR, NL) Cash Securities NBB SSS Interbolsa BOGS Securities Securities Securities Clearstream DE Securities Monte Titoli Securities Iberclear Securities APK Securities TBF Cash RTGS+ Cash BIREL Cash SLBE Cash BOF-RTGS Cash TOP Cash Ellips Cash TARGET SPGT Cash Hermes Cash ARTIS Cash IRIS Cash LIPS Cash OeKB Securities NTMA Securities Other CSDs Securities Multiple form of DvP *planned for BE and NL

16 Custody and Settlement Euroclear (BE, FR, NL) Cash Clearstream DE Securities Securities NBB SSS Interbolsa BOGS Securities Securities Securities OeKB Securities Monte Titoli Securities Iberclear Securities APK Securities Cash TARGET2 NTMA Securities Other CSDs Securities Two forms of DvP

17 Custody and Settlement Listing Listing Trading Flow of trades CCP CCP Clearing Settlement Cash Cash Settlement ISSUER Issuer Issuer CSD CSD Investor CSD CSD BANK BANK & BROKER INVESTOR Asset Services Corporate actions Investor information

18 Custody and Settlement EXCHANGE LISTING TRADING CLEARING HOUSE CCP CCP CLEARING Securities/Cash Settlement Cash Cash Accounts CSD Securities Accounts T2S ISSUER ISSUER CSD CSD INVESTOR CSD CSD BANK BANK & BROKER INVESTOR

19 Custody and Settlement Euroclear (BE, FR, NL) Asset servicing NBB SSS Interbolsa BOGS Asset servicing Asset servicing Asset servicing Clearstream DE Asset servicing Monte Titoli Asset servicing Iberclear Asset servicing APK Asset servicing Sub-cash TARGET2-Securities Cash Settlement engine TARGET2 Securities OeKB Asset servicing NTMA Asset servicing Other CSDs Asset servicing One form of DvP

20 Custody and Settlement Availability of information for asset servicing Availability of functions to allow CSDs to provide services to their participants All settlement instructions related to asset servicing and/or other services settled with appropriate priority on the TARGET2-Securities platform Principle: no more need for settlement activities at the level of CSD IT platforms

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22 TARGET2-Securities Perimeter Jesús Pérez Bonilla Banco de España Meeting with representatives of market participants and market infrastructures ECB, Frankfurt, December 2006

23 Perimeter All securities transfers processed by a CSD including: National and foreign securities held through a link with another CSD DVP in euro central bank money, FOP and other technical booking transfers Primary and Secondary markets (Grey market, OTC ) Principle: allowing maximum cost savings by IT decommissioning of local settlement engines and related tasks

24 Perimeter Settlement based on RTGS DVP in central bank money Standard message processing with real time technology Low liquidity needs with state-of-the-art optimisation mechanism; including self-collateralisation techniques, algorithms for complex operations Minimising risks with immediate finality both on cash in central bank money - and securities legs of transfers Principle: most efficient and secure settlement type

25 Perimeter All processes related to settlement activities: Validation of received settlement instructions Matching services Verifying and reserving cash and securities Optimisation procedures Debiting and crediting cash and securities Queue management services Automated re-alignment of inter-csd Reporting services Principle: allowing full benefits in term of costs reductions for market infrastructure

26 Perimeter Operating days and hours compliant with Eurosystem user standards: Open on TARGET2 opening days Process operations night and day on automated basis to ensure a focus during the day-time on intraday operations Principle: fully compatible with TARGET2 to allow optimum market infrastructure availability

27 Perimeter Euro central bank money: Main focus settlement of DVP transactions in euro central bank money Extendable to new CSDs and NCBs when joining the euro area Extendable to CSDs outside the euro area settling in euro Outside the perimeter: Settlement in commercial bank money Principle: building an open architecture to answer market integration needs even beyond euro area

28 Perimeter Beyond euro? Demands from market participants dealing in various currencies. We are concentrating on the euro, which is the currency for which the Eurosystem is responsible. Of course, it would be technically possible to include other currencies. Politically, we respect it is the decision of the central banks of other currencies.

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30 TARGET2-Securities Functional Architecture Marc Bayle ECB T2S Pre-project Team Meeting with representatives of market participants and market infrastructures ECB, Frankfurt, December 2006

31 Functional architecture SETTLEMENT INSTRUCTIONS SECURITIES CASH CSD A CSD A ACCOUNTS NCB A ACCOUNTS T2S SETTLEMENT ENGINE CSD B CSD B ACCOUNTS NCB B ACCOUNTS TARGET2 CSD C CSD C ACCOUNTS NCB C ACCOUNTS T2S platform

32 Functional architecture Securities Securities CSD CSD A CSD CSD B CSD CSD C CSD CSD D CSD A ACCOUNTS CSD B ACCOUNTS CSD C ACCOUNTS CSD D ACCOUNTS T2S settlement engine can only debit and credit these securities. CSDs can put all securities into T2S platform. All possible level of segregation accepted up to direct holding structure. Harmonised account structure in T2S based on information needed for settlement only.

33 Functional architecture Cash One TARGET2 Cash account RTGS account TARGET2-Securities Dedicated cash sub-account Operated on TARGET2-Securities platform T2S settlement engine can only debit and credit these dedicated sub-. The CSDs participants can move liquidity in and out of these sub- at any time. At the end of the day all liquidity is pooled back from the sub- into the main TARGET2 RTGS account.

34 Functional architecture Validation (1) Functional blocks Matching & Lifecycle Management Engine Lifecycle Management (4) Instruction Maintenance Instructions Matching (2) Instructions not yet/ no longer eligible (8) Purge & Archive (3) (5) (11) Static Data Manager Settlement Eligibility Regulatory Reporting Settlement Eligible instructions Engine (10) Recycling (6) Sequencing (9) Optimization Securities Feed back (7) Booking Propose for settlement Cash

35 Functional architecture Functional description TARGET2-Securities CSD B CSD A PARTICIPANTS Customers data SECURITIES CSD A ISINs and ISINS data Instructions Interface Instruct Query Status Maintain Instruction Account Balances Interface Query Monitor CSD AUTHORIZA - TION INTERFACE Set up / change / maintain Participants Securities Rules Lifecycle Management and Matching Instruction ready Information for settlement on status SECURITIES ACCOUNTS CSD A ACCOUNTS CSD B ACCOUNTS CSD Optimization procedures Settlement Engine CASH ACCOUNTS CASH ACCOUNTS NCB A ACCOUNTS NCB B ACCOUNTS NCB NCB C ACCOUNTS CSD SECURITIES RULES SETTLEMENT PARTICIPANTS CSD A CSD A CSD A AGENTS CSD A CSD A CSD A CSD A NCB A CSD A CSD A CSD A CSD A CSD B CSD B CSD B NCB B Payment System Interface TARGET2 NCBs T2S Static data

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37 TARGET2-Securities Connectivity George Kalogeropoulos T2S Pre-project Team Meeting with representatives of market participants and market infrastructures ECB, Frankfurt, December 2006

38 Overview Technical Connectivity of CSDs and CSDs participants with T2S Principles and options of connectivity Modes and means of communication They define the functionality available for users to instruct and monitor their balances

39 Connectivity Functional description TARGET2-Securities CSD Participants CSD B CSD A PARTICIPANTS Customers data SECURITIES CSD A ISINs and ISINS data Instructions Interface Instruct Query Status Maintain Instruction Account Balances Interface Query Monitor CSD AUTHORIZA - TION INTERFACE Set up / change / maintain Participants Securities Rules Lifecycle Management and Matching Instruction ready Information for settlement on status SECURITIES ACCOUNTS CSD A ACCOUNTS CSD B ACCOUNTS CSD Optimization procedures Settlement Engine CASH ACCOUNTS CASH ACCOUNTS NCB A ACCOUNTS NCB B ACCOUNTS NCB NCB C ACCOUNTS CSD SECURITIES RULES SETTLEMENT PARTICIPANTS CSD A CSD A CSD A AGENTS CSD A CSD A CSD A CSD A NCB A CSD A CSD A CSD A CSD A CSD B CSD B CSD B NCB B Payment System Interface TARGET2 NCBs T2S Static data

40 Connectivity Centralised platform with decentralised : Securities remain with CSDs, under their legal regime, under their control Cash remain with NCBs, under their legal regime, under their control Connectivity options: For CSDs direct technical connection For CSDs participants direct technical connection possible in particular for intraday operations and reporting via Eurosystem Single Interface Principle: potential connectivity level of participants is defined by CSDs in accordance with their rights and obligations

41 Connectivity Communication modes and means: Might differ depending on type and intensity of communication (Real time and timed based, batch file transfer and single messaged based) Use of harmonised messages based on ISO 15022/20022, open architecture to receive directly message with Y copy messaging to CSDs Eurosystem Single Interface for cash, securities and possibly collateral purpose for Eurosystem counterparties Network to use remain to be defined Principle: adapting communication tools to participants needs

42 Summary Direct connectivity for market participants subject to strict requirements and CSDs approval Flexible communication and connectivity, cost cautious and client oriented. Subject to extensive market consultation

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44 TARGET2-Securities Cross-CSD CSD transactions Ignacio Terol ECB T2S Pre-project Team Meeting with representatives of market participants and market infrastructures ECB, Frankfurt,, December 2006

45 Cross-CSD transactions INVESTOR CSD CSD A Securities CSD A ACCOUNTS Cross-border settlement through inter-csd ISSUER CSD CSD B INVESTOR CSD CSD B INVESTOR CSD CSD C CSD B ACCOUNTS CSD C ACCOUNTS * Settlement engine engine INVESTOR CSD CSD D CSD D ACCOUNTS Domestic settlement */ Automated real-time realignment where necessary with issuer CSD

46 Cross-CSD transactions How easy? One instruction One cross-csd transaction: Example: Bank B in CSD B sells 100 to Bank C in CSD C Issuer CSD B Investor CSD C Bank B Inv CSD C Mirror a/c B Bank C

47 Cross-CSD transactions How easy? Realignment is also automatic: Example: Bank A in CSD A sells 100 to Bank C in CSD C. The security has been issued in CSD B. Investor CSD A Issuer CSD B Investor CSD C Bank A Inter-CSD C Mirror a/c B Inv CSD A Inv CSD C Mirror a/c B Inter-CSD A Bank C Step 1: Settlement Step 2: Realignment Settlement with real-time realignment

48 Cross-CSD transactions How easy? Cross border matching in T2S compared with the situation today with links : Cross border matching to be performed in T2S Complexity of process reduced to domestic complexity T2S 2. Generate allegement 5. Matching Investor CSD Investor CSD 1. Settlement Instruction Participant 6. Match confirm 3. Allegement 4. Settlement Instruction Participant 6. Match confirm Cross border matching [ECSDA Oct 2006]: Instructing CSD instructs first

49 Cross-CSD transactions How easy? Cross border settlement in T2S compared with the situation today with links : Complex chain of process steps reduced to one step DVP settlement with immediate and simultaneous finality Payment steps integrated within T2S T2S 1. DvP settlement with simultaneous finality 2. Settlement Confirmation Investor CSD 2. Settlement Confirmation Investor CSD Cross border settlement [ECSDA Oct 2006]: Generic message flow

50 Cross-CSD transactions How far? An option we discarded: All CSDs should be ready to accept all type of securities issued in other CSDs. T2S Principle: Users need to open a single account with a single CSD to settle any security available in T2S with any participant. (Similar to TARGET1 and TARGET2). But: Asset servicing too costly for some CSDs. We prefer to create incentives rather than force this

51 Cross-CSD transactions How far? The option we are considering: T2S would provide inter-csd among all CSDs. Each investor CSD indicates which ISIN codes it is ready to accept from each issuer CSD. T2S publishes, for each CSD, the list of ISIN codes that can be settled. A new business opportunity for CSDs A business decision each CSD must take

52 Cross-CSD transactions Consequences Reachability is key (together with price and level of service) for participants to decide through which CSD to connect to T2S If a CSD does not wish to accept ISIN codes from other CSDs, it may do so, but its participants will not fully benefit from T2S. If a CSD does not have the means to accept ISIN codes from other CSDs but wishes to remain competitive, it may outsource (e.g. to a custodian) the task of asset servicing on securities issued elsewhere. We expect that more than one CSD would invest in providing full reachability in order to serve international customers.

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54 TARGET2-Securities Objectives and Benefits Yvon Lucas Banque de France, Director Payment Systems and Market Infrastructures Meeting with representatives of market participants and market infrastructures ECB, Frankfurt,, December 2006

55 OBJECTIVES To contribute to the integration of European post-market infrastructures To provide efficient and harmonised settlement services in central bank money To reduce the cost of securities settlements To contribute to harmonisation of market practices

56 BENEFITS Efficiency of settlements will be ensured: - Consolidation into one single platform processing both cash and securities - Based on the most efficient model - No more difference between cross-border and domestic, Costs will be reduced: mutualisation of investment and running costs Competition will be fostered since CSDs, which will retain their current role vis-a-vis their participants, will be able to offer added-value services (tri-party, securities lending )

57 BENEFITS CSDs participants will be offered the opportunity to centralise their securities holdings in one place ( single interface ) Issuers will improve the liquidity of their securities that will become available to a wider set of investors without changing procedures in place today with their CSD The Eurosystem and its counterparties will also benefit of this efficiency for using domestic and cross-border collateral in its credit operations

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