TARGET2-Securities (T2S) Functional Design at a Glance. An introduction to T2S for CBF customers October TARGET2- Securities (T2S)

Transcription

1 TARGET2-Securities (T2S) Functional Design at a Glance An introduction to T2S for CBF customers October 2013 TARGET2- Securities (T2S)

2 TARGET2-Securities (T2S) Functional Design at a Glance An introduction to T2S for CBF customers Clearstream Banking AG, Frankfurt Document number: F-6776 Date of publication: October 2013 The information contained in this document is subject to change without notice and does not represent any guarantee on the part of Clearstream Banking Ag, Frankfurt (referred to on this document as Clearstream Banking Frankfurt or CBF) nor on the part of any other company belonging to Clearstream International, société anonyme. No part of this Handbook may be reproduced or transmitted for any purpose, in any form or in any way without the explicit written permission of Clearstream Banking Frankfurt. This also includes making photocopies and notes. In the absence of any indication to the contrary, time in this document always means Central European Time (CET). Copyright Clearstream Banking AG, Frankfurt (2013). All rights reserved. T2S Functional Design at a Glance 2

3 Disclaimer Clearstream Banking is committed to inform its customers regarding the foreseen changes to its functionality as early as possible. While at the same time Clearstream's migration to TARGET2- Securities (T2S) is still years ahead, the content of the document in hand may prove to be updated. Hence, this glossary represents the state of information available to Clearstream Banking at the publication date. The description may be subject to modifications or enhancements at a later stage of the T2S Implementation project. In case of modifications, Clearstream Banking will provide the respective updates in due time as further releases of functional documentation. Clearstream Banking therefore makes no guarantees, representations or warranties in respect of the glossary and accepts no responsibility or liability as to the glossary and under no circumstances will be liable for any loss or damage caused by reliance on any statement made in this document. Contact In case you require further information or in case of questions related to specific areas please contact our T2S Customer Readiness Team. T2S Customer Readiness Team Telephone +49 (0) 69/ Fax: +49 (0) 69/ T2S-Support@clearstream.com Customers should note that, as is normal practice within financial organisations, Clearstream has implemented telephone line recording. The main purpose of telephone line recording is to ensure that the interests of Clearstream and of its customers are protected against misunderstanding or miscommunications under the provisions of the applicable laws. Recorded telephone conversations may be listened to in order to: Clarify a sequence of events in case of complaint or doubt from either party to a conversation, that could lead to financial or any other damage Enable the temporary supervision of calls while they occur, upon consent of the involved parties, to ensure the delivery of expected levels of professionalism, quality and service to customers The recorded telephone lines are the subject of an ongoing formal maintenance and quality control programme to ensure their continued effective and appropriate deployment and operation. The recordings are kept on tapes for a period of two years. T2S Functional Design at a Glance 3

4 Content: 1. Preamble Implementation timeline Getting in touch Summary of the T2S implementation features What will change for CBF customers with the implementation of T2S? What is the main impact of T2S implementation on CBF customers? Options for CBF customers to connect to T2S Participation as Indirectly Connected Participant (ICP) via CBF Prerequisites for CBF customers to participate as ICP Participation as Directly Connected Participant (DCP) via CBF Prerequisites for CBF customers to participate as DCP Account setup Current CBF account setup for securities and cash settlement T2S Concept for account setup CBF account setup following T2S Connectivity Core settlement services on the T2S platform Key features Timeline and deadlines for settlement today and in future Eligible securities Lifecycle Management of OTC instructions Cross-border Settlement Settlement of Non CCP Stock Exchanges (SE)- and Eurex CCP trades Cash settlement in Euro Key features Today s CBF Euro Cash Settlement via T2 using the ASI Procedures Future T2S Euro Cash Settlement Future Euro cash payments for Corporate Action- and Income Events Cash settlement in non-t2s currencies via CBF Current cash settlement procedure in non-euro currencies via CBF Future cash settlement of non-t2s currencies Value-added services offered by CBF CASCADE Registered Shares (RS) Custody Services: Corporate Action- and Income Events Vaults Services New Issues Services Global Securities Financing Services (GSF Services) Appendix ISO message formats for CBF customers in ICP mode ISO MX mapping to ISO MT T2S Holiday calendar ECB migration wave composition Overview of T2S user connection options for CBF instruction types Overview of available CBF non-euro currencies for DvP settlement Glossary T2S Functional Design at a Glance 4

5 Table of Figures: Figure 1: Overview of T2S Readiness timeline 8 Figure 2: Overview of the T2S and CSDs services with T2S implementation 10 Figure 3: Overview of connection options for CBF customers in ICP mode 12 Figure 4: DCP model for core settlement with several CSD accounts on T2S 13 Figure 5: DCP model for core settlement via one CSD 13 Figure 6: Overview of current CBF account setup for securities and cash settlement 14 Figure 7: Hierarchical T2S concept for account setup 15 Figure 8: Example of CBF account master mapping to the T2S usage of BIC Figure 9: Example of the naming convention of CBF for a T2S SAC 17 Figure 10: Mapping example of the current CBF account setup to T2S 18 Figure 11: Usage of CBF third-party accounts on T2S 19 Figure 12: Connectivity options for T2S participants in ICP and DCP mode 21 Figure 13: Overview of prerequisites for T2S participants access in DCP mode 22 Figure 14: Overview of CBF and T2S connectivity setup 23 Figure 15: Example of CBF customer s account identification in Settlement Instructions 24 Figure 16: Example of counterparty identification in settlement instruction 25 Figure 17: Overview of key features of the core settlement services on T2S 27 Figure 18: Overview of current CBF settlement cycles 28 Figure 19: Overview of future T2S settlement cycles 28 Figure 20: Overview of current and future proceeding for securities static data attributes 30 Figure 21: Overview of cross-border links of CBF as issuer and investor CSD 46 Figure 22: Overview of general instruction details for a cross-border settlement 47 Figure 23: Example of the identification of the receiving counterparty in 48 Figure 24: Overview of current settlement process of Non CCP SE- and Eurex CCP trades 49 Figure 25: Comparison of EUR cash settlement 55 Figure 26: Overview of today s CBF Euro cash settlement via T2 56 Figure 27: Overview of Euro cash settlement following T2S migration 57 T2S Functional Design at a Glance 5

6 Figure 28: Overview of Bund payments during night-time settlement 60 Figure 29: Overview of payments (e.g. income events) during the day-time settlement 60 Figure 30: Process flow for cash settlement in non-t2s currencies for CBF ICP mode 65 Figure 31: Process flow for cash settlement in non-t2s currencies for in DCP mode 66 Figure 32: Overview of future handling of the Registered Shares position types in T2S 68 Figure 33: Overview of usage of Registered Shares instruction types 69 Figure 34: Overview of timeline for CBF custody event notification 72 Figure 35: Overview of processing and settlement of custody events (securities only) 73 Figure 36: Overview of Vaults Services following the implementation of T2S 78 Figure 37: Overview of New Issues Services following the T2S implementation 79 Figure 38: Overview of the process flow for the GC Pooling Service 81 Figure 39: Overview of the process flow for LMS services 82 T2S Functional Design at a Glance 6

7 1. Preamble Clearstream Banking already informs its customers on a regular basis about the migration schedule for implementation of Target2-Securities (T2S). T2S is a pan-european technical platform for securities settlement in central bank money, built and operated by the Eurosystem/ECB (European Central Bank). Both Clearstream s T2S fundamentals presentation and our bulletins already provide general information about the T2S implementation project. Customers have also nominated their single point of contact (SPOC) to work closely with Clearstream Banking Frankfurt (CBF) during the implementation. This document complements the above-mentioned publications and provides customers with more indepth information. It includes a summary of changes, as well as a description of new and enhanced features that T2S introduces. This document also outlines and indicates the potential impacts of T2S on CBF customers. The changes are expected to impact the following business processes and services delivered by CBF: Account setup Core settlement and cash services Value-added services Connectivity CBF manages the migration with the objective of minimising the mandatory changes for its customers while also leveraging the service scope of the T2S platform. T2S will hereby enable CBF to provide its customers an improved service offering. This document starts with a summary of the key features and the current timeline to T2S implementation. This is followed by a description of formal features such as the possibilities of connecting to T2S and of setting up accounts. The next chapters of the document introduce the future core settlement and value-added services which complement the CBF product offering. Information on connectivity is also included. This document aims to provide answers to the following questions: Which organisational features will CBF customers need to consider regarding T2S implementation (e.g. account structure, connection options to T2S)? How will CBF customers be impacted by the business and functional related aspects (e.g. securities and cash settlement, custody, connectivity) of T2S implementation? These topics will be dealt with in greater depth in the Detailed Functional Descriptions (DFD), which are scheduled for publication late in 2013 onwards. The DFDs will provide detailed information on settlement, connectivity, value- added and supplementary services. In parallel the CBF Member Readiness Team will support and guide customers throughout the project until the implementation of T2S. Before CBF migrates its core settlement features to T2S customers have the opportunity to take part in a simulation. More details will be available in due course together with separate documentation such as the simulation guide and the migration guide. T2S Functional Design at a Glance 7

8 2. Implementation timeline Clearstream Banking drafted an overall timeline for customer readiness activities which shall provide on overview of the activities planned. This schedule is dependent on the milestones provided by the ECB and a number of measures are linked to the related documentation. The figure shows the current timeline for the T2S Customer Readiness plan. 3. Getting in touch Figure 1: Overview of T2S Readiness timeline Should you require further information or have any questions related to specific areas, please contact your Relationship Manager, your regular Customer Service contacts or the T2S Customer Readiness Team Phone: +49(0)69/ Fax: +49(0)69/ T2S-Support@clearstream.com Clearstream Goes T2S - We Will Guide You T2S Functional Design at a Glance 8

9 4. Summary of the T2S implementation features 4.1 What will change for CBF customers with the implementation of T2S? T2S is a central technical platform for securities settlement in central bank money, built and operated by the Eurosystem/ECB. T2S aims to harmonise domestic and cross-border settlement processes across the Eurozone. The Central Securities Depositories (CSDs) will remain legally responsible for securities settlement, but will technically outsource their settlement infrastructure to T2S (positions and accounting). On 30th April 2012, Clearstream Banking Frankfurt (CBF) formalised its decision to outsource settlement by signing the T2S framework agreement. Currently, more than 20 European CSDs have already signed the T2S framework agreement for securities settlement. The ECB proposed four migration waves between 2015 and CBF s migration to T2S is planned in wave 3 which is scheduled for September Connection options for CBF customers to participate in T2S CBF will make both connectivity options offered by the Eurosystem available to its customers. Principally, the Eurosystem/ECB provides two types of connection for T2S to its participants: directly to T2S (authorised by at least one CSD i.e. via CBF) as DCP (Directly Connected Participant) or indirectly to T2S via at least one CSD, i.e. via CBF as ICP (Indirectly Connected Participant) Customers with a direct connection to T2S will act in DCP mode and can send their settlement instructions directly to T2S for one or more CSD accounts. Customers planning to send their settlement instructions via the CSD with which they maintain the account will act in ICP mode. Whereas ICPs only need one access point to T2S via one CSD, DCPs need to additionally consider an ICP connection, because of the limitation of the T2S DCP connectivity to only core settlement services. For CBF customers the ICP mode is therefore of key relevance. As T2S will not support information flows related to value-added services that certain CSDs might provide, these can only be accessed via the ICP channel. T2S will only support ISO message standards which are not yet widely used by most financial institutions. Customers acting in DCP mode have to establish the new technical infrastructure with ISO Between CBF and its customers acting in ICP mode the current technical CBF-interface via ISO will be maintained and enhanced to support the new T2S functionalities. This minimises the mandatory impact on changes to messages. T2S Functional Design at a Glance 9

10 Figure 2: Overview of the T2S and CSDs services with T2S implementation Core settlement services Once CBF has migrated to T2S, core settlement functions such as creation of settlement instructions lifecycle management (e.g. matching, modification, settlement priority, etc.) settlement cycles and processing (for securities and cash in Euro) will be performed by T2S and no longer directly by CBF systems. CBF will also enhance its current lifecycle management services to include bilateral cancellation, instruction linking and partial settlement. Clearstream intends to make all T2S eligible securities available to its customers main account(s) in order to leverage the full potential of T2S. Any security in Collective Safe Custody (CSC) which is deposited in CBF will be processed via T2S. While acting as Security Maintaining Entity (SME) as defined by the Eurosystem/ECB CBF provides data to T2S for such securities and is, as contractual partner to the ECB (European Central Bank) responsible for the setup and maintenance of this static data. CSC securities, which are deposited with another CSD and held in a cross-border link (FCSC) with CBF, will also be made T2S eligible. A real-time interface between T2S and the respective CSDs including CBF ensures the exchange of settlement data and compliance between T2S and the CSDs. This applies to OTC trades as well as to Non CCP-Stock Exchange (SE) and Eurex CCP trades, and covers the German domestic market as well as the existing or planned cross-border links, if such CSDs participate in T2S. CBF will apply its crossborder settlement procedures to the respective cross-border markets participating in the different T2S migration waves. Existing cross-border links with other CSDs will migrate in line with the T2S migration waves (please see also Appendix) and follow the standard T2S processes. This is irrespective of whether the securities are held in CBF or in the respective CSD. Customers can hence opt to hold all their European securities covered by T2S centrally with CBF. Existing direct FoP links are planned to be upgraded to full DvP links after migration to T2S. The current CBF settlement cycles including nighttime processing and all daytime processing cycles will be replaced by the new T2S settlement day with two cycles during the night and continuous intraday real-time settlement. T2S Functional Design at a Glance 10

11 Account setup for securities- and cash settlement T2S supports the multi-party concept. Parties are the 4CBs, the National Central Banks (NCB) and the participating Central Security Depositories (CSDs) as well financial institutions/banks. Business relationships between the different parties will be set up by using two BIC Branch Codes. Each CSD participant is identified by the BIC of its CSD plus its own BIC. CBF will open for each customer account master in CBF (4-digit account) a corresponding party at T2S and for each CASCADE 7 digit account a corresponding securities account (SAC). After implementation of T2S the cash settlement for delivery versus payment Euro (DvP) will migrate from TARGET2 (T2) to T2S. The funding of the dedicated cash accounts (DCAs) which belong to the National Central Bank (NCB) will come from the RTGS accounts in T2. The DCAs are thereby linked to the SACs. CBF s value-added services In addition to the core settlement business CBF will continue to offer its existing value-added services/non-core settlement services to CBF customers in ICP mode by using their existing infrastructure: CASCADE RS Registered shares Custody services-corporate Action- and Income Events Vaults and New Issues services Global Financing Services-Collateral Management, GC Pooling, Securities Lending 4.2. What is the main impact of T2S implementation on CBF customers? CBF aims to keep the impact on customers to a minimum. Technically this can be applied to all functional aspects. However, in order to let our participants profit from all T2S functionalities, CBF will enrich its interface and has to slightly adapt its connectivity. Furthermore, customers might need to validate the potential impact on their operational processes from the new operational schedule and from the nature of T2S as a rather integrated model compared to the interfaced model which they are used to today. Moreover CBF customers can decide whether and how they want to become a DCP in parallel to their ICP mode to CBF. Customers acting in DCP mode will need to be ISO compliant to connect to T2S whereas customers acting in ICP mode need to adapt their ISO connectivity for the T2S changes depending on which CBF services they want to use. The following chapters describe potential main impact of T2S on customers in the different CBF business areas: Account setup (chapter 6) Connectivity (chapter 7) Core settlement services on T2S platform (chapter 8) Cash settlement in Euro (chapter 9) Cash settlement in non-t2s currencies via CBF (chapter 10) Value-added services offered by CBF (chapter 11) It should also be evaluated if changes will be necessary to standing instruction systems as T2S will introduce the identification of parties via BIC Branch Codes. This will need to be considered especially for cross-border settlement. Potential organisational adaptations will also need to be analysed. T2S Functional Design at a Glance 11

12 5. Options for CBF customers to connect to T2S As already mentioned, customers can connect directly and/or indirectly to T2S. CBF supports settlement functionalities for both options and provides the entire T2S settlement functionality. The following two sections explain these options to connect to T2S and the respective prerequisites in detail. 5.1 Participation as Indirectly Connected Participant (ICP) via CBF As shown in the figure below customers may opt for acting in ICP mode via (at least) one CSD to communicate with T2S, for example via CBF. CBF will offer its customers access to all markets in T2S. Therefore a CBF customer may consider replacing links to current agents, custodians and local CSDs. CBF maintains the business and legal relationship to the ICP. However, as today, ICPs could use the services of various CSDs and/or sub-custodians at once. Figure 3: Overview of connection options for CBF customers in ICP mode 5.2 Prerequisites for CBF customers to participate as ICP ICPs communicating via CBF to T2S need to consider the following aspects: Only one connectivity channel via CBF has to be supported which serves as the gateway to various T2S markets Account setup procedures, migration and testing activities can focus on CBF. T2S Functional Design at a Glance 12

13 5.3 Participation as Directly Connected Participant (DCP) via CBF Customers opting for the DCP mode to communicate directly with T2S need to establish the new technical channel to T2S. It is important to note that CBF customers requesting DCP connectivity can use communication in ICP and in DCP mode simultaneously. Contractually, the respective CSD remains the contractual party for activities on T2S. For direct communication with T2S, the respective CSDs, such as CBF, will remain the main responsible partner versus the Eurosystem. In particular the CSDs grant the necessary authorisation to act as DCP participant on T2S. The ECB will grant permission for the technical connectivity. A DCP will send all instructions to T2S directly; the CSD may opt to receive relevant copies to process the instructions within their systems. This is an optional feature. For CBF this feature enables the simultaneous use of ICP and DCP connectivity on the same accounts. All CBF customers acting as DCPs need to maintain a direct connection to CBF in ICP mode. This particularly applies if DCPs want to use CBF s value-added services such as CASCADE RS or Global Securities Financing (GSF) services because these services are not supported in T2S. The two figures below show the general options for customers who connect as directly connected participants to T2S. The left one shows the option where a DCP can instruct several CSD accounts on T2S via one technical channel for the core T2S settlement services and directly instruct the CSD for non-core settlement services. The one on the right includes the option where the customer decides to be indirectly connected to a number of CSDs and use one CSD for the core settlement activities. Figure 4: DCP model for core settlement with several CSD accounts on T2S Figure 5: DCP model for core settlement via one CSD CBF will support the DCP connectivity mode for all T2S message types as foreseen by the Eurosystem. T2S Functional Design at a Glance 13

14 5.4 Prerequisites for CBF customers to participate as DCP Customers who plan to be connected to T2S in DCP mode need to consider the following aspects: The business and legal relationship will remain with the different CSDs A new connectivity channel to T2S has to be established by using the ISO message format for the core settlement services, while the entire value-added services will only be provided in ICP mode by the different CSDs In case customers wish to simultaneously maintain links with multiple CSDs/custodians and T2S, different account setup procedures have to be considered Customers need to follow different testing and migration scenarios of the various CSDs and T2S during the migration waves. 6. Account setup 6.1 Current CBF account setup for securities and cash settlement Currently CBF keeps securities accounts for its customers which serve to settle transactions. CBF does not keep cash accounts for the cash settlement of these transactions. CBF s customers need to hold RTGS accounts on the TARGET2 platform as direct TARGET2 participants or use a correspondent bank that is connected to TARGET2 directly. Figure 6: Overview of current CBF account setup for securities and cash settlement For the cash settlement within the settlement cycles during night-time (STD and RT-STD) as well as for the settlement cycles during daytime (CONT SDS1, SDS1, CONT SDS2 and SDS2), CBF uses internal, technical cash settlement accounts reflecting the cash liquidity that customers have reserved for settlement in their RTGS accounts. The settlement of transactions in non-euro currencies is done in commercial bank money through cash accounts managed via the Clearstream Banking Luxembourg platform Creation. Changes resulting from the future T2S multi-parties concept as well as the impact on the current CBF account setup are explained in more detail in the following two chapters. T2S Functional Design at a Glance 14

15 6.2 T2S Concept for account setup Hierarchical T2S multi parties concept T2S supports a multi-parties concept consisting of the T2S operator itself, the National Central Banks (NCB), the participating Central Security Depositories (CSD) and financial institutions/banks. The current Clearstream account structure for securities and for technical cash settlement will reflect this hierarchical concept with the T2S implementation. To allow for an intuitive identification, CBF has chosen to establish a 1:1 mapping of the current CBF account master structure to the T2S securities accounts. This solution minimises the impact on customers regarding the account setup. The figure below shows the prospective account concept. Figure 7: Hierarchical T2S concept for account setup The following aspects allow for smooth settlement while respecting the current CBF account setup for the majority of customers: CBF opens for each customer account master in CBF (4-digit account) a corresponding party at T2S and for each CASCADE 7-digit account a corresponding Securities Account (SAC) Payment banks need to open a Dedicated Cash Account (DCA) with a NCB, e.g. Deutsche Bundesbank, to ensure the cash settlement in T2S-eligible currencies for DvP (delivery versus payment). CBF will connect the SAC to the DCA. As a consequence each SAC of a CSD participant has to be linked to at least one (default) DCA of a Payment Bank to enable delivery versus payment (DvP) settlement. The DCA number will be provided by the respective NCB. The CBF participant can be the holder of the DCA, or it can choose another bank to act as payment bank holding a DCA For the migration CBF asks its customers to provide one BIC Branch Code per customer account master and at least one DCA. T2S uses BIC Branch Codes to identify settlement accounts On T2S each CSD participant is identified by the BIC of its CSD plus its own BIC. A financial institution having a relationship with different CSDs and NCBs will be defined several times as a party. For example, a bank having a relationship with two different CSDs and one NCB will be recognized as three parties in T2S (i.e. at least as a participant for each CSD and as a payment bank for the NCB). BIC Branch Codes (BIC 11) can already applied upfront by using a form on the SWIFT website. T2S Functional Design at a Glance 15

16 Future CBF securities accounts To minimise customer impact, CBF will maintain its account structure with main and sub-accounts. As today, CBF customers can segregate different business activities on account master level which will be reflected on the T2S party level. The following figure represents an example of the CBF account master mapping reflecting the T2S usage of BIC 11 to identify SACs. Figure 8: Example of CBF account master mapping to the T2S usage of BIC 11 The current customer account master is set up in T2S as CSD participant. CBF will set up the customer account master as Party Type CSD participant in T2S. There will be an one-to-one mapping of CBF s existing account master structure (e.g. 1234) to the T2S Party Type CSD participant (e.g. BANKDEFFXXX ) The CSD participant is represented by the Party-BIC and the CSD-BIC. Attributes of CSD participants can be derived from customers account masters CBF securities accounts (7-digits) are set up in T2S as SACs (securities account). In T2S, CBF will set up SACs (35-digit account number) for each customer securities account as an ordinary CSD participant account used for settlement of instructions. SAC numbers can be derived from the BIC Branch Code applied on the basis of the customer account master (e.g. securities account of bank BANKDEFF in CBF would be reflected in T2S as DAKVBANKDEFFXXXSA ). T2S Functional Design at a Glance 16

17 The following figure shows an example of the naming convention from CBF for a T2S SAC. T2S Account Scheme 1) T2S proposal contains two elements BIC4 to identify CSD or NCB Proprietary account number as free text BIC4 of CSD / NBC Free Text for proprietary Account Number (A-Z, 0 to 9, no special characters, blanks allowed) CBF T2S Account Scheme Based on the T2S scheme, CBF defined the following structure BIC4 identifies CBF, which will be represented with DAKV BIC11 represents the CBF customer as CSD participant Account type (AT) shows the prefix SA to indicate securities account Proprietary ID contains the CBF account number BIC11 of BIC of CBF AT Proprietary ID CSD Participant D A K V S A Sample Securities account of CBF customer BANKDEFF will be reflected as DAKVBANKDEFFXXXSA ) Proposal is currently in review with CSG and HSG; results will be shared with the AG in the course of 2013 Figure 9: Example of the naming convention of CBF for a T2S SAC Consequently, counterparties on T2S needs to be addressed by their CSD BIC11 and counterparty BIC11. From a T2S perspective, a single BIC11 can relate to many different parties, i.e. BankBIC11 at CSD1, BankBIC11 at CSD2, BankBIC11 at NCB3. BIC in T2S identify the T2S SACs. There will be no difference between domestic and cross-border counterparties in T2S. T2S cash accounts for settlement Cash settlement in T2S eligible currencies (at the moment only Euro) will be processed via Dedicated Cash Accounts (DCA) in T2S. The funding of these DCAs will be done from the RTGS accounts in TARGET2. Customers who want to participate in Delivery versus Payment (DvP) settlement need to link their T2S SAC to at least one DCA via a National Central Bank (NCB) such as Deutsche Bundesbank (for example, SAC account DAKVBANKDEFFXXXSA has to be linked to a DCA). The DCA number will be provided by the respective NCB. A validation of the DCA number cannot be carried out by CBF. Several DCAs can be linked to one SAC. If more than one DCA is assigned to one SAC, then one of them will be used as a default DCA. This means that, if no specific DCA is mentioned, e.g. within a DvP instruction, then the default DCA will be used for cash settlement. T2S Functional Design at a Glance 17

18 Regarding the CBF Auto-Collateralisation service on account master level a DCA needs to be linked to a SAC in order to identify this DCA as an available DCA for auto-coll and to identify the linked SAC as collateral source. A DCA needs to be linked separately for Income payments at night (Bund payments only). For details regarding the processing please refer to chapter 9.4 Future cash payments (Euro) for Corporate Action (CA)-/Income Events. For more details on DvP settlement in non-euro currencies, please refer to chapter CBF account setup following T2S Overview on future securities and cash accounts relations The figure below provides an example of how the current CBF account setup will be mapped to the T2S account setup according to the hierarchical T2S multi party concept. Figure 10: Mapping example of the current CBF account setup to T2S The above figure shows: Each CBF (sub-) account of an account master is mapped to one SAC in T2S (1:1) One SAC can be linked to multiple DCAs (n:m), CBF sub-accounts can also be linked to a DCA CBF is responsible for the SACs while the DCAs are the responsibility of the customer/ncb DCAs need to be linked to one RTGS account in TARGET2. This default RTGS account is used for the End of Day (EoD) cash sweep from the DCA. The DCAs are set up and managed by the NCBs One RTGS account can be linked to multiple DCAs (1:n). T2S Functional Design at a Glance 18

19 CBF account specific: settlement via third-party accounts (Reg-über) The settlement service for the so-called third-party accounts of branches for which the settlement is done via the account master of the head office will remain for the German domestic stock exchange business as today. Following customer consultations, CBF foresees to migrate the account master of the third party head office to T2S while the third-party accounts of the branches will remain internal to CBF. The same applies for the current management of Eurex Clearing collateral on the third-party accounts of the branches as well as for the OTC settlement between the head office and the related third-party account of ICPs and DCPs. Reporting for the third-party relationship will then be provided to CBF customers acting in ICP mode. Figure 11: Usage of CBF third-party accounts on T2S T2S Functional Design at a Glance 19

20 Customer impact The current CBF account setup will remain mostly unchanged, however CBF has provided the following checklist for account setup aspects, which might have to be assessed by customers. Impact for account setup DCP mode ICP mode Analyse the current CBF account structure in relation to their usage of the core T2S settlement services and/or CBF s valueadded services (e.g. opening/closing account master for special business, etc.). Analyse how many DCA(s) should be provided to CBF regarding: - settlement for all CBF account masters - settlement one per CBF securities account - special DCA for special CBF sub accounts and custody services (Bund payments) Decide to open or re-use BIC Branch Codes (BIC 11) with SWIFT and inform CBF about the BIC 11 to be used in T2S as Party BIC for their account master. BIC can already be requested via SWIFT website. Customers should think about consolidating their CBF accounts prior to migration in order to restrict the opening of T2S Party BICs in T2S Customers internal setup and/or adaptions of own accounts as well as counterparties BIC Branch Codes (especially for crossborder-settlement) need to be considered Moving potential positions on third-party accounts (e.g. Eurex Clearing Collateral) At least one DCA (Dedicated Cash Account) need to be opened by a Payment Bank at an NCB or a Correspondent Bank for DvP settlement in T2S eligible currencies Authorisation needs to be in place if a DCA of a third Payment Bank/Correspondent Bank is used If required, specify to NCB and CBF if the DCA on CBF account master level is eligible for Auto-Collateralisation T2S Functional Design at a Glance 20

21 7. Connectivity CBF will align the ICP and DCP processing to offer the full integrated service scope to customers acting in ICP and DCP mode. The following figure presents an overview of the technical connectivity options for customers in ICP mode via CBF and in DCP mode via T2S. Figure 12: Connectivity options for T2S participants in ICP and DCP mode Connections and technical prerequisites for CBF customer s access in ICP mode CBF integrates all ICP services into its ISO interface standard to minimise migration impacts and will support existing interfaces via SWIFT, MQ-Series and File Transfer. All instructions for settlement are provided by CBF to T2S and CBF processes settlement-related messages from T2S in real-time. CBF will reflect the settlement on T2S and update the CBF systems based on the messages from T2S. CBF customers will receive all information about settlement via the existing ISO interfaces. Existing CBF interfaces will be enhanced to include T2S-specific values where needed to provide the T2S enhancements to customers. Additionally, the ISO 7775 messages for CASCADE RS remain for customers that are MT500, MT501, MT510 and MT519. The current CBF message and report subscription tool as well as its respective configuration remains in place for CBF customers acting in ICP mode. This applies also for the communication channels via SWIFT, MQ-Series and File Transfer. CASCADE Host and CASCADE PC will still be used as online frontends. These frontends are explained more in detail at the end of this chapter. Connections and technical/legal prerequisites for customer s access in DCP mode ISO is the T2S interface for settlement to its DCP participants and T2S offers an ISO interface for settlement-related instructions to CSDs, NCBs and DCPs. T2S uses the ISO messages in co-existence mode with ISO 15022, that is T2S uses only the subset of ISO functionality that can already be used in ISO SWIFT provides a detailed mapping from ISO to ISO and vice versa. The DCP access for T2S participation will be granted in two stages: ECB Certification by the ECB and CSD Authorisation by the respective CSD, for example CBF T2S Functional Design at a Glance 21

22 The DCP access for a specific market can be granted after a successful ECB Certification and CSD Authorisation. The following figure explains how the DCP access will be granted by ECB and CSD. Figure 13: Overview of prerequisites for T2S participants access in DCP mode Concerning the CSD Authorisation CBF will define scenarios that DCPs need to simulate successfully to show their compliance with CBF processing. The scenarios need to cover specific business contexts, for example domestic settlement scenarios, cross-border scenarios with T2S In-CSD and T2S Out- CSD, market-specific scenarios. CBF will support end-to-end simulation in a combined T2S-CBF simulation environment. Connectivity setup The Eurosystem provides Application to Application (A2A) and User to Application (U2A) access. The DCP needs to connect to A2A via a Value Added Network (VAN) provider. The business and legal relationship remains with the CSD, e.g. CBF. T2S access rights and privileges for CSD participants (DCPs only) are granted by CBF for the CBF related actions on CBF accounts at T2S. T2S Functional Design at a Glance 22

23 The below figure summarises the CBF and T2S activities regarding connectivity setup. CBF Connectivity Setup Routing Configuration Message Subscription Individual setup for each CBF customer T2S Connectivity Setup Access Rights and Privileges Routing Configuration Message Subscription Report Configuration Setup for CBF and all CSD links Individual setup for each DCP customer Generic setup for ICP customers CBF will set up all master data and all connectivity related information for DCPs and ICPs in T2S CBF will define profiles for all ICP and DCP users to grant comprehensive access to T2S Figure 14: Overview of CBF and T2S connectivity setup CBF will create the necessary authorisation, privileges and subscription to connect to the T2S platform for settlement activities for the CBF related actions A privilege is the right to trigger one or several user function(s) within T2S on a defined data scope. The subscription defines messages to be received from T2S Privileges and rights can be granted on party s SAC level. Also, CBF can grant rights and privileges to a party on T2S that instruct for settlement on accounts of another party in T2S. For this purpose customers ask CBF to prepare a respective Power of Attorney (PoA). CBF will then set up the PoA in CASCADE as well as in T2S Customers need to appoint an account administrator who is set up in T2S by CBF for the CBF accounts. The customer account administrator then can grant rights and privileges to his internal users CBF will open and maintain the securities accounts in T2S for its DCPs. T2S Functional Design at a Glance 23

24 CBF customer s own account identification in settlement instructions (German domestic market) The following figure provides an example how CBF customers will be identified in their settlement instructions (here delivery instruction). The T2S account provides the information about how the CBF account masters account is mapped to the T2S SAC. This information will not be provided in instructions. Figure 15: Example of CBF customer s account identification in Settlement Instructions CBF customers acting in ICP mode can continue to instruct in ISO either with the CBF account number using the proprietary CBF account or by using the CSD BIC11, Party BIC11 and T2S account number. CBF customers acting in DCP mode need to instruct towards T2S in ISO by using the CSD BIC11, Party BIC11 and T2S account. T2S Functional Design at a Glance 24

25 Counterparties identification in settlement instruction (German domestic market) The following figure provides an example of how CBF counterparties will be identified in their settlement instructions (here receipt instruction). The T2S account provides the information about how the CBF account master is mapped to the T2S SAC. This information will not be provided in instructions. Figure 16: Example of counterparty identification in settlement instruction T2S Functional Design at a Glance 25

26 Online Frontends Besides and in parallel to the connectivity options SWIFT, MQ-Series and File Transfer with the ISO standard interface, CBF customers acting in ICP mode can use the CASCADE online application, as today. DCPs can use the T2S GUI as frontend. The table below provides an general overview of how both applications can be used by ICPs and DCPs. Frontends available with T2S implementation CBF customer in ICP mode T2S participants in DCP mode CASCADE Host and CASCADE PC T2S GUI Available with the current functionalities and services including adjustments and additional enhancements according to T2S requirements Available for instruction entry/modification and queries Technical connectivity is done either via: Leased line SWIFT Internet connection (HOB RD VPN) Technical connectivity is done either via: Network Service Provider (NSP) Internet connection The usage of the T2S GUI always requires the DCP certification of ECB. A demo of the T2S GUI can be found on the ECB homepage T2S Functional Design at a Glance 26

27 8. Core settlement services on the T2S platform 8.1 Key features T2S will become the central technical platform for securities settlement in central bank money (for the time being in Euro only). The following figure provides an overview of the core settlement services that will be outsourced to the T2S platform. Core settlement functionalities like the complete lifecycle of a transaction, matching or settlement will then be provided by the T2S platform. Clearstream s T2S-I (real-time interface) ensures an adequate data exchange between T2S and CBF. Figure 17: Overview of key features of the core settlement services on T2S All above performed services will be explained in more detail in the following chapters starting with a description of the current and new settlement timelines. T2S Functional Design at a Glance 27

28 8.2 Timeline and deadlines for settlement today and in future Current timeline and deadlines for the CBF settlement cycles Currently transactions in CBF are processed in different provisioning and settlement cycles. For cash and securities settlement, the CASCADE platform offers: Two night-time processing cycles (STD, RT-STD) and Five daytime processing cycles (CON SDS1, SDS1, CONT SDS2, SDS2 and CONT SDS3) Today s timeline and deadlines of the T2S settlement cycles Figure 18: Overview of current CBF settlement cycles In each of these processing cycles, transactions are settled either through: Batch processing (STD at 19:00, SDS1 at 10:00 and SDS2 at 13:15) or Continuous settlement (RT-STD at 01:30, CONT SDS1 at 07:00, 08:00 and 09:00, CONT SDS2 at 11:00 and 12:00 and CONT SDS3 from approximately 13:45 until 18:00 for FoP transactions) Furthermore, CBF s customers have the option of participating in real-time settlement (RTS) from 07:00 until 16:00 where DvP transactions in Euro are settled. Future timeline and deadlines of the T2S settlement cycles The timing of the processing in CBF for T2S eligible securities will follow the T2S business day. Figure 19: Overview of future T2S settlement cycles Settlement takes place in two night-time settlement (NTS) batch cycles. The first NTS batch cycle starts at 19:30, the second one after the first has finished. Subsequent real-time settlement processing (excluding T2S maintenance window from 03:00-05:00) takes place until 18:00. T2S Functional Design at a Glance 28

29 Settlement processing and recycling of pending OTC transactions Today CBF cancels verified OTC instructions after 40 working days starting from the settlement date independent of whether the instruction is matched or unmatched. Unverified instructions are cancelled by CBF after two working days. CBF will adjust to the following T2S procedures with the T2S implementation: Unmatched OTC instructions will be cancelled automatically either after 20 working days starting from the intended settlement date or the date of the last status change of the instruction Usually matched OTC instructions will stay in T2S and will be recycled until they are settled or bilaterally cancelled (for details, please see also paragraph Lifecycle management of OTC instructions in chapter 8.4). It may be necessary for matched instructions to be cancelled by T2S in cases of revalidation (e.g. securities or account/party static data have changed and then the revalidation of the instruction in T2S fails). However, based on CBF customer demand, the existing deletion period of 40 business days for pending market claims instructions will remain unchanged Regarding the status, different status fields are defined (Settlement, Match, Cancellation, Hold) Instructions that cannot settle in T2S within the NTS cycles will be forwarded to intraday realtime settlement processing Cash liquidity and security need to be available on a gross basis for the real-time settlement, that is purchases and sales between the same counterparties will not settle if one of them does not have the respective securities/cash. For the night-time settlement netting is foreseen. Reporting on pending and late instructions will be provided continuously by CBF and T2S. Cancellation and recycling rules also apply for cross-border instructions against other CSDs that also participate in T2S (as T2S In-CSDs). Customer impact The following table summarises the impact for customers in ICP and DCP mode regarding the new settlement cycles and deadlines as well as the handling of instruction recycling. Impact on timelines und deadlines DCP ICP Based on the timeline and deadlines for the new real-time procedure during the day as well as the night-time processing in T2S customers need to adjust internal processing and messaging times to the new T2S settlement Necessity to adapt the new recycling rules and observe the automatic cancellation periods For details regarding cross-border trades, Eurex CCP and Stock Exchange (Non CCP SE) trades, please refer to the chapters 8.5 and 8.6. T2S Functional Design at a Glance 29

30 8.3 Eligible securities CBF intends to make all T2S eligible securities available in order to leverage the full T2S harmonisation potential. With the T2S implementation CBF will migrate the following securities in T2S accounts: Securities in CSC that are deposited in CBF. CBF as Issuer CSD will be responsible for maintaining the required securities data in T2S as a so-called Securities Maintaining Entity (SME) CSC securities that are held via a CSD-link and where the securities are deposited with the respective CSD. The Issuer CSD will be responsible for the securities data, if the CSD is participating in T2S. For any other securities issued by a CSD that does not take part in T2S (Out- CSD) a participating CSD (T2S In-CSD) will be the responsible SME For securities held today in Non-Collective Safe Custody (NCSC) CBF aims to offer the same settlement service in T2S in order to leverage the full T2S harmonisation. CBF uses a number of the 104 mandatory and optional attributes for securities (e.g. ISIN code, short/long name or issue date) in its current settlement and custody processes. They are based on the information provided by the Wertpapier-Service-System (WSS). The T2S securities static data concept intends to use 12 attributes, which are named in the figure below. In addition each CSD is allowed to set up to ten additional Market Specific Attributes (MSA). CBF will follow this T2S conceptual solution for static data. The following figure compares the current and future procedure. Figure 20: Overview of current and future proceeding for securities static data attributes At T2S a security can be created real-time by the respective SME depending on the concerned security and the various CSDs that might be involved. CBF will use this opportunity to set up securities. Depending on the T2S definition the modification of an attribute will either be effective immediately or with the start of the next settlement day (SoD). A deletion will be processed one year after maturity date (please see also chapter 11.4, paragraph New Issue services ). T2S Functional Design at a Glance 30

31 8.4 Lifecycle Management of OTC instructions This chapter explains how CBF will implement the following mentioned core settlement functionalities for instruction management lifecycle. By doing so, CBF focuses on providing the best possible services to its customer, but with a minimum of changes in order to support a smooth T2S migration. Additional instruction types/cbf-specific instruction types Entry of OTC instructions via DCP and ICP mode Matching service and CBF specifics (Direct Matching, Passive Matching Service, Cancel Matching (Rücknahme Matching)) Modification functionalities: settlement priority, hold/release Reservation/blocking functionality Allegements CBF specifics: TEFRA D Release Partial settlement (new) Instruction linking (new) T2S bilateral cancellation (new) At the end of this chapter the potential impacts for CBF customers are summarised in a tabular form. CBF introduces new instruction types: DwP, RwP and PfoD To allow CBF customers to take advantage of the full range of the T2S platform functions, CBF will support all T2S instruction types and also the following new instruction types with the migration on T2S: Delivery with Payment (DwP)/Receipt with Payment (RwP) Delivery/receipt with payment, that is the delivery of cash and securities from one party to another; for example netting results from CCPs Payment Free of Delivery (PfoD) Payment free of delivery is an exchange of cash without the delivery of securities. CBF will use PfoD instructions to provide custody payments deriving from securities of the German state (German government bonds) during the night-time settlement (please see also chapter 9.4. Future cash payments (Euro) for Corporate Action-/Income Events). CBF will enhance its reporting, formats and CASCADE online functionalities to reflect the new instructions types. Additionally T2S allows sending of settlement instructions as already matched. In already matched instructions, the information of both delivery and receipt instructions is included. This instruction type will be used for Eurex CCP- and Non CCP-Stock Exchange trades as well as for instructions generated by CBF, for example deriving from custody activities. CBF customers can as well send already matched instructions for domestic CSD business, that is both counterparties need to belong to the same CSD and hence it cannot be used for cross-border settlement. In several cases a PoA (Power of Attorney) is needed. T2S Functional Design at a Glance 31

32 The existing CASCADE instruction types: Free of Payment (DfoP/RfoP) and Against Payment (DvP/RvP) will generally remain unchanged, but enhanced regarding the new services (e.g. partial settlement or instruction linking). They are available for customers in ICP and DCP mode and be used optionally, depending on the account setup. The settlement of DvP/RvP instructions requires a T2S DCA which is linked to the SAC. Every instruction status update on T2S can be notified to CBF customers in real-time. A complete overview of the existing CASCADE instruction types, their connection options and availability after the implementation of T2S can be found in the Appendix. Current entry of OTC instructions for CBF customers in ICP mode will remain CBF customers in ICP mode benefit from the fact that there will be no changes regarding the entry of OTC instructions. As today, CBF customers can continue to send instructions to CBF in current standard format ISO and/or via CASCADE. CBF validates these instructions and forwards them by using the newly established T2S-I, Clearstream s instruction hub to T2S. Domestic counterparties can continue to be addressed with the CBF account numbers (please see also chapter 6). Furthermore, for CBF customers instructing in ICP mode, the current CBF/CASCADE instruction numbering will remain unchanged (see table below). CBF Instruction number range Usage Can be chosen by the customers Reserved for Eurex CCP surplus deliveries Automatically generated by CBF; also within this number range CASCADE RS instructions are processed Customers acting in a DCP mode can send instructions directly to T2S by using their own 35-digit SAC. This can be done in A2A (Application to Application ISO 20022) and in U2A (User to Application access T2S GUI). T2S forwards a copy of the instructions to CBF for DCP activities on CBF accounts or for which CBF has the privileges. Counterparties are to be addressed with their T2S BIC Branch Code and the counterparty CSD BIC (please see also chapter 6). CBF customers acting in ICP and DCP mode can use both modes to pass OTC instructions to T2S. The Matching Service follows T2S rules CBF will follow the T2S matching rules in order to support the harmonisation of the matching service for domestic and cross-border business between T2S In-CSDs. Each new instruction entered by customers will be taken through this matching process except already matched instructions like custody instructions, Eurex CCP instructions and Non CCP Stock Exchange. The matching rules apply equally to domestic and cross-border instructions. T2S will execute matching at Party level, that is on BIC11 level. Each Party is identified by its own BIC11 and by the BIC11 of its CSD. There will be no pre-matching. T2S Functional Design at a Glance 32

33 In addition to the mandatory fields additional non-mandatory fields in the matching process, the socalled additional matching fields and optional matching fields will be compared. Additional matching fields cannot match against blank. Consequently, once an additional matching field is filled in by one counterparty, the other counterparty also has to fill it in. Optional matching fields can match against blanks but where both parties provide a value, the values need to match. The T2S matching rules are identical for all participating markets. Regarding cross-border settlement the different market practices only apply if customers need to fill in fields that are optional and additional matching fields. The following table includes the mandatory, additional and optional matching criteria for DvP/DWP in Euro as well as for FoP instructions. T2S Mandatory match criteria T2S Optional match criteria T2S Additional matching fields DvP/DWP FOP DvP/DWP FOP DvP/DWP FOP Payment Type Securities Movement Type ISIN Code Trade Date Settlement Quantity Intended Settlement Date Delivering Party BIC Receiving Party BIC CSD of the Delivering Party CSD of the Receiving Party Common Trade Reference Client of delivering CSD participant Client of receiving CSD participant T2S securities account number of the delivering party T2S securities account number of the receiving party Opt-out ISO transaction indicator (referring to custody processing) CUM/EX Indicator Currency Settlement Amount Credit/Debit n/a n/a n/a T2S Functional Design at a Glance 33

34 The matching tolerance for the settlement amount will be enhanced Currently CBF supports a match tolerance of EUR 25. With the T2S migration CBF will add the match tolerance of EUR 2 for cash countervalues smaller/equal EUR 100,000 according to the T2S matching rules. If all matching fields match except for the countervalue, T2S checks if the cash amounts indicated are compliant with the tolerance amount. When settlement instructions with different countervalue amount are matched, the amount indicated by the seller will be used. The tolerance level for cash amounts will be the following: Countervalue for the cash amount Tolerance EUR 100,000 EUR 2 > EUR 100,000 EUR 25 CBF will still offer the existing CBF match error service in a world with T2S for its customer in ICP mode. As today ICP customers can send a match error via MT530 as response to an MT578 to inform the counterparty about a matching disagreement. CBF will then inform the counterparty via MT548 (only ICPs) about the match error that has been used in the MT530. Also, the information continues to be provided by CBF with the MT536 (Clearing & Settlement Statement)/MT537 (Statement of Pending Transaction). T2S provides neither real-time feedback about unmatched instructions (only in the Securities Transaction Pending Report) nor unmatched reason codes. Therefore it is not possible to send unmatched reason codes (e. g. DMON disagreement settlement amount) from T2S to the counterparty. DCP customers can receive the Securities Transaction Pending Report via T2S. The standard setup for configuration is end of day. CBF specifics: Direct matching, Passive Matching Service, Cancel Matching (Rücknahme Matching) Direct Matching The CBF Service Direct Matching will not be available anymore with the T2S implementation. Currently CBF offers the possibility of Direct Matching to allow customers to match an instruction with a specific existing counter-instruction in CASCADE. T2S will not support Direct Matching where matching to a particular counter-instruction could be enforced. Nevertheless counterparties can try to enforce matching by filling the field Common Trade Reference. However, there is still a risk of cross-matching with other instructions. Passive Matching Service for Free of Payment instructions Passive Matching is an exclusive service for CBF customers and will not be provided in T2S. CBF will support a solution to CBF customers in ICP mode to allow further usage of current CBF Passive Matching rules. For CBF customers using CBF s Passive Matching service today, CBF creates automatically the counterparty RfoP instruction in CASCADE based on the counterparty s DfoP instruction for matching purpose. T2S Functional Design at a Glance 34

35 With the T2S implementation CBF will generate the matching instruction based on allegements received from T2S. If no SAC is indicated by the counterparty in its DfoP instruction CBF enters the main account ( 000 ) in the counterparty RfoP instruction and submits it to T2S for matching. Cancel Matching ( Rücknahme Matching ) Currently CBF offers its customers the possibility to cancel their own matched unsettled instruction unilaterally by using the CASCADE online service Cancel Matching. By doing so no settlement takes place. With the migration to T2S the CBF service Cancel Matching is no longer available because of the introduction of bilateral cancellation, which is described later in this chapter. Matched instructions need to be deleted according to the bilateral cancellation principle (except T2S instruction type already matched instructions please see also respective paragraph bilateral cancellation ). Changes/modifications in OTC instructions The CBF instruction modification functionality will be aligned with the T2S modification logic. For selected business processes, CBF will activate the non-modifiable flag (e.g. custody-related or Eurex CCP instructions), as today. Four parameters of an instruction can be modified as long as the transaction is unsettled: Settlement priority Hold/release Partial settlement indicator (not if a partial settlement has occurred) Instruction linking; no partial settlement is allowed for linked instructions Only one of the four parameters can be modified within one modification instruction at a time. ICP customers can either use CASCADE online or their MT54X (for cancellation and re-instruct) and MT530 messages (see below) to perform the change. Instructions cannot be modified if they have been created by CSDs or CCPs and also if the ModificationCancellationAllowed flag is set to no in the settlement instruction. Within already matched instructions either both sides (delivery and receipt) or only one side can be modified. For modifications of other instruction attributes, customers need to cancel the original instruction, and re-instruct. If such an instruction has already matched, then both counterparties need to cancel it. The following paragraphs describe the four modification functionalities in more detail. Prioritisation logic for instructions settlement CBF will also follow the T2S prioritisation logic. Instructions containing priorities that are not allowed in line with the following specified rules will be rejected in T2S as well as in CBF (CASCADE). Today s CBF priorities 3 and 4 will be mapped to T2S priorities 0003 and CBF priority 5 will no longer be supported. T2S Functional Design at a Glance 35

36 There will be four different levels of priority for settlement instructions for the T2S night-time processing: 1 Reserved priority: can only be used by CSDs and NCBs 2 Top priority: can only be used by Stock Exchanges, MTFs and Central Counterparties 3 Available at all times for T2S actors 4 Available at all times for T2S actors and will be the default priority for customer instructions for which no other priority is assigned. These priorities can be provided by the delivering or the receiving party. In cases of discrepancy, T2S applies the higher priority. Other priorities that CBF currently provides to its customers will no longer be available. Hold/Release functionality for OTC instructions Customers still have the option to set instructions on hold. With T2S this will be done with the Party Hold indicator PTYH. The change of the status from hold to release or vice versa can be done via modification in T2S directly. T2S has specified three more hold indicators that are supported by CBF but they can only be set and changed either by the CSD or by T2S. Based on the T2S definition, CSD participants can only use the indicator Party Hold. Due to the new Party Hold indicators there might be changes within the CBF reporting (e.g. MT530). Settlement is only possible if all four hold indicators are set to no. Allegements As today, CBF will allege pending unmatched instructions to the counterparty. There will be no change in the CBF subscription process for allegement instructions for CBF customers acting in ICP mode. CBF customers acting in ICP mode: Can receive allegements for all markets, for domestic, cross-border and T2S Out-CSD settlement (if matching is required) Receive allegement via MT578 NEWM, and allegement removals and cancellations via MT578 REMO and CANC Receive a statement of settlement allegements via MT586. CBF customers acting in DCP mode (connectivity format ISO 20022): Can receive allegements for any market as well Receive allegements Settlement Allegement Message sese.028, and allegement removals and cancellations Allegement Removal Message sese.029 and Cancellation Advice semt.020 Can also receive a statement of settlement allegements Securities Settlement Transaction Allegement Report semt.019. T2S Functional Design at a Glance 36

37 CBF specifics: TEFRA D securities With the T2S implementation the current CBF service for TEFRA D will still be available for CBF customers in ICP mode. Today CBF offers two procedures (strict and flexible) for processing TEFRA D securities within the 40- day period starting with the issue day. Within this period the Tax Equity and Fiscal Responsibility Act of 1982 of the U.S. Internal Revenue Service ( TEFRA D Rules ) makes it unlawful for the issuer of the securities affected ( TEFRA D securities or TEFRA D securities classes ) or the sales partners of such an issuer to sell these securities to U.S. citizens and Persons who have spent more than 183 days in the U.S.A, thus qualifying as residents for tax purposes. More details about the current CBF processing of TEFRA D securities can be found in the TEFRA D Functional Description on the Clearstream website New Service: Partial settlement CBF will support the new automated partial settlement feature. The partial settlement can be applied for OTC transactions, Eurex CCP trades and for Non CCP Stock Exchange (SE) transactions. Partial settlement is an option for customers in case settlement is not possible due to lack of securities or cash. Instructions can be flagged with the following partial settlement indicators : PART = partial settlement allowed PARQ = partial settlement with quantity threshold (has to satisfy a minimum quantity of securities (quantity defined in static data of securities account)) PARC = partial settlement with cash threshold (has to satisfy a cash value minimum (value defined in static data of securities account)) NPAR = no partial settlement (this indicator always prevents a partial settlement although if one party has indicated a partial settlement (e.g. with PART) within its instruction) Partial settlement is optional and can only occur if the partial settlement indicator attribute is set in the instruction. The partial settlement indicator can be used as well unilateral. Customers can indicate in the instruction which threshold should be applied: Cash amount has to exceed a cash threshold (for DvP and DwP instructions types) due to lack of cash Securities amount has to exceed a securities threshold (for FoP, DvP and DwP instructions types) due to lack of securities For CBF customers acting in ICP mode it is foreseen that: Partial settlement indicator will be supported in MT54X settlement messages Partial settlement indicator can be modified with MT530 Partially settled instructions are reported via MT54X settlement confirmation in combination with an additional MT548 for the remaining pending part CBF customers acting in DCP mode need to set the partial settlement flags in ISO Securities Settlement Transaction Instruction sese.023, and they can request the modification of the partial settlement flag via ISO Condition Modification Request sese.030. T2S Functional Design at a Glance 37

38 Partial settlement takes place at three fixed times of the settlement day: During the last cycle in the night-time processing During two intraday partial settlement windows at 14:00 and 15:45 PfoD instructions and linked instructions are not eligible for the partial settlement feature. Instruction linking of type WITH/BEFO/AFTE prevents partial settlement. New: Instruction linking To provide customers the full range of settlement services CBF will implement the service Instruction Linking based on the T2S concept. Customers can use this service optionally and need to set up instruction and modification processes to include link type indicators and pool references. When submitting settlement instructions, it is possible to link them to other settlement instructions in T2S. The following link types are supported: WITH = settle together with the linked instruction BEFO = settle before or at least at the same time as the linked instruction AFTE = settle after or at least at the same time as the linked instruction INFO = link for information only More than two instructions can be linked via pool reference. An existing instruction can be linked to (LINK)/unlinked (UNLK) from other existing instructions via a modification request: Linkages can be added, removed or changed (via removal and subsequent new linking) Linkages can impact settlement eligibility Linkages of type WITH/BEFO/AFTE prevent partial settlement Link types can be changed (e.g. from after to with ) by unlinking the instructions and re-linking them with the new link type. CBF customers will be able to link instructions in ICP and DCP mode. CBF customers acting in ICP mode can presumably link instructions via MT54X messages and can remove, add or change linkages of existing instructions via MT530 in ICP mode (format adjustment of MT530 required). CBF status reporting will reflect the additional linkage-related status codes (e.g. reason code LINK). CBF will also use instruction linking to support internal business processes. Instruction links created by CBF cannot be modified by CBF customers. CBF customers acting in DCP mode can specify in a new instruction in the sese.23 if this instruction should be linked to another instruction. Instruction linking for already pending instructions in T2S can be done via ISO Condition Modification Request sese.030 in DCP mode. T2S Functional Design at a Glance 38

39 New Service: Bilateral cancellation for matched OTC instructions CBF implemented bilateral cancellation already for some cross-border links, for example France, Netherlands or Belgium. In future CBF will follow as well the T2S bilateral cancellation process. The future CBF cancellation processing will be aligned to the following described T2S bilateral cancellation specifications: Cancellation of matched OTC instructions will only be possible if both counterparties cancel their delivery and receipt instructions separately Unilateral cancellation is possible for unmatched and already matched instructions As long as the counterparty does not send a cancellation request the cancellation remains pending and the instruction will still be eligible for settlement Cancellations of remaining parts of partially settled instructions are possible. Bilateral cancellation can be requested in ICP and DCP mode. CBF customers acting in ICP mode can use the existing MT54X CANC and will be informed as counterparty about a cancellation request via MT548 with IPRC/CPRC. CBF will introduce a new status cancellation requested by counterparty. If the referenced instruction is unmatched or already matched, the cancellation will be executed immediately after its validation. The CBF reporting will reflect the bilateral cancellation status. CBF Customers acting in DCP mode can trigger a cancellation via ISO Cancellation Request sese.020 and will be informed as counterparty about a cancellation request via ISO Status Advice sese.024 with <PrcgSts> <CxlReqd>. According to the current T2S configuration, matched instructions will not fall into an automated cancellation period and hence the timeframe is not limited. However, T2S automatically cancels unmatched instructions 20 working days after the Intended Settlement Date or the date of the last status change of the instruction depending on which date is the latest (please see also chapter 8.2, paragraph Settlement processing and recycling of pending OTC transactions ). Customer impact The below table summarises the impact for CBF customers acting in ICP and DCP mode regarding the services and functionalities for the lifecycle management of OTC instructions. Services and functionalities for Lifecycle Management Description/Impact DCP ICP New Kept Adapted Deleted Support new instruction types DwP, RwP and PfoD (Generation of new instructions/internal processing of related status and settlement reporting) Systems need to be adjusted in order to generate and send instructions directly to T2S in ISO (A2A) via sese.023 RECE/DELI. For instruction passing via U2A, the T2S GUI can be used T2S Functional Design at a Glance 39

40 Services and functionalities for Lifecycle Management Description/Impact DCP ICP New Kept Adapted Deleted Different counterparties addressing has to be considered: Counterparty at other T2S In-CSD and CBF customer instructs as ICP: BIC11/BIC11 (for account master of FCSD/BIC11) Counterparty at other T2S In-CSD and (CBF) customer instructs as DCP: BIC11/BIC11 Counterparty at CBF and (CBF) customer instructs as DCP: BIC11/BIC11 Counterparty at CBF and CBF customer instructs as ICP: BIC11/BIC11 or CBF account master of counterparty T2S will introduce new rejection reasons which customers need to be able to process Possibility to submit already matched instructions for special instruction types like CASCADE RS (Bestandsübertrag) Support of already matched instructions in the new ISO format Possibility to pass already matched instructions with CBF online and via MT54X Usage of current CBF interfaces for passing instructions. However, if an instruction passes the CBF validation but not the T2S validation, CBF will need to cancel the instruction in CASCADE and report this back to the customer. For this purpose, new rejection or error messages are sent and need to be processed T2S Functional Design at a Glance 40

41 Services and functionalities for Lifecycle Management Description/Impact DCP ICP New Kept Adapted Deleted Compliance with ISO and readiness with the new matching rules of T2S New matching fields need to be provided in the instructions to CBF and need to be adapted within customers internal processing to new matching rules CBF still wants to maintain the possibility of setting a fail reason/matching errors on the counterparty instruction (via MT530) and report this to the counterparty (via MT548 and MT537) New flexible matching tolerance for differences of countervalues has to be observed (tolerance levels): countervalue smaller/equal tolerance = 2 ; countervalue bigger 100,000 tolerance = 25 Match tolerance of 2 is currently not supported in CBF CBF will adjust its error reporting and codes in line with the T2S feedback Only positive matching feedback is provided, negative matching feedback is not provided. Thus, no reason for matching fail is provided CBF services Direct matching and Cancel Matching will no longer be supported in T2S Currently CBF Passive Matching service is not foreseen in T2S. A solution for DCPs can be achieved by a configuration set up which allows that CBF will receive allegement messages intended to be provided to DCP T2S Functional Design at a Glance 41

42 Services and functionalities for Lifecycle Management Description/Impact DCP ICP New Kept Adapted Deleted Defined T2S prioritisation levels (3 High priority and 4 Normal priority ) can be modified through MT530. The existing MT530 format needs to be adjusted to support this functionality Settlement priority can be modified through ISO Condition Modification Request sese.030 Processes and messaging (sese.023, sese.030) need to be adjusted to support the hold/release modification ( PTYH ). DCPs need to process new Hold Status indicators which they receive in the status reporting. Possibility to use hold/release flag with the new Hold Status indicator PTYH For ICPs there might also be changes in message types like MT530. ICPs need to process new Hold Status indicators ( PTYH, CSDH, CDEL, DVAL ) which they receive in the status reporting Partial settlement is an optional service for CBF customers which can be used to increase settlement efficiency. After a partial settlement is executed, the instruction is split into a settled and a remaining part (which can be subject to additional partial settlement) T2S Functional Design at a Glance 42

43 Services and functionalities for Lifecycle Management Description/Impact DCP ICP New Kept Adapted Deleted Regarding partial settlement it is foreseen that: Partial settlement indicator will be supported in MT54X settlement messages Partial settlement indicator can be modified with MT530 Partially settled instructions are reported via MT54X settlement confirmation in combination with an additional MT548 for the remaining pending part Partial settlement indicator made via CASCADE online ( KVEE, KVEA, KVAI, KVAA ) The current CASCADE LION service Partial Delivery/Teilbelieferung for Non CCP Stock Exchange (SE) trades will be kept. This service could only be requested and administrated in ICP mode Partial settlement flag in ISO Securities settlement Transaction Instruction sese.023 message DCPs can request the modification of the partial settlement flag via ISO Condition Modification Request sese.030 DCPs will receive ISO Settlement Confirmation sese.025 for the settled part and ISO Status Advice sese.024 for the remaining part T2S GUI: the flag is visible and can be modified as long as the instruction has not been settled Need to support the cancellation request to T2S via sese.020 as well as the status update out of T2S via sese.024 or semt.014 T2S Functional Design at a Glance 43

44 Services and functionalities for Lifecycle Management Description/Impact DCP ICP New Kept Adapted Deleted Cancellations can still be sent to CBF in old formats (MT54X CANC). However, customers need to adjust processing of status updates for cancellation requests sent by their counterparties. The CBF online feature Cancel Matching which leads to the cancellation of the own instruction and leaves the counter-instruction unmatched will be decommissioned Additionally CBF will introduce bilateral cancellation of matched instructions which is reflected in the CBF reporting Support the receipt of new allegements (sese.028), cancellation of allegements (semt.019, semt.020) and removal of allegements (sese.029) sent from T2S Subscription for receipt of allegements, removal and cancellation from CBF via MT578. The process will only change with minor adjustments which are currently under investigation and will be published in time in the Detailed Functional Descriptions (DFDs) The current TEFRA D procedure is only available in CASCADE online for CBF customers in ICP mode. T2S Functional Design at a Glance 44

45 Services and functionalities for Lifecycle Management Description/Impact DCP ICP New Kept Adapted Deleted For CBF customers who use the flexible procedure the effective settlement deadline on the last day of the TEFRA D period would be earlier than the T2S deadline, e.g. at 17:45. In T2S there will be the possibility to have restrictions on ISINs. For example the restriction regarding TEFRA D securities could be the early end-of-day deadline As today immediate technical validation (acknowledgement) will be sent to the CBF customers, if the message has been subscribed to. The result from the T2S Business Validation will be provided as status code IPRC/PACK. In line with T2S, in case of an already matched instruction the status matched will also be included in this message T2S Functional Design at a Glance 45

46 8.5 Cross-border Settlement Customer will benefit from the harmonisation of the cross-border markets in T2S. CBF therefore will also align its cross-border settlement to the four T2S migration waves. For details regarding the wave composition, please refer to the ECB migration wave composition in the Appendix. Regarding the cross-border settlement CBF intends to: Migrate to T2S all existing direct cross-border links for CSC securities that are deposited with CBF to T2S with CBF as Issuer CSD. The left figure below shows the current links to CSDs that will become T2S In-CSDs as well as two other potential T2S Out-CSDs. Further links to other T2S markets are being analysed. More details will be provided after the assessment has been conducted Create direct links to all T2S In-CSDs for FCSC securities which are deposited with these CSD with CBF as Investor CSD. The right figure below lists those current links to CSDs that will become T2S In-CSDs as well as one T2S Out-CSD. CBF is currently analysing which T2S markets can be connected in addition to today s direct link markets Figure 21: Overview of cross-border links of CBF as issuer and investor CSD CBF cross-border settlement in T2S is characterised by the following aspects: Cross-border settlement with In- and T2S Out-CSDs will be processed in T2S irrespective of whether CBF is Investor or Issuer CSD The current cross-border settlement processes on direct links to other T2S In-CSDs will be replaced by standard T2S processes All direct links to other T2S In-CSDs will be DvP links (where not yet established) for crossborder settlement in Euro It is planned to migrate links to T2S Out-CSDs to the T2S platform while preserving their securities, currency and settlement scope as much as possible. T2S Functional Design at a Glance 46

47 With the implementation of T2S, all instructions will follow the standardisation instruction management and settlement rules (please refer to chapter Lifecycle management of instructions ). This applies to: Matching rules Settlement prioritisation Modification processes Cancellation processes Partial settlement Allegement processes Exception: already matched instructions will only be allowed for cross-border settlement if a CSD authorises other CSDs to exchange such instructions. What is different to today s processing of cross-border settlement transactions? Today, customers need to address different CBF accounts for the counterparty s CSD, depending on whether the CSD is Issuer or Investor CSD. With the T2S migration CBF will use the new T2S cross-border logic (details will follow in the respective Detailed Functional Description (DFD)). From a customer point of view, in T2S there will be no difference between domestic and crossborder instructions concerning Issuer and Investor CSDs. In T2S, participants do not longer need to distinguish between Issuer and Investor CSDs in their instructions. CBF ensures correct book entry on the related accounts in T2S. If a CSD requires market specific information, instructions against this CSD might still be different depending on the CSD s role as Issuer or Investor CSD. Cross-border settlement does not need to be instructed via the Issuer CSD any longer. T2S will trigger the realignment bookings All FCSC securities can be instructed directly to counterparties with any T2S In-CSD, e.g. French securities can be delivered directly to a counterparty in the Austrian market The following figure includes the general instruction details for a cross-border settlement based on the T2S party concept. Figure 22: Overview of general instruction details for a cross-border settlement T2S Functional Design at a Glance 47

48 The following section shall serve as an example of the aspects explained above. Cross-border settlement instructions between counterparties of CSDs that participate in T2S The picture below provides an example of how counterparties will be identified for cross-border settlement between T2S In-CSDs. In the example below, a CBF customer delivers securities to a counterparty of the Austrian CSD OEKB with an address account (here, the CBF account number). Independent from the ICP/DCP connectivity mode, CBF customers need to address their counterparty with its Party BIC11 code. Figure 23: Example of the identification of the receiving counterparty in Customer impact The impact for CBF customers is provided in the below table. Impact of cross-border-settlement DCP ICP Within the harmonised cross-border settlement the Counterparty CSD Accounts provided in instruction messages and reporting need to be implemented in ISO message types (sese.023) Within the harmonised cross-border settlement the Counterparty CSD Accounts provided instruction messages and reporting need to be adapted for the current message types (MT54X) T2S Functional Design at a Glance 48

49 8.6 Settlement of Non CCP Stock Exchanges (SE)- and Eurex CCP trades Current procedure Today Stock Exchange trades (Non CCP) in CSC and NCSC securities from German Regional Stock Exchanges like Berlin, Munich, Düsseldorf or Stuttgart are routed via XontroTrade to CASCADE LION. Stock Exchange (SE) trades coming from the Frankfurt Stock Exchange via Xetra are transferred through the Eurex CCP-System into CASCADE LION (Lieferfreigabe online) for settlement. CBF offers two release mechanisms for CASCADE LION instructions. If a CBF customer has chosen the positive release method for its CBF account master then the instructions are submitted as blocked instructions. Instructions from customers which have chosen the negative release method will be forwarded as released instructions. Depending on the custody type of the security CSC securities are settled via CASCADE and cash (Euro) via TARGET2 ASI Procedure 6 NCSC (AKV) securities will be routed by CASCADE LION to the Creation platform for securities as well as cash (in commercial bank money) settlement. Pending SE trades in CASCADE LION will not automatically be cancelled by CBF. These trades remain in CASCADE LION until they will be cancelled by both counterparties or they will settle. Currently Eurex only forwards their CCP instructions (delivery surplus and gross trades) in CSC securities to CASCADE. Such securities settle in CASCADE and the respective cash settlement is performed via the CBF cash clearing method by using TARGET2 ASI Procedure 6. The below figure illustrates the current settlement processing flow for Non CCP SE- and Eurex CCP trades. Figure 24: Overview of current settlement process of Non CCP SE- and Eurex CCP trades T2S Functional Design at a Glance 49

50 Future lifecycle management of SE trades (Non CCP) Concerning SE trades, CBF will also keep potential enhancements for its customers to a minimum. The general setup for lifecycle management, settlement and reporting of SE trades will largely remain as it is today. However, CBF will introduce the following mandatory functional changes for SE trades in order to be aligned with the T2S features: An automated partial settlement via T2S will be introduced in parallel to the existing actively triggered partial settlement ( LION Teilbelieferung ). A combination of both is possible. Automated partial settlement requires a new default flag in CASCADE LION. More details can be found in the table below Customers need to also follow the bilateral cancellation process, the existing unilateral cancellation requests for SE trades will no longer prevent settlement after the T2S implementation. SE trades from the different German Stock Exchanges will be transferred into CASCADE LION, as today. Also instructions will be forwarded on an ongoing basis according to the chosen release method (positive/negative). CASCADE LION forwards these settlement instructions as already matched instructions in the evening of the trading day to the respective settlement systems according the custody type of the securities: Instructions in CSC securities and with a cash value in Euro will be forwarded by CBF immediately and directly to T2S. Securities and cash will be settled in T2S Instructions in CSC securities and with a non-euro cash value (e.g. USD) will be forwarded by CBF immediately and directly to T2S for the securities settlement. The non-euro cash value will be settled via Creation Instructions in NCSC securities are forwarded to Creation, as today The cash value of instructions with securities in custody types STR (individual custody) and WPR (Wertpapierrechnung; including EEX 2 trades) will settle as today. All changes to the SE transaction are forwarded to T2S immediately. For CBF customers acting in ICP mode SE trades will be accessible via CASCADE LION, as today. The table below specifies the future functionalities and services for lifecycle management of Non CCP Stock Exchange (SE) trades. Services and functionalities for Lifecycle Management Overview Lifecycle Management of SE trades (Non CCP) New Kept Adapted Deleted Functionality/service Available in T2S (DCP) The current CASCADE LION positive/negative release method will remain as today. The related hold/release functionality will be available for buys and sells (currently only for sells) Available in CASCADE LION (ICP) 2 European Commodity Clearing in Leipzig T2S Functional Design at a Glance 50

51 Services and functionalities for Lifecycle Management Overview Lifecycle Management of SE trades (Non CCP) New Kept Adapted Deleted Functionality/service Available in T2S (DCP) Available in CASCADE LION (ICP) T2S bilateral cancellation CASCADE LION Partial settlement (seller defines in CASCADE LION partial amount). Technically, CBF will cancel the original instruction(s) in T2S and replace it by two new ones: one released instruction with the adjusted amount one blocked instruction with the remaining amount After successful settlement of the first partial delivery additional partial settlement of the remaining instruction can be requested via CASCADE LION T2S automated partial settlement will be available. LION trades are eligible for T2S partial settlement except the LION Teilbelieferung A new default flag will be introduced to identify how CASCADE LION should initially instruct the SE trade into T2S In addition, subsequent modification of the partial settlement flag will be possible. CASCADE LION Gesamtrückstellung will be decommissioned./. T2S Functional Design at a Glance 51

52 Services and functionalities for Lifecycle Management Overview Lifecycle Management of SE trades (Non CCP) New Kept Adapted Deleted Functionality/service Available in T2S (DCP) NEW: Transaction linking for Non CCP Stock Exchange (SE) trades, i.e. other instructions can be linked to these SE trades (with WITH, BEFO and AFTE flags). This is available for CBF customers in ICP mode. In DCP mode on T2S only own instructions can be linked TEFRA D Release processing is expected to remain as today Available in CASCADE LION (ICP) Future settlement of Non CCP Stock Exchange (SE) trades SE trades in CSC securities will be processed in the T2S night-time settlement batches in the T2S real-time process starting latest at 05:00 and continuously until 16:00 within RTS (formerly at 10:00 and 13:15 only) Reporting for CBF customers Currently, in CASCADE online queries and in the CBF reporting (e.g. daily settlement list/clearing & Settlement Statement), SE trades can be identified via their CBF instruction type AA10. The existing MT536 reporting will continue to be provided for CASCADE LION instructions for the different custody types such as CSC, NCSC, STR and WPR securities in field 70E Transaction Details Narrative. CBF customers will also have access to SE trades in T2S by using the DCP mode. However, the identification of a SE trade in T2S is not straightforward. The ISO transaction code TRAD is used for both SE and OTC trades. T2S does not support the identification of an SE trade. CBF will add information into the sese.023 to allow identification as SE trade. That is, CBF will provide all current LION SE trade attributes also in T2S. The final definition is being discussed with the Eurosystem. T2S Functional Design at a Glance 52

53 Customer impact The below table summarizes the impact for CBF customers regarding the future handling of SE trades. New Kept Adapted Deleted Impact SE Trades (Non CCP) DCP ICP Independent from the chosen connection option customers will still need ICP access to support non-csc Stock Exchange (SE) trade business, e.g. NCSC settlement business with Creation, as well as to trigger specific CASCADE LION functionality such as LION Partial settlement/teilbelieferung The new T2S functionalities/services: partial settlement instruction linking and bilateral cancellation will be supported Partial settlement requires a new default flag in CASCADE LION. Furthermore, customers will be able to change the partial settlement indicator. The bilateral cancellation principle applies for CBF customers in ICP and DCP mode Day time settlement of SE trades is no longer batch-driven, thus there will be a potential impact on the customers cash and securities management processes CASCADE LION Reporting for CBF customers acting in ICP mode available as today (e.g. online queries, Clearing&Settlement statement (MT536, etc.) for CBF customers acting in DCP mode CBF will attempt to add information into the sese.023 to allow the identification as SE trade T2S Functional Design at a Glance 53

54 Eurex CCP trades and Eurex collateral management Eurex Clearing is in the process of defining the future T2S-related processing model. Fact finding and discussions with customers are ongoing, both in bilateral information exchanges and in the regular customer consultation bodies ( Arbeitskreise ) operated by Eurex Clearing. Upon finalization of the ongoing consultation process, Eurex Clearing will provide an overview of the future processing model in the T2S environment beginning of quarter four 2013 to their customers. Respective information will be shared with the CBF s T2S Implementation project. Based on this CBF will inform their customers within the relevant Detailed Functional Description documents. The existing Eurex collateral accounts will be mapped to T2S. As today these accounts will be set up in such a way that the account owner does not have access to the securities on them, but only Eurex Clearing can instruct on the accounts. T2S Functional Design at a Glance 54

55 9. Cash settlement in Euro With the implementation of T2S, Euro cash funding for securities settlement in the night-time and intraday processing will be managed via dedicated cash accounts (DCA) in T2S. The funding of these DCAs will be done by the RTGS accounts in TARGET2 (T2) and the payment banks will be responsible for managing the DCAs. With T2S an efficient pooling of liquidity at the DCA will be possible and for that reason CBF will support the most effective management of the DCA. CBF will offer tools, such as the extended cash forecast to support customers cash funding, especially at the start of the night-time settlement. After a brief comparison between the current and future procedure and a short description of the current CBF cash settlement in Euro, this chapter describes subsequently the future handling of cash settlement in Euro more in detail. 9.1 Key features The below table provides a high-level comparison between Euro cash settlement today in CBF and future cash settlement model following migration to T2S. Figure 25: Comparison of EUR cash settlement The following paragraphs explain the key features of cash settlement for Euro DvP settlement as well as for cash payments resulting from custody and other payments, this for the current and the future. T2S Functional Design at a Glance 55

56 9.2 Today s CBF Euro Cash Settlement via T2 using the ASI Procedures The following figure shows an overview of the current cash settlement in CBF for Euro DvP as well as custody payments (Corporate Action- and Income Events) and other cash payments. Figure 26: Overview of today s CBF Euro cash settlement via T2 Currently CBF uses the TARGET2 ASI Procedures for its cash settlement as follows: Procedure 2- For Euro RTS real-time settlement of DvP transactions and direct payments in TARGET2 for cross-border settlement Procedure 6- For cash pre-funding on RTGS sub-accounts for the CBF night-time (STD, RT-STD) and daytime settlement (CONT-SDS1, SDS1, CONT-SDS2 and SDS2) Procedure 3- For DD1/DD2/DD3 (direct debit 1, 2 and 3) cash bundles of custody and other (nonsettlement) payments. Timing of DD1/DD2/DD3 is aligned with current settlement SDS processing. CBF provides a Cash Forecast for the day-time and night-time cash cycles as a tool for customers to facilitate pre-funding for TARGET2 ASI Procedure 6. For the cash settlement resulting out of the settlement cycles from night-time processing (STD and RT-STD) and for the settlement cycles from daytime processing (CONT SDS1, SDS1, CONT SDS2 and SDS2), CBF uses an internal, technical cash settlement account structure (xxxx 22x) that reflects the liquidity customers have reserved for settlement in their RTGS sub-accounts in T2. CBF provides an online Cash Forecast for all CASCADE settlement cycles to support its customers cash provisioning needs as well as services like standing instructions for cash reservation. T2S Functional Design at a Glance 56

57 In order to participate in real-time settlement (RTS), the buyer and the seller need to issue a direct debit authorisation to CBF and to Deutsche Bundesbank. In RTS, Euro DvP transactions are settled individually with immediate book entry of securities and cash. The simultaneous settlement of securities and cash is achieved by first blocking the securities on the seller s side (sub-account 995) and then carrying out cash settlement through the RTGS accounts in T2. After positive feedback from T2 to CBF, the blocking of the securities is cancelled and the securities are entered in CASCADE, bringing about final settlement. 9.3 Future T2S Euro Cash Settlement CBF will support its customers with the future Euro cash settlement in T2S by providing services to manage the efficient pooling of their liquidity: The extended CBF Cash Forecast for T2S can be used to facilitate funding of the DCA before start of T2S night-time settlement CBF s liquidity management service for payment banks allows to trigger liquidity transfers from the RTGS account in TARGET2 to the DCA in T2S based on the CBF Cash Forecast Custody payments on German Government bonds (Bunds) will be processed via T2S to facilitate the funding for the night-time settlement in T2S (See chapter 9.4, Future cash payments (Euro) for Corporate Action- and Income Events). The below figure shows an overview of the future cash settlement timeline and procedures and explains the key changes following the implementation of T2S. 19:0 Issu (Out-CS Figure 27: Overview of Euro cash settlement following T2S migration T2S Functional Design at a Glance 57

58 Today the cash bookings for Euro DvP transactions settle on RTGS sub-accounts in T2, after the migration to T2S, these bookings will settle on DCAs. Cash funding in T2S has to be provided at least on one DCA with a National Central Bank (NCB). The cash funding of the DCAs is provided via a RTGS account in T2. DCAs are linked to the T2S SACs. For more information regarding SACs please refer to chapter 6 Account setup in T2S and CBF. Payment banks will be responsible for managing DCAs in T2S for the two night-time processing cycles and for the real-time settlement that runs intraday. T2S will execute a mandatory cash sweep from the DCA to the RTGS account in T2 at the end of the processing day (EoD) at approximately 17:45. The existing CBF Cash Settlement Accounts (xxxx 22x) will be closed over the migration weekend and CBF customers can also close the linked RTGS sub accounts accordingly. Nevertheless, for its customer CBF will become the gateway to effective cash management by offering a consolidated view/forecast of its customers DCAs. CBF will continue to use the following T2 ASI Procedures after the implementation of T2S: TARGET2 ASI Procedure 3 (P3) Custody (different to German Government (Bund) payments) and other payments (e.g. fees, price differences, manual adjustment bookings) will continue to settle via P3 directly on RTGS accounts in T2 Income payments for German Government bonds (Bunds) will be processed via T2S to facilitate funding of night-time settlement in T2S Any other ASI procedures (e.g. P6) will no longer be used with T2S by CBF. Self-Collateralisation as currently processed by Bundesbank and CBF via T2 will be replaced by T2S-Auto- Collateralisation Some custody payments currently processed by CBF via P3 will remain unchanged. All direct debit cash clearing cycles (DD1 DD3) are planned to be kept. CBF will support its customers with an extended Cash Forecast based on data from the T2S Cash Forecast T2S will provide its Cash Forecast per DCA, independent of how many SACs and parties are connected to it. The T2S Cash Forecast includes: Current cash balance on DCA (at start of day zero) Pending liquidity transfer orders from DCA (TS2) to RTGS (T2) Pending settlement instructions (matched instructions with the status either on hold or released ) Projected cash balance (sum from above) Outstanding intraday credit through Auto-Collateralisation (at start of day zero) Respective sum CBF will supplement the information provided in the T2S Cash Forecast with its own Cash Forecast data to in order to help customers manage their liquidity pool as efficiently as possible. This will require customers to provide a PoA to CBF. As mentioned above, the CBF Cash Forecast will be based on cash forecast data provided by T2S and be enriched by: German Government (Bund) payment information Eurex CCP instructions for NTS (if not included in T2S Cash Forecast) and the respective sum (T2S content and enriched CBF data). T2S Functional Design at a Glance 58

59 CBF will provide the Cash Forecast at account master level online as today. In order to receive the T2S Cash Forecast on behalf of the payment bank, CBF will require a Power of Attorney (PoA). The enriched CBF Cash Forecast for T2S can be used to facilitate funding of the DCA prior to the start of the nighttime settlement in T2S. In line with the current service offering, CBF will provide the following liquidity management services for payment banks: Generation of current order (cam.050 LiquidityCreditTransfer) in T2 to trigger liquidity transfer from RTGS to DCA based on CBF for night-time settlement. Configuration of buffer amounts either with a fixed amount or a pre-defined percentage. Cash provisioning/liquidity management Cash is transferred to DCAs from the RTGS account and it can be withdrawn from DCAs back to the RTGS account. These processes can be initiated either in T2 or T2S but not via reservation out of CBF. Cash transfer instructions can be passed as: immediate liquidity transfer pre-defined liquidity transfer. Transfer of cash between T2 and T2S is only possible during the hours in which both systems are open, that is not during their respective maintenance windows T2 (22:00 01:00) and T2S (03:00 05:00). CBF could initiate on behalf of the CBF customers cash transfers via a current order/standing transfer order based on the CBF Cash Forecast. Should customers choose to use this service they would need to provide CBF with PoA. At the end of the each processing day, all DCAs need to have a zero balance. T2S will perform a cash sweep procedure daily at approximately 17:45. Today, a cash sweep is processed in the morning (after 06:00). With the CBF migration to T2S this procedure will no longer be valid. T2S related cash information can be requested either in real-time or received via a predefined reporting schedule, based on either, settled amounts, cash balances, blockings, reservations and thresholds. The respective NCB will be responsible for the DCA setup and configuration. Regarding the linking of DCAs to each T2S SAC, at least one DCA could be allocated. The customer will need to open a DCA with an NCB (e.g. Deutsche Bundesbank) or use a cash correspondent s DCA. In both cases, the DCA number will need to be provided to CBF. In order to benefit from the CBF s offering for liquidity pooling, customers can use the existing CASCADE accounts as today. CBF will automatically set up the necessary parties and SAC in T2S. Cross-border settlement DvP in Euro With the migration of CBF to T2S, no specific RTGS sub-accounts for the settlement with other T2S In-CSDs (e.g. Euroclear France, Netherlands and Belgium (ESES) or OEKB (Austria)) are any longer required. All settlement will be done by at least one DCA in T2S. 9.4 Future Euro cash payments for Corporate Action- and Income Events In general the current CBF procedure for custody and other payments will remain unchanged apart from the timing of the activities. CBF s payment mechanism for Corporate Action- and Income Events will continue to enable minimised funding needs for all involved CBF customers. T2S Functional Design at a Glance 59

60 Income events: Government bond (Bund) payments in night-time settlement The liquidity resulting from payments of German Government bonds can be used for T2S night-time DvP settlement, as today. Bund payments in T2S will be processed similar to the current procedure with TARGET2 ASI Procedure 6. However, in future they will be paid via PfoD instructions (please see also paragraph lifecycle management of instructions in chapter 8.4). CBF will submit PfoDs out to T2S for night-time settlement based on data from the custody processing and accumulating all events for the receiving customer to fund the DCAs. In line with the definition of PfoD custody payments will be made per account, and not be in one single sum as today. Payments will be processed by CBF s custody service KADI as early as possible (T2S NTS cycle 1 sequence 1 stands for processing of corporate action on stocks ) so that payments can still settle within NTS and the cash can be re-used for settlement. Even though, there is a dedicated sequence for corporate actions such instructions can also settle in subsequent sequences or cycles. Figure 28: Overview of Bund payments during night-time settlement Income events, fees and other bookings in the day-time settlement All payments can directly be used by CBF customers as a source of cash on the central T2 RTGS account as today. Day-time settlement via TARGET2 s ASI Procedure 3 remains unchanged, too. CBF will send cash instructions to T2 for settlement on the RTGS accounts via the current netting mode, i.e. paying agents debits will be netted against credits, market claims and all events will be accumulated within one cash batch. Figure 29: Overview of payments (e.g. income events) during the day-time settlement CBF s account setup will allow a different RTGS account to be linked for CBF custody payment during day-time settlement to the RTGS account linked to the DCA allocated to the SAC in T2S. T2S Functional Design at a Glance 60

61 Reporting In line with the current process for Government Bond (Bund) payments, CBF will provide reporting via MT566, MT942 and potentially MT950. PfoDs will not generate additional settlement reporting for CBF customers in ICP mode. Individual cash booking keys might disappear or be adjusted. The number and contents of cash packages may also be adjusted. MT566 reporting will be provided at event/transaction level which will keep T2 cash instructions and related fees for day-time settlement to a minimum. CBF cash reporting for ICPs: Cash reporting related to securities settlement will no longer be provided by CBF. However, MT942 (Euro Cash Clearing Report) is intended to remain for all cash transactions initiated via CBF in T2 and T2S (specific scope and format to be defined). The MT950 report will also potentially remain. Reporting of payments made within DD1, DD2 and DD3 clearing will continue to be shown in the Geldtagesauszug, MT566 and CBF s online functionality (currently CASCADE online transaction KNZI ) will remain as today. T2S cash reporting for DCAs: Cash reports and queries will be provided by the T2S platform directly to payment banks. Customer impact The table below outlines the impact for CBF customers in DCP and ICP mode regarding Euro cash settlement. Impact on cash settlement in Euro DCP ICP Current account setup for cash settlement has to be verified (please see also chapter 6) DCA needs to be opened with NCB and provided to CBF; they need to be assigned for settlement and Bund payments to CBF accounts Current cash set up and standing reservation instructions will become obsolete. Special cash processes based on Target2 Procedure 6 (e.g. DvP settlement with counterparties in crossborder links like France or Belgium) will be decommissioned when CBF migrates to T2S. Current CSA (cash settlement account) and CFA (cash funding account) will be closed with the migration of CBF Liquidity management will be handled via T2 and T2S. Customers need to adjust their internal cash management processes accordingly. Individual liquidity provision funding via CBF (reservation) is not possible any longer. However, CBF will still provide the option to generate cash transfers on behalf of the customer based on the CBF Cash Forecast for night-time settlement (NTS) Customers need to adjust their internal coordination with their treasury departments based on new calculation methods and might need to change their internal calculation of liquidity requirements T2S Functional Design at a Glance 61

62 Impact on cash settlement in Euro DCP ICP Customers cannot use the CBF s Real-Time-Settlement (RTS) DvP Euro flag within an instruction any longer because of replacement by T2S intraday settlement Custody and other payments remain unchanged, except Bund payments and timing. Individual cash booking keys might disappear or be adjusted. Number and contents of cash packages might be adjusted Cash management procedures need to be adjusted. This might lead to organisational change in comparison to existing procedures Cash reporting requirements need to be checked with NCB Customers acting as payment banks need to provide a PoA to CBF if they want CBF to pass current orders from their RTGS account to their DCA account based on the CBF Cash Forecast If multiple DCAs are used, it might be necessary to modify an instruction, if the DCA specified within the instruction does not have sufficient cash coverage Customers will see eventually multiple payments on their cash account (DCA) for Bund payments because for each ISIN one payment will be initiated The reporting out of T2S and/or T2 as basis for the internal cash book entries has to be used. Cash information can be retrieved as well out of T2S GUI Regarding the receipt of payment confirmations from different systems, i.e. T2S for Bund payments, T2 for other payments, customers need to be in a position to process confirmations from different sources internally T2S Functional Design at a Glance 62

63 Impact on cash settlement in Euro DCP ICP The reporting out of T2S and/or T2 as basis for the internal cash book entries might need to adjust MT942 formats T2S will send settlement confirmations for PfoDs payments (e.g. for Bund payments) and CBF will also send them via MT564. Customers need to process different confirmations internally T2S Functional Design at a Glance 63

64 10. Cash settlement in non-t2s currencies via CBF CBF will extend T2S to include non-euro DvP settlement. This chapter aims to describe the current and future CBF cash settlement models for non-t2s currencies Current cash settlement procedure in non-euro currencies via CBF Today, CBF offers the option for DvP settlement in various currencies other than Euro, the so-called foreign currency (FC) instructions. The securities of such DvP transactions (OTC and Non CCP-Stock Exchange (SE) trades) are settled in CASCADE while the cash settlement takes place on the Creation platform in Commercial Bank Money (CoBM). For this purpose both CBF counterparties (the buyer and the seller) need to have corresponding cash accounts on the Creation platform. A complete list of the eligible non-euro currencies is included in the Appendix. CBF will maintain its current settlement procedure for non-euro currencies following the implementation of T2S. CBF customer in ICP and DCP mode will be able to continue using this CBF service without changes to the setup which also remains unchanged. Regarding CBF settlement in non-euro currencies there will be no limitation to this service post T2S in comparison to the current service offering Future cash settlement of non-t2s currencies In its first release, T2S will not support settlement in currencies other than Euro. For settlement in non-t2s currencies, the cash value would be settled outside of T2S and CBF will leverage its functionality via CoBM, as it does today. Customers requesting this service have to have an account on the Creation platform. Potential counterparties for settlement in non-t2s currencies are CBF and CBL account holders. For DvP settlement of OTC- and SE (Non CCP) instructions in non-t2s currencies between counterparties belonging to T2S In-CSDs, the securities will settle in T2S whereas the cash settlement will continue to settle in CBF on the Creation platform. DCP customers will need to instruct with a free of payment (FoP) instruction against foreign currency (FC) and ICP customers instruct as done today. Customers will be informed accordingly via the respective reporting. On settlement day, T2S will block the securities and report the blocking to CBF. CBF will then trigger the settlement of the cash value on Creation. After the cash value has settled in Creation, CBF will release the blocking in T2S. T2S will conclude the settlement. The T2S blocking will be reported as booking on a 995 sub-account to the ICP customers. DCP customers will receive a T2S report Reporting of Blocking (semt.015). T2S validation rules prevent DvP instructions for non-t2s currencies from being accepted. T2S/the ECB suggest submitting DvP instructions for non-t2s currencies as Foreign currency (FC) FoP instructions (including all cash information but selecting the payment flag free ) in T2S. In this case T2S will match the FC FoP instruction without considering the cash information. That is the currency, the matching criteria like credit/debit indicator or cash amount. As an example, consequently a FoP instruction which originally includes a cash value in USD could match in T2S with a receipt instruction mentioning the cash value in GBP. T2S Functional Design at a Glance 64

65 CBF customers instructing in DCP mode will need to send the instruction as so-called sese.023 FREE with additional cash information in the cash attributes. T2S will match those instructions according to FoP rules. To identify those cases, CBF will internally verify each matching result of foreign currency (FC) instructions to confirm, whether the cash attributes of the matched instructions fit together according to the FC DvP matching rules. Should a pair of instructions match incorrectly, CBF will cancel the instructions and inform the impacted customers so they can re-instruct. CBF would like to advise its customers to use the field Common Reference as an optional matching flag for this kind of instruction in order to limit the risk of mismatching and to avoid the cumbersome corrective actions. When CBF instructs T2S, the Common Reference will comprise the abbreviation FC (foreign currency) and the currency (for example: FCUSD). In case the Common Reference is not filled by a CBF customer acting in ICP mode for a FC instruction, CBF will include a reference derived out of the cash parameters, to ensure the matching is correctly performed. The following two paragraphs explain the future cash settlement model for non-t2s currencies for CBF customers acting in ICP mode and for CBF customers instructing in DCP mode in more detail. Cash settlement in non-t2s currencies for CBF customers acting in ICP mode Legend: Process flow Optional reporting Figure 30: Process flow for cash settlement in non-t2s currencies for CBF ICP mode T2S Functional Design at a Glance 65

66 Cash settlement in non-t2s currencies for CBF customers acting in DCP mode Figure 31: Process flow for cash settlement in non-t2s currencies for in DCP mode Cash settlement in Swiss Franc for Swiss CSC securities in CBF cross-border link with SIX SIS The current process for the cash settlement of Swiss Franc in relation to DvP transactions Swiss CSC securities in the cross-border link with the Swiss Central Depository SIX SIS requires both counterparties to have accounts with the Swiss National Bank. This process will continue with T2S because the Swiss market has decided to leave Swiss Franc on the Swiss National Bank and to offer only Euro settlement via T2S. Customer impact The below table provides an overview of the impact on cash settlement in non-t2s currencies in DCP and ICP mode. Impact cash settlement in non-t2s currencies DCP ICP CBF customers in ICP mode can submit a DvP instruction in CASCADE for DvP settlement in non-t2s eligible currencies CBF customers in DCP Mode need to submit a FoP instruction (sese.023 FREE ) with additional cash information (risk of mismatching) To avoid mismatching it is strongly recommended to ICPs and DCPs to agree specific details (e.g. cash information in additional fields like Common Reference ) within the instruction T2S Functional Design at a Glance 66

67 11. Value-added services offered by CBF Today, CBF offers a wide range of additional services to its customers in addition to the core settlement services described in previous chapters. CBF will continue to provide these value-added services following the implementation of T2S. Predominantly they will remain in the current CBF environment and will be available to ICP customers of CBF. With this approach CBF will continue to offer its customers a complete service for core settlement as well as for value-added services in a T2S world. The following chapters explain the following value-added services more in detail: CASCADE Registered Shares (RS) Custody services-corporate Action-and Income Events Vaults Services and New Issues services Global Financing Services-Collateral Management, GC Pooling, Securities Lending 11.1 CASCADE Registered Shares (RS) CBF will extend its CASCADE RS service enabling customers to settle RS securities on T2S. CASCADE RS includes a function for keeping positions of registered shares in CASCADE. It also includes an expanded settlement process to take into account the particular requirements regarding the reporting of the shareholders for registration in the share ledger, with electronic interfaces to the issuer and the share ledger manager. In the case of registered shares, the CBF customer s securities account positions are classified into the three types of positions. In addition to this, the positions are kept at the level of individual shareholders. The following paragraphs aim to explain the future lifecycle management and settlement processing model of RS securities. CASCADE s core functionalities for processing and settlement of registered shares, like the registration, will remain within CASCADE RS because T2S will not offer a registration functionality. The communication facilities will therefore be kept for CASCADE RS transactions (MT500 Instruction to register, MT519 Modification of Client Details). It will be possible to use unregistered positions for settlement in T2S. Registered securities will be flagged in T2S as registered shares. As it is today, registered, allocated and unregistered positions resulting from corporate actions will not be taken into consideration for provisioning and will need to be earmarked in T2S in order to prevent that they are used for settlement. T2S Functional Design at a Glance 67

68 Settlement of registered shares after the implementation of T2S Registered Shares (RS) positions are mirrored and earmarked in T2S. RS position types in CASCADE RS are mirrored in T2S with different earmarking types. CASCADE RS positions which are blocked for regular settlement of Stock Exchange- and OTC transactions are earmarked in T2S with a restriction type (RSHB or RSHE). Blocked positions are: Registered position (Hauptbestand) Allocated position (Zugewiesener Meldebestand) Allocated Corporate actions position (Zugewiesener Meldebestand Kapitalmaßnahmen) Unregistered CA position (Freier Meldebestand KE) Only an unregistered position (Freier Meldebestand (FMB)) can be used for settlement and remains without restriction in T2S bearing the earmarking AWAS (AvailableWithNoAdditonalStatus, unregistered position). It should be noted that for blocked positions no differentiation can be made in T2S between individual blocked position types. Therefore all additional functionality referring to registered shares for which identification of the shareholder is necessary remains on CASCADE RS. Typical RS functionalities like registrations, etc. will remain within CASCADE RS. The communication facilities will therefore be kept for CASCADE RS transactions (MT500 Instruction to register, MT519 Modification of Client Details). The following figure provides a summary of the future handling process for Registered Shares position types in T2S and CASCADE RS. Figure 32: Overview of future handling of the Registered Shares position types in T2S Internal account transfers are not relevant for T2S settlement and therefore are only processed within CASCADE RS and instructed in ICP mode. T2S Functional Design at a Glance 68

69 Registration of Registered Shares only offered via CASCADE RS for CBF customers in ICP mode Registration and re-registration of Registered Shares will only be offered to CBF customers in ICP mode via CASCADE online or MT500. CBF will earmark the respective positions in T2S prior to sending out requests to the registrar for registration/re-registration. Registrations are allocated three times a day (10:30, 13:30, 17:00). The same process applies to the registration of Unregistered Positions CA (FMB KE). Usage of Registered Shares instruction types Current CASCADE RS instruction types for registered shares include: Re-registration (Umschreibung) De-registration (Bestandsübertrag) Internal account transfer (Interner Depotübertrag) External account transfer (Externer Depotübertrag) Initial registration (Ersteintragung) These will all continue to be eligible post T2S. The below table provides an overview of RS instruction options for ICP and DCP connectivity mode. Partial settlement for these transactions is not possible, as is the same today. Figure 33: Overview of usage of Registered Shares instruction types The automatically generated re-registration (Automatischer Eintragungsservice) process will continue to be an internal CASCADE RS process because it does not impact the various positions. T2S Functional Design at a Glance 69

70 While best used in ICP mode, CBF will also offer specific CASCADE RS functionalities to DCPs. This will apply to instructions for de-registrations. With some limitation, it will be possible to move customer positions from position type RSHB in AWAS with a de-registration instruction Such instructions will be set on CSD Validation Hold in T2S until CBF release the respective RS-instructions. CBF will perform a check in CASCADE RS to confirm whether the positions are available in the instructed RS position type, for the respective shareholder or client reference. If the check is successful, the position will be reserved in CASCADE RS and the instruction will be released in T2S. Customer impact Most Registered Shares activities are available for CBF customers in ICP mode, only. Positions held under the individual customer references of CBF participants can only be seen within CASCADE RS (function KVBA-BB). Impact CASCADE Registered Shares (RS) DCP ICP Position and external account transfers can be instructed in DCP mode. Position transfers can be instructed via already matched sese.023. CASCADE RS Position Type, client reference and shareholder number need to be included in the instruction. For external account transfers beneficiary data of the shareholder needs to be delivered as well There will be no identification of individual RS position types within the T2S earmarked position Registered Shares activities (registration/re-registration)are not offered Necessity to process internal earmarking of RS positions based on confirmations from T2S related to new earmarked positions Earmarking of CASCADE RS positions will be initiated by CBF exclusively as Registered Shares processing is not foreseen via DCP functionality in T2S. However, DCPs need to process messages showing internal CASCADE RS positions types Registration/re-registration can only be instructed in ICP mode via CASCADE online or MT500. These instructions remain unchanged Instructions for position and external account transfers can still be sent via MT542 or online in CASCADE Communication via MT519 (Modification of Client Details) will remain The earmarking functionality will be included in the existing CBF messaging and reporting formats as well as in the online functionality. Fields and values are changed accordingly. New earmarking request message will be defined via MT542. The status feedback is sent via MT546 and 548. The MT535, MT536 and MT537 reporting will be up-dated. Change from one earmarked position into another can be done via MT54X (with Balance from/balance to attributes). Earmarking of registered shares positions will probably be initiated by CBF based on respective CASCADE RS instructions T2S Functional Design at a Glance 70

71 11.2 Custody Services: Corporate Action- and Income Events CBF aims to continuously enhance its corporate action and income event service offering independently to the specific T2S related modifications. Thereby most of the market standards for CA processing (resulting from Giovannini Group Barrier 3 recommendations) will be fulfilled in 2014 or together with the T2S implementation of CBF. More details can be found in the related CBF custody publications and CASCADE release notes. In general T2S will serve as a settlement platform and custody services will remain at the CSDs, nevertheless, there will be some impact from the T2S environmental conditions, such as: Modified timeline for the notification of CBF events Custody settlement and processing (securities only) Blocking of securities resulting from corporate action events Processing of Ex- and Opt-out flag Modified Market and reverse claims processing Custody payments in Euro, the currency eligible in T2S (for further details see chapter 9) Transformations replace modifications of CA relevant instructions The following paragraphs will explain these amendments in greater detail. T2S Functional Design at a Glance 71

72 Timeline for CBF event notifications today and in future The following figure compares the current and future timeline for custody events notifications. Figure 34: Overview of timeline for CBF custody event notification

73 The following figure shows the current and future processing and settlement of custody events (securities only). Figure 35: Overview of processing and settlement of custody events (securities only) T2S Functional Design at a Glance 73

74 For the distribution of securities resulting from a corporate action (CA) the same logic will apply as today that is securities will be distributed to the same sub-accounts where the underlying position is booked. Instructions will be generated and forwarded to CASCADE. These instructions will be transformed to a sese.023 with the ISO transaction code CORP and flagged already matched. Afterwards they will be submitted for settlement to T2S. Information on the underlying ISIN, the corporate action event, etc. will be added. MT566 confirmations will be sent once the instruction has settled. For position adjustments the old position will be debited and the new position credited. Both instructions will be linked so that they settle together. Pending instructions will be adjusted by the existing instruction being cancelled and a new instruction with new parameters being generated. In the new instruction the position type and specifics like the reference of the original instruction will be included. Corporate action instructions will usually be executed in sequence 1 of the first night-time cycle in T2S and the respective underlying ISIN will be blocked for settlement in this sequence. The two night-time cycles in T2S have various sequences. Therefore, such corporate action instructions could also settle in any of the subsequent sequences/cycle. It might be necessary for CBF to block the ISINs from settlement activity in T2S during the CA processing. Voluntary CA events are processed in line with mandatory ones. Instructions via MT565 and status advices within CBF and the reporting will remain unchanged. Related cash payments will be executed via TARGET2 P3 within DD1-3 processes, as they are today. In addition, the distribution of NCSC securities via Creation will remain unchanged. Blocking of securities resulting from Corporate Action processing There is no dedicated procedure during the night-time settlement of T2S to ensure that instructions related to corporate action event procedures are not used for settlement. Therefore securities with outstanding corporate action events need to be blocked for further processing in order to avoid unauthorised settlement. After all relevant corporate action instructions have been processed the respective securities will be automatically unblocked by CBF. The blocking of securities will apply for the below mentioned corporate action event types. Identifier/Code for CA Description TA22x Redemptions TA231 TA232 TA240 Redemptions in securities Reclassification, Conversion of Shares, Capital Decrease, Merger, Pari-Passu, Reverse Stock Split Series-/Group Split TA260 Intermediates to Lead Manager

75 Market and reverse claims Market claims will follow the same rules as today. CBF will process all market claims on CSC securities in line with the German domestic rules (CBF as Issuer CSD). For FCSC securities (CBF as Investor CSD) the respective domestic rules of the issuer CSD will apply (e.g. record date processing). Market claims are included in the netting mode of the day-time settlement for corporate action- and income events and herewith supports a better liquidity for customers (for further information see chapter 9.4, Future cash payments (Euro) for Corporate Action- and Income Events). Market claims will be executed on the same range of transactions as today, i.e. OTC, SE, CCP, for income- as well as for corporate action events. Market claims can also be executed on partially settled transactions. Today the compensation period is 25 days after the entitlement day. It is foreseen to reduce this period in November 2013 to 20 days. The timeline for the processing and payment/settlement of market claims will need to be adjusted to the new T2S settlement day. The criteria for the selection of transactions for the processing of market claims may also need to be adjusted due to new matching rules of the Ex flag (CCPN/XCPN) and the new Opt-out flag (please refer to the paragraph lifecycle management of instructions in chapter 7 and Processing of Ex and Opt-out flag later in this chapter for further details). CBF will also provide the option for customers to use the Opt-out flag NOMC (no market claim). If such a flag will be entered bilaterally, this will result in: no market claim regarding income- and non income distribution events no reverse claim regarding income- and non income distribution events only cancel instead of transformation (cancel/re instruct) regarding reorganisation events CBF customers will be credited and debited for cash compensations via TARGET2 ASI Procedure 3 within DD1-3 cash clearing cycles, as today. Market claims for cross CSD transactions will be booked by CBF against the RTGS accounts of the counterpart CSD. For securities transfers resulting from market claims CBF will instruct T2S via FoP sese.023 with the status already matched and with ISO transaction code CLAI (Claim or Compensation). This transaction code shall be reserved for CBF only. As today, CBF will send instructions as blocked if required by the respective customer who will subsequently need to release these instructions. In T2S this feature will remain and releases can be done in ICP and DCP mode. In order to achieve this, modifications to these instructions will be allowed, enabling customers to cancel these instructions if required. Besides amendments to the timeline, there will be no further changes to CBF s existing Market & Reverse Claims service. Currently CBF investigates whether the intra-day custody processing will need to be adapted to enable processing in near-time or at particular times. The table below shows a comparison between the current and the future processing of market and reverse claims. T2S Functional Design at a Glance 75

76 Topic Current CBF processing Future processing with T2S Generation of Market & Reverse Claims for Cash Generation of Market & Reverse Claims for Securities Cash settlement of Market & Reverse Claims Securities settlement of Market & Reverse Claims Subject to Market Claim Market Claim period Instruction blocking with release functionality End of RTS before STD STD, RT-STD, SDS1, SDS2 and RTS DvP DD1, DD2, DD3 STD, RT-STD and Continuous Settlement Settled OTC, SE, CCP, CMS transactions (depends on cash or share compensation) 25 business days after the entitlement date Yes End of T2S RTS before T2S NTS Cyclic during new T2S RTS DD1, DD2, DD3 T2S NTS, new T2S RTS Settled OTC, Stock Exchange, CCP, Collateral Management System, transactions and depends on cash or share compensation 20 business days after the entitlement date. The modification of the compensation period is foreseen prior to the migration to T2S. Currently it is foreseen to be implemented in 2013 Yes Processing of Ex and Opt-Out-flag Currently instructions can be marked for ex dividend processing (Special Ex Dividend ( SPEX )). The ex dividend processing applies when both counterparties provide the ex-flag indicator in their settlement instructions. However, this flag is not a matching criteria. Customers can also subscribe to the Ex-Flag reporting. In future T2S will use additional matching fields for the processing of Ex- and Opt-out flags. Also refer to chapter 8.4, paragraph Lifecycle management of instructions. Additional matching fields cannot match against blanks. Therefore once an additional matching field is completed by one counterparty, the other counterparty will also have to provide the flag to achieve matching. In line with the consultation of the German Market CBF will provide a solution for the implementation of the Opt-out flag following the migration to T2S. CBF s current Ex-Flag reporting will be decommissioned based on the T2S implementation timeline. The following modification of instruction details is requested: T2S Functional Design at a Glance 76

77 Transformations replace modifications of Corporate Action relevant instructions Currently, it is possible for corporate action related transactions to be modified. With the CBF migration to T2S this will not be possible anymore. Instead CBF will use transformations of pending transactions in case of reorganization events. Then the general rule will apply that open-ordertransformations occur for events TA232 (e.g. reclassification, conversion of shares), where the following criteria do not apply: Old ISIN = new ISIN AND Currency of the exchange ratio numerator = denominator numerator of the exchange ratio smaller than the denominator of the exchange ratio Please also note that a 20 business days transformation period will be implemented. Customer impact The impact on customers is reduced because all corporate action instructions will be instructed by CBF. Customers may need to adjust some internal processes to comply with the new formats and content of corporate action confirmations. Impact custody services (Corporate Action- and Income Events) DCP ICP Regarding market claims customers need to be able to actively support ex as well as Opt-out flag The current CBF Ex Flag reporting will be decommissioned based on the T2S implementation timeline. Modification of instruction details is requested for CBF customers in DCP and ICP mode. For example CBF will replace the current indicator SPEX by XCPN (Ex Coupon) which is used by T2S. It is intended to re-use the existing Ex-Flag procedures except for changes concerning the matching relevancy, e.g. new additional T2S matching fields The blocking of securities resulting from CA events might lead to minor settlement delays of instructions in the respective ISINs T2S Functional Design at a Glance 77

78 11.3 Vaults Services CBF will continue to offer a variety of vaults services. And its top rated services for issuance will be ported to T2S as well. In general the CBF Vaults accounts for securities settlement in T2S will be mapped to T2S issuance accounts in order to reflect the holdings of CBF participants. Other CBF Vaults accounts will remain internal to CBF. The mapping of the accounts will be based on the different safekeeping types. Figure 36: Overview of Vaults Services following the implementation of T2S Instructions types Deposits (AA 3 16) and Withdrawals (AA18) are FoP instructions which will be available to customers in ICP mode only. However, the Straight-Through Processing (STP) will not be impacted. Mark up and mark down instructions will continue to be offered to CBF customers acting in ICP mode only. The processing scheduled for mark up instructions concerning the Auto-Dispo service will be slightly different from today in order to align with the T2S settlement day. The service level of the end of day as part of the mark down Auto-Dispo functionality will remain unchanged. Customer impact The following table provides an overview of the customer impact regarding CBF s vaults services. Impact vaults services DCP ICP The identification of new vault accounts needs to be supported Deposits (AA16) and withdrawals (AA18) are not supported New vaults accounts parties in instructions and reporting need to be identified The optional mark up/mark down and Auto-Dispo functionality will be aligned with the T2S settlement day and can settle on these accounts after the sweep out 3 AA = Auftragsart (Instruction type) T2S Functional Design at a Glance 78

79 11.4 New Issues Services To minimise the impact on customers, CBF will adapt its New Issues procedures without impacting the agent banks. CBF intends to continue to provide the existing service level for the new issues process and the Electronic Documentation Transmission (EDT) service towards its customer. As today, CBF will remain responsible for the static data of all CSC securities for which CBF is the Issuer CSD (please see also chapter 8.3, Eligible securities). The figure below includes an overview of the proposed solution for the securities admission procedure in relation to T2S. Please note that this proposal is still conceptual and is pending validation. Figure 37: Overview of New Issues Services following the T2S implementation The deadline for the receipt of Global Notes & other documents as well for securities issued via a non-edt procedure will remain unchanged. (Issue-Date -1: 13:00 CET). There will be no impact to customers regarding CBF s New Issues services. T2S Functional Design at a Glance 79

80 11.5 Global Securities Financing Services (GSF Services) All Clearstream Global Financing Services will continue to be offered after the implementation of T2S. The existing Collateral Management Service as well as the GC Pooling and Securities Lending services will be enhanced with the migration and CBF customers will be able to benefit from the increased liquidity pool. Collateral Management Service (CMS) The CMS of CBF will be migrated to T2S in the way that settlement is affected by T2S for the related transactions resulting from: Pledges to Deutsche Bundesbank Eurex Clearing margining Bilateral contracts GC Pooling The CMS functionality itself will not be affected and customers will continue to interact with CBF interfaces only. The Clearstream GUI as well as the existing Collateral Management related ISO messages will continue to be supported by CBF. The CMS specific sub-accounts (550 and 551) will be mirrored in T2S. For each CMS customer a respective securities account (SAC) will be opened in T2S, but position and allocation changes within the CMS will not be reflected in T2S, as they will all refer to positions within the Collateral Management Pool, 550 sub-account/sac. Transfers between different 550 sub-accounts (e.g. bilateral transfer, GC Pooling transfer) can be instructed via the CMS interfaces, forwarded to and settled at T2S. Transfers from and to the 550 sub-accounts can be instructed either via online or via MT542 with COLI / COLO flag and will be forwarded directly to the CMS. Prior to CBF s migration to T2S, Clearstream itends to integrate and upgrade its two Collateral Management systems - CMAX (Clearstream Banking Luxembourg) and XEMAC (Clearstream Banking Frankfurt). Possible service extensions such as the potential setup of a cross-border extension of GC Pooling services into other T2S markets or a potential relation of GC Pooling functionality with T2S Auto-Collateralisation in the context of T2S are being analysed. GC Pooling (GCP) Service The general processing for GCP trades in CSC securities regarding their lifecycle management and settlement will remain unchanged with the T2S and therefore necessary customer efforts will be kept to a minimum. Depending on collateral availability and trade currency, different settlement locations will be used: Collateral available a) on T2S securities accounts will settle on T2S b) in CBL (ICSD) will settle in Creation The cash leg of GC trades in a) Euro will settle via T2 Cash b) non-t2s currencies will settle in Creation No impact on timing is expected for the GCP service because cash settlement will take place in T2, as it is today. T2S Functional Design at a Glance 80

81 The handling of settlement for GCP trades in non-euro currencies will be processed according to the settlement process for Euro trades except that the countervalue in non-euro currencies will be settled on the Creation platform. Collateral transfers will be instructed and settled in T2S. The processing and settlement of GCP trades for NCSC securities will not be affected by the migration to T2S and will therefore remain unchanged. Bank A Bank B Collateral Management Creation Figure 38: Overview of the process flow for the GC Pooling Service T2S Functional Design at a Glance 81

82 Securities Lending Services (LMS services) To fully support customers CBF will migrate and enhance the current CASCADE based LMS services to support settlement in T2S: Automated Securities Lending Services (ASL) Strategic Securities Lending Services (SSL) KAGplus Lending Services, i.e. Strategic Securities Lending Service for Investment Trust Companies Figure 39: Overview of the process flow for LMS services The LMS related sub-accounts will be represented by SACs in T2S. Lenders in the ASL programme will still have the option to segregate securities which are eligible for securities lending on dedicated sub-accounts (here 510 lending pool accounts). Alternatively, lenders will have an option to define a virtual lending pool sourced from the main account and managed internally in the LMS system. As an enhancement to the ASL programme, the borrowing requirements and loan closings will be determined at multiple times throughout the day regardless of the initial opening. Intraday lending pool updates will be supported. Multiple lending pool and collateral allocations will be executed during the day. Lending services for pending FoP transactions will also be supported. As today, collateral requirements will be calculated by LMS and collateral transfers will be triggered either for: the x680 xxx CBF pledge accounts via a direct pledge mechanism or as cash collateral via T2 P2 to CBF s T2 account or via CMS or other collateral management systems T2S Functional Design at a Glance 82

83 Loan opening and closings will be instructed as FoP via sese.023 by CBF with ISO transaction code SECL (Securities Lending Operation)/ SECB (Securities Borrowing Operation). These codes are reserved for LMS only. Instructions are not sent as already matched. Partial settlement is not supported because LMS identifies loan returns itself and instructs accordingly. CBF customers are not allowed to cancel instructions directly. The priority is set to normal, that is 4. Instructions which are not settled will need to be cancelled by CBF at the latest by the end of the day (potentially more often) as they become obsolete once new borrowing requirements are determined. Collateral transfers are to be instructed in the same way as today with the same indicators, but with ISO transaction codes COLI (Collateral In) / COLO (Collateral Out). CBF customers in DCP mode can instruct transfers into and out of the lending pool via MT510, via sese.023, including transaction code TRAD without special parameters. For CBF customers in ICP mode there will no changes to the current procedure. For all settlement activities LMS will communicate with CASCADE. CASCADE will provide information on borrowing demand, lending pool and positions to LMS. LMS will send instructions to CASCADE for any opening and closing of instructions as well as for collateral transfer. These instructions will be transformed and forwarded them to T2S. CBF customers in DCP mode will need access to receive information regarding their CBF pledge account x680 nnn within T2S and this can be done via PoA. Customer impact The below table summarizes the impact on customers regarding the GSF services. Impact GSF services DCP ICP The CBF Collateral Management account structure will be transferred into T2S. SACs need to be set up as CSD participant accounts in T2S for LMS lending related subaccounts The interaction with the CMS will be via CBF as today. The CMS requires only minor adaptation on customer side. Potential impact of T2S settlement day on Collateral Management schedules and timing is under analysis Customers using the CMS are not impacted by T2S with respect to CMS functionality, only with respect to location, timing and deriving functionality of instruction settlement. The CBF sub-accounts 550 cannot be instructed in DCP mode. The impact on the CMS side is minimised for interaction with CMS. However, all security transfers can only be used in ICP mode via online or via MT542 ( COLI / COLO ) Customers will need to adjust their internal processes depending on the chosen option for settlement of GC trades in Euro For ICPs there will be no changes to reporting DCPs need to reconcile their reports from T2S, T2 and CBF Automated securities lending/fails lending needs to be adjusted to the new T2S settlement day. Customers need to adjust their internal processes to new timing and eventually to new calculation criteria for transactions considered for automated borrowing Strategic lending (including KAGplus) can only be instructed by CBF customers in ICP mode via MT540/MT542 with transaction codes SECL / SECB. The LMS trade reference shall be provided to DCPs within the respective instructions T2S Functional Design at a Glance 83

84 12. Appendix 12.1 ISO message formats for CBF customers in ICP mode The following table includes an overview of the T2S enhancements and their impact on the ISO message type formats currently provided by CBF to its customers. T2S Functional Design at a Glance 84

85 CBF customers can subscribe to real-time feedback for all settlement messages from CBF via the SWIFT and MQ-series interfaces. CBF will send real-time feedback during the day and in addition CBF will provide the settlement status after each sequence of the T2S batch. Also real-time settlement feedback several reports will be provided by CBF. MT536, MT537 and MT586 can be delivered at several times during the day. Currently an hourly schedule is foreseen. The time for delivery of statements for batches during the T2S NTP will depend on the duration of the sequences within the batches. Complete (full) and delta reporting will remain as today. The MT535 can be provided: daily at the end of day mid and end of each month quarterly yearly During weekends and when T2S is closed, T2S cannot send or receive messages (please see also the T2S holiday calendar within the Appendix). CBF can store messages received from customer and forward them when T2S opens again ISO MX mapping to ISO MT The following table provides an extract of T2S MX messages and their allocation to the CBF message types. T2S Functional Design at a Glance 85