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Reserve Bank of IndiaPune, 30 September – 1 October 2013

Payment and settlement systems - changing dynamics

T2S Programme OfficeEuropean Central Bank

Table of Contents

Global trends in the field of market infrastructure3

Use of global standard for local systems2

European context and challenges1

Payment and settlement systems – changing global dynamics

2

EU: a single market

An area without internal frontierswhere

goodspersonsservicescapital

•can circulate freely.

SEPA for retail and card payments

Cashless payments in euro in the EU (EEA) should become as easy, efficient and reliable as domestic payments

“One account, one card, one terminal”

EU Fragmented InfrastructureIn securities and large value payment market infrastructure

Target2

NasdaqOMX

Nordic

MTFs e.g. Chji-x/Turquoise

LU S.E.EuronextPT, BE,FR, NL

NYSEMTFse.g.

BATSNasdaq

EUROPE UNITED STATES

SixGroup

EMCF

VP CSDx

Euro-CCP

LCH Clearnet SALCH

ClearnetLtd.

Six-xClear

InterBolsa

Euroclear

SIS

SNB

BE FI FR NL SEUK&IE

......NCBx...

Clearing

SecuritiesSettlement &

Assetservicing

Trading

CashSettlement

BMEGroup

Iberclear

DeutscheBórse

EurexClearing

ClearstreamBankingFrankfurt

ClearstreamBankingLuxemb.

LondonStock

Exchange

BorsaItaliana

Cassa DiComp

MonteTitoli

NSCC FICC

FED

DTCC

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EU Fragmented InfrastructureSecurities Market Infrastructure in numbers

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trading reporting clearing settling

65 regulated markets 1 trade repository 9 CCPs 25 CSDs

58 multilateral trading facilities

3 systemic internalisers

EU market infrastructure challenges

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The integration of European market infrastructure is a political priority for EU governments

Major efforts are being made to facilitate integration, through harmonisation and interoperability

Usage of global standards is a must

Three actions possible for ECB/Eurosystem: regulations, catalyst for change, operator of market infrastructure

Table of Contents

Global trends in the field of market infrastructure3

Use of global standard for local systems2

European context and challenges1

Payment and settlement systems – changing global dynamics

8

Use of global standardsProviding an integrated market infrastructure

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A common platform for payments large value: TARGET2

A common securities market infrastructure: T2S

Standardising retail payments for creating a single euro payment area (SEPA)

ISO 20022a commonelement

For EU…

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2013

2014 2015 2016 2017 2018

1st user consultation

2nd user consultation and provision of GFS

Go-live

Use of global standardsTARGET2 migration to ISO 20022

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There were a number of initiatives in Europe related to ISO 20022 already before TARGET2 approved its migration strategy:

SEPA: the Single Euro Payments Area has replaced domestic retail credit transfers and direct debits with standardised European payments by using ISO 20022 messages

T2S: as announced by the T2S program, ISO 20022 messages will be used from the outset (new messages had to be developed for T2S, as no international standards previously existed)

EU: in the securities industry the EU is driven by the Giovannini Protocol, aiming at eliminating barriers that hamper efficient cross border activities in Europe (harmonising different standards and communication protocols is one way to achieve it)

Use of global standardsMaximising the reuse of investments for market participants

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ISO 20022 Registration

Management Group

ISO 20022 Registration

Authority

ISO 20022 Standards Evaluation

Groups

Securities

Payments

Trade services

Forex

Cards

TARGET2

T2S

CLS

SWIFT

Euroclear

other

ISO 20022 users

ISO 20022 Financial

Repository

Data Dictionar

y

Business Process Catalogu

e

ISO standard 20022: UNIFY

Business models

Candidate ISO 20022

messages

Universal financial industry message scheme

Use of global standardT2S: a business case

One integrated settlement process (domestic and cross-border)

CSD

CSD

CSD

NCB

Market ParticipantM

ark

et

Part

icip

an

t

Market Participant

Marke

t Particip

an

tC

ust

od

ian

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Scope of T2SPurpose of T2S

A Service offered to CSDs for Settlement only

Notary Function

Custody/ asset-

servicing Function

Banking Function

SettlementFunction

Registration of issuer indebtedness and investor holdings

e.g. coupon payments,

redemptions, stock splits

Change of ownership among

investors

e.g. lending and borrowing only in

some (I)CSDs

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Advantages of T2S for Europe

Making Europe a better place to trade and invest

Purpose of T2S

A single pool of securities

To harmonise fragmented

and inefficient financial markets

To enhance competition in

settlement services

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Account Structure in T2SFunctioning of T2S

Technical platform of all securities and cash accounts to settle all securities transactions in

central bank money

TARGET2

CENTRAL BANK MONEY

VALIDATION and MATCHING

SECURITIES

OPTIMISATION

of

SETTLEMENT

SETTLEMENT

and

REALIGNMENT

CENTRAL BANK MONEY

CSD A

CSD B

CSD C

NCB A

NCB BNCB B ACCOUNTS

NCB A ACCOUNTS

NCB C

CENTRAL BANK MONEY

NCB A ACCOUNTS

Other RTGS

TARGET2VALIDATION and MATCHING

SECURITIES

OPTIMISATION

of

SETTLEMENT

SETTLEMENT

and

REALIGNMENT

CENTRAL BANK MONEYSECURITIES

OPTIMISATION

of

SETTLEMENT

SETTLEMENT

and

REALIGNMENT

SECURITIES

OPTIMISATIONof

SETTLEMENT

SETTLEMENT

and

REALIGNMENT

CENTRAL BANK MONEY

CENTRAL BANK

MONEY

NCB B ACCOUNTS

NCB A ACCOUNTSCSD A

CSD B

CSD C

CSD A

CSD B

CSD C

CSD A ACCOUNTS

CSD C ACCOUNTS

CSD B ACCOUNTS

NCB A

NCB B

NCB A

NCB B ACCOUNTS

NCB A ACCOUNTS

CENTRAL BANK MONEY

NCB A ACCOUNTS

Other RTGS

NCB C ACCOUNTS NCB C ACCOUNTS

Other RTGS

CENTRAL BANK

MONEY

CENTRAL BANK

MONEY

CSD A

CSD B

CSD C

CSD A

CSD B

CSD C

NCB A

NCB B

NCB C

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Optimisation FeaturesFunctioning of T2S

NotaryFunction

Technical netting

Partial settlement

Additional optimisationalgorithms

Autocoll-ateralisation

Reduction of the need for cash and

securities on transactions to

minimize the use of resources

Splitting of transactions in the

case of limited availability of

resources

Creation of extra liquidity for

settlement via collateral on flow

and stock

Consideration of all transactions with equivalent ISINs to identify

chains of transactions, empty circles,

etc.

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User ConnectivityFunctioning of T2S

Two T2S network providers to maintain competition: - Eurosystem

licensing procedures led to selection of SIA/Colt and SWIFT as the two value-added network providers

Additionally, internet access in U2A mode is also planned

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Status quo of T2S

The T2S Programme Plan

Development of software for core functions is complete

Focus is now on testing

StartMon 17/07/06

FinishTue

31/07/17

SP17SP13

SP6SP5

SP4SP3SP2SP1

T2S Go-Live

Migration Phase (SP14 - 16)User Testing Phase (SP7-12)

EATDevelopment & Testing PhaseSpecification Phase

Preparation Phase2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

We are here

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T2S Community

23 CSDs have confirmed their participation, representing nearly 100% of settlement volume in euro

T2S remains an open system: other CSDs can still join, but will have to pay an entry fee

So far only the euro and DKK (as of 2018) will be settled in T2S, but other currencies may join later

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ECB Governing

Council

T2SBoard

Governors’ Forum

Non-euro Currencies Steering Group

(NECSG)

CSD Steering Group (CSG)

National UserGroup (NUG)

Non-euro central banks’

governors / boards

Project Managers

Group (PMG)

Operations Managers

Group (OMG)

Change Review Group

(CRG)

ECB

ReportingEscalationCRG reporting to CSGTechnical Groups reporting to T2S Board

Advisory Group (AG)

T2S governance since 1 July 2012Status-quo of T2S

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Financial Equilibrium in T2S

Tariff Structure

Investment cost

Running costs

Prices

PLUS TIMES

Volume estimates

Status-quo of T2S

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CSDR

Three streams shaping the new European securities settlement landscape

Market integrationA new securities settlement landscape

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T2S

DVP will no longer be a bilateral relationship between one CSD and

one NCB.Any CSD in T2S is

potentially in a DVP relationship with any

NCB in T2S

Harmonisation

Same market practice all over Europe: national boundaries will be broken down

The new framework will lead to increased competition

CSDs regulation

Same safety and efficiency rules all

over Europe

Competition

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A new securities settlement landscape

Benefits for CSDs

A technologically advanced, state-of-the-art, and robust settlement engine

Economies of scale by pooling together settlement volumes across Europe

New business opportunities through access to new markets

Long-term savings from efficient re-shaping to T2S

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Benefits for Users

Same processing and reduced settlement fees for domestic and cross-border transactions

Possibility to access all securities from one account in one CSD

Potential to optimise collateral and liquidity requirements

Reduced back-office costs by centralising settlement and thus streamlining interfaces

New business opportunities through access to new markets

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Higher level of competition in post-trade industry

A Single Market for financial services in Europe through harmonised clearing and settlement

Reduced settlement risks on cross-border transactions to positively affect financial stability

Investors can more easily diversify their portfolios

Issuers can more easily reach European investors

Reduced costs of capital for firms lead to economic growth

Benefits for Markets

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Use of global standardsAcross products…

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Making Euro area market infrastructure more accessible for all

Preparing for answering the globalisation challenges?

For outside EU…

ISO 20022a commonElement?

Table of Contents

Global trends in the field of market infrastructure3

Use of global standard for local systems2

European context and challenges1

Payment and settlement systems – changing global dynamics

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Global trends in the field of market infrastructureNew challenges

New challenges

• Managing globalising markets• High volume of information from multiple sources• Reporting for multiple purposes to multiple parties

Only one source of information the transactionsand assets of financial institutions

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Global trends in the field of market infrastructureNew challenges

Reusing existing investments

• Optimising existing information and systems• Increasing transparency for internal reporting• Increasing meaningful access to information for competent authorities

ISO 20022 amongst other standards can help

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Global trends in the field of market infrastructureCapitalising on investments made

ISO 20022 for payments

Communications between the

ordering customer and its

bank, etc.

Interbank transfers via correspondent banking or ACHs,

high value payments, low

value bulk payments, RTGS,

etc.

Account opening, standing orders, transaction and

account information,

advices & statements from …

Payment initiation

Clearing & settlement

...the account servicing

institutions to account owners,

including reporting from the financial

institution…

…to the ordering & beneficiary customers,

reconciliation, exceptions & investigations

handling.

Cash Management between various actors:

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Global trends in the field of market infrastructure

Account opening,

standing orders, transaction and

account information,

advices & statements, queries &

investigations

Income, corporate

actions, market data, proxy

voting

Collateral, repos, securities lending &

borrowing

CustodyCollateral management

Trade Initiation, pre-trade

Trade, post-trade

Clearing & settlementSecurities

Issuance

Capitalising on investments made

ISO 20022 for securities

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Global trends in the field of market infrastructure

Clearing and Settlement, including

netting and related

reporting

Post-trade:confirmation,

matching, assignment,

novation, etc.

Notification of trades to

third parties

Pre-trade: IOI,

quotes, etc.

Trigger events, option

exercises

Trade: order,

execution, allocation, affirmation,

etc.

Capitalising on investments made

ISO 20022 for forex

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Trade facilitators: chambers of commerce,

insurance co, freight forwarders, carriers, customs,

factoring co

Associations providing rules and

master agreements

(eg IFSA, ICC)

Private and corporate customers (treasurers)

Application providers

Financial Institutions

Risk management

entities

Global trends in the field of market infrastructureCapitalising on investments made

ISO 20022 for trade services

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POI messages for payments, administrative

and device related services

Similar messages transacted on

internet or from mobiles or other personal devices

Transactions between

acquirers and card issuers

ATM processes such as

authorization, processing,

ATM management and inventory

Transactions between merchants and acquirers, and cardholders and issuers that

support authorization, clearing, reversal, chargeback, dispute

processing, etc.

Global trends in the field of market infrastructureCapitalising on investments made

ISO 20022 for card and retail payments

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Global trends in the field of market infrastructureOther standards

Other global initiatives are popping up

• LEI - an ambitious project coming to reality• ISIN already a reality in most markets• … mapping all needs ?

ISO is providing technical committee and working groups

Thank you for your attentionwww.t2s.eu

@T2SECB

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T2S on the web: www.t2s.eu

- Publication of all relevant information and key documents

- Access to documents of all T2S working groups

- “Spotlight” on latest information on the project

- Information on project plan, governance, pricing, harmonisation

- Ad hoc sections dedicated to all the T2S community (CSDs, banks, NCBs, others)

- Publication of newsletter “T2S OnLine”

More information on T2Swww.t2s.eu

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