T2S in the securities chain
The developments on the world's stock exchanges receive ample media coverage on a daily basis. However, the trade in securities in itself does not lead to the buyer receiving securities or the seller receiving the proceeds: these transactions must be settled first.
Various parties play a role in this settlement process. All transactions concluded on a trade platform are passed on to a Central Counterparty (CCP). The CCP records the transactions and acts as an intermediary between the buyer and the seller, taking over the obligations of both. At the end of a trading day, the CCP nets all the transactions the buyers and sellers have carried out, creating a single receipt for each security for the buyer and a single delivery for each fund for the seller. Next, the CCP sends the settlement instructions for the transaction to the Central Securities Depository (CSD).
Most CSDs settle securities transactions against a 'central bank money' account held with the central banks, by which these also become involved in the settlement process. T2S brings together the securities held with the CSDs and the central bank money on a single technological platform. The advantage of such an integrated system is that it enables the simultaneous exchange of moneys and securities, creating a "true" receipt or delivery versus payment.
T2S improves financial stability
Most European countries have their own infrastructure for securities settlement, which means that the European infrastructure for securities settlement is highly fragmented. The main reason for developing the T2S platform is to achieve harmonisation and integration of this infrastructure at the European level. The new platform with its integrated model will improve the overall efficiency of the settlement process, as it enables all transactions – both domestic and cross-border – to be settled on a single platform. This will contribute to the efficiency of cross-border settlements in particular, leading to lower costs.
In addition, the need for collateral and liquidity will decline for both buyers and sellers, because it allows them to place their securities portfolios with fewer CSDs. One of the other benefits of T2S is that securities in a participant's securities account and securities purchased can be used as collateral for free intraday liquidity, provided by the central bank.
Issuers will have access to a larger, more liquid market. Thanks to recently introduced European legislation, they now have the right to have their securities recorded in any CSD established in any Member State. T2S could also boost competition between settlement services providers, leading to better and/or cheaper services for their customers.
T2S can only succeed if many CSDs join the platform
Currently, 24 CSDs have indicated they will join the T2S platform (Figure 1).