What is TARGET2-Securities (T2S)?
Having developed the technical infrastructure and put in place the appropriate regulatory framework, the Eurosystem launched TARGET2-Securities (T2S), a single platform that enables investors to settle securities transactions in central bank money[1] simultaneously[2], at the same cost and following the same procedures, regardless of the investor's country of origin. Individual national financial marketplaces migrated to T2S in waves over the space of two years, between June 2015 and September 2017, when the platform became fully functional.
T2S has revolutionized securities settlement in Europe by bringing to an end the complex cross-border settlement procedures and problems caused by different settlement practices among countries. As well as removing technical barriers, the launch of T2S has also made it possible to remove a number of the operational practices that the market itself had been unable to overcome and that were hindering the full integration of securities settlement services in Europe[3]. T2S therefore has made it possible to settle financial assets under the same conditions safely and efficiently across the euro area.;
How does T2S work?
When an investor buys stocks, bonds and government securities, they are credited to the securities account they hold with a central securities depository (CSD)[4] connected to T2S. Simultaneously, the investor is debited from the dedicated euro cash account held by the investor's bank with its respective national central bank, which is in turn connected to the platform (hence the definition of the model as integrated). When securities are sold, the reverse process occurs.
Each transaction in T2S is settled individually (without netting) with a procedure that is quick, low-risk and efficient. T2S also provides a set of sophisticated technical features, including settlement optimization, harmonization and auto-collateralization mechanisms, with net benefits in terms of cost saving and liquidity management.
Why T2S? There are five main objectives:
- to make it easier for investors to buy securities in other euro-area countries;
- to reduce the cost of cross-border securities settlement;
- to increase market competition and efficiency by harmonizing the technical and operational practices connected with post-trade services;
- to reduce the need for liquidity by settling securities transactions made on European markets using a single settlement account held with a national central bank;
- to reduce settlement risk and increase financial stability by using central bank money for transactions settled on the platform.
Participation in T2S by central depositories is voluntary and governed by the Framework Agreement, which is the contract setting out the mutual rights and obligations that hold between the Eurosystem and participating CSDs. Currently, 21 CSDs in 20 European countries use T2S.
By participating in T2S, CSDs entrust the Eurosystem with the technical management of the functions relating to securities settlement, although they remain legally responsible and continue to provide basic services such as issuance and custody services, as well as corporate event management. Participating CSDs also continue to provide value-added services that they decide upon autonomously, such as tax services, securities lending and triparty collateral management.
The development and operation of T2S was assigned to the central banks of France, Germany, Italy and Spain (4CBs), operating under a Level2/Level3 Agreement[5] with the Eurosystem, which sets out their reciprocal rights and obligations and the expected service levels.
Just as it does for T2, Banca d'Italia handles the operational management of T2S jointly with Deutsche Bundesbank; they monitor compliance with the expected service levels, and are the point of contact for all participating national central banks and CSDs. The two central banks maintain and develop the system and also manage all the administrative, legal and security aspects. They are also in charge of the IT infrastructures on which the system runs and of those necessary for its upgrade.
Finally, Banca d'Italia is the sole point of contact for Italian financial intermediaries on technical and administrative matters. It monitors the transactions carried out and intervenes in the event of malfunctions affecting the system or individual participants.
Connecting to T2S
In order to allow depositories and large custodian banks (which hold and manage securities for smaller banks) to connect and communicate with T2S, the adopted technical solution is a single point of access (Eurosystem Single Market Infrastructure Gateway, ESMIG) for all TARGET services (T2, T2S and TIPS). Participants can choose from several connectivity options and from two Network Service Providers: NEXI-Colt and SWIFT.
T2S is a multi-currency platform
T2S has been designed to operate as a multi-currency platform. In fact, central banks outside the euro area can access the platform by signing the Currency Participation Agreement (CPA) with the Eurosystem in order to settle the cash leg of securities transactions denominated in their respective national currencies. Danmarks Nationalbank, the central bank of Denmark, was the first to sign the CPA, making transaction settlements in Danish kroner available on T2S in October 2018.
[1] Securities transactions are settled in 'central bank money' when the cash leg is settled in accounts held by counterparties with their respective central banks.
[2] This settlement mechanism, called delivery-versus-payment (DVP), ensures that the security is only transferred if the corresponding payment occurs.
[3] Removing the barriers to the free flow of capital favours the creation of the Capital Markets Union (CMU), promoted by the European Commission to extend the diversification and expansion of investment sources, help to simplify access to credit for firms and make the financial system more stable and resilient to future banking crises, to the benefit of credit institutions, investors and EU citizens.
[4] A central securities depository (CSD) is a legal entity that holds securities accounts in the name and on behalf of their customers (mostly financial institutions); offers settlement and custody services for financial instruments; registers new securities issuances in their accounting books. Monte Titoli SpA is the central securities depository for Italy.
[5] The agreement's name derives from that fact that it regulates the relationship between two levels of governance, namely the Eurosystem (Level 2) and the 4CBs (Level 3).
Contacts
Markets and Payment Systems Directorate General
Payment Systems Directorate
Wholesale Payment Systems Division
Via Pastrengo 14 - 00185 Rome
Tel: +39 06 4792 5700
e-mail: target.services@bancaditalia.it
Markets and Payment Systems Directorate General
Payment Systems Directorate
Eurosystem Market Infrastructures Division
Largo Guido Carli, 1 - 00044 Frascati
Tel: +39 06 4792 6000
e-mail: SSP-SERVICEDESK-IT@bancaditalia.it
