We’ve just returned from three European road shows with Clearstream discussing T2S, collateral and liquidity. These were extremely interesting – our synopsis and lessons learned are below. The meeting participants were split between market experts and front office practitioners who really weren’t yet sure what T2S was and how it would impact them. T2S will be another very important input to collateral strategy going forward.
Here are our takeaways from the week’s worth of meetings:
- T2S collateral and liquidity strategy is a much newer topic than settlement. While most of the audience had heard of T2S and the settlement impact, only perhaps 20% had thought much about collateral. Our panelists in each country reported that about 25% of their clients and colleagues had started to work on what T2S meant for internal collateral and liquidity strategy.
- Service providers gaining the most traction on T2S client acquisition were working collaboratively with clients to determine the cost/benefit impact of T2S on collateral and liquidity. This is a very specific and individual analysis for each institution. Sometimes clients were willing to share data and have the service provider conduct the entire analysis. Other times the client was doing the entire piece of work and asking the service provider for defined inputs. In the end however, this collaborative approach meant that the client and service provider had a good understanding of each other.
- The cost of T2S is expected to be EUR 1 billion. It is unlikely that financial intermediaries are going to recoup this cost in the near future. Collateral and liquidity savings are the primary means by which costs can be recaptured. If firms do not consider collateral and liquidity actively then they will see only the expense side of T2S.
- We estimate that firms with internal liquidity or Collateral Transfer Pricing costs of 40 bps or greater, and with a trading book of any size, can generate actual cost savings from a smart T2S strategy.
- There are many ways to actually access the T2S platform and acquire securities services. There is no one-size-fits-all model. As a result, an individual approach will be necessary for each client firm to figure out their best path.
- T2S is an opportunity for financial intermediaries, not a regulation. As a result, attention may be paid first to regulation that impacts collateral. T2S may provide a genuine option to mitigate some of the negative impacts of regulation.
- Agent banks and CSDs are working to move up the value chain in the services they offer. At what point is there a ceiling, or do service opportunities continue to expand? We don’t have an answer at this point.
- There are also questions about whether commercial bank or central bank money is the best option for market participants.
Our thanks to Clearstream for hosting these events and to Clearstream and bank participants in each location for speaking on the panels in each location. We look forward to continuing our work on T2S, collateral and liquidity – its a topic that’s going to be with us for a while.