Collateral and liquidity management under TARGET2-Securities (T2S) is an emerging work stream that requires attention from market participants. Settlement mechanisms under T2S are now generally understood, including how settlement will be managed through Central Securities Depositories and the need for a Central Bank dedicated cash account. Consolidating accounts across participating European markets will produce immediate savings.
However, much less emphasis has been paid to the cost of collateral and liquidity for going direct or using an Agent Bank, how much can actually be netted in any individual firmʼs trading book, and what changing collateral requirements for other products will mean in the short-term and mid-term. There is much to consider in this mix: along with internal costs of capital, collateral and liquidity, firms must consider methodologies for Collateral Transfer Pricing and their strategies for asset servicing across markets.
T2S is the European Central Bankʼs program for central settlement of securities across Europe. This is an important step in the consolidation of European financial markets. The project takes the diverse settlement procedures of over 20 markets and creates one harmonized process. This change will hopefully reduce settlement costs and the need for multiple service providers in the value chain. It also creates new opportunities for lowering the cost of collateral and liquidity by consolidating settlement accounts and increasing netting possibilities.
T2S is about efficiency, competition and creating a single European market. This is true for collateral and liquidity as well although the implications are more global in nature due to the mobility of capital. The European Central Bank has deliberately set in motion a chain of events that will reduce the need for some intermediaries. Clearly, this is a threatening move for sectors of the market; agent banks, Central Securities Depositories and custodians will all be forced to evaluate the services they offer and to whom.
This report has been written for collateral, liquidity and operations managers not just in Europe but worldwide. It is our intention to help these financial market participants think through some of the complex issues at hand and see a way through to formulating their business strategy.
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