Oliver Wyman/Clearstream study shows banks savings from T2S

09.09.2014

Study supported by Oliver Wyman highlights that banks need to act now to reap full benefits of the European Central Bank (ECB) initiative TARGET2-Securities (T2S)

Benefits of T2S go much beyond initial scope of pan-European harmonisation of cross-border settlement
Brokers, custodians and regional banks could save between EUR 30 million and EUR 70 million per annum

The European Central Bank’s TARGET2-Securities (T2S) initiative could allow brokers, custodians and banks to each save between EUR 30 and EUR 70 million annually if they take action now to optimise their securities and cash supply chain to take full advantage of the T2S model, according to analysis conducted by Oliver Wyman and commissioned by Clearstream, a Deutsche Börse Group company.

T2S is expected to produce significant macroeconomic benefits as a result of the fact that it will reduce costs for cross-border settlement of financial transactions. But the study (“The T2S Opportunity – Unlocking the hidden benefits of TARGET2-Securities”) shows that prompt action by the banks to streamline and adapt their T2S operating systems will produce further significant financial rewards.

The study produces quantitative case studies to show that banks could realise significant capital, funding and operating cost savings by delayering settlement-related exposures, pooling collateral for settlement and tri-party purposes, netting more cash settlements and simplifying their operations. Based on conservative assumptions, the Oliver Wyman analysis estimates the savings potential in three high-level case studies:

– A broker-dealer with EUR 100 billion trading assets and liabilities across major T2S markets could save up to EUR 70 million;
– A global custodian with EUR 400 billion in assets under custody across major T2S markets could save up to EUR 50 million;
– A regional bank with EUR 140 billion in securities deposits across major T2S markets with a home market bias could save up to EUR 30 million.

These case studies and the potential savings have been validated in interviews with market participants. Estimating the savings potential for any given institution requires a detailed analysis of the specific settlement portfolio and operating model. In addition to cost efficiencies, a more consolidated T2S model can provide further benefits to banks, increasing stability and reliability of post-trade operations, reducing operational complexity and associated risks.

Philip Brown, Head of Global Client Relations and Member of the Executive Board of Clearstream, said: “As a prerequisite for achieving the full T2S benefits, banks need to fundamentally rethink and change their current operating models in the post-trade area, particularly around settlements. Given planning, budget and implementation cycles, banks need to take action now to realise these substantial benefits as soon as possible after T2S is fully implemented. As T2S will impose adaptation costs on market participants in any case, there is a window of opportunity to leverage the change to achieve the full savings potential of consolidating assets.”

TARGET2-Securities is addressing the fragmentation in European post-trade space and enables cost efficiencies which banks can consider to support their savings agendas. T2S will enable banks which take action to reap significant benefits from consolidating assets, direct access and use of central bank money. These efficiencies will play an important role in unleashing the wider macroeconomic benefits from integrating European securities markets, building on the creation of the Euro and joint interbank payment system TARGET2.

TARGET2-Securities is an initiative by the European Central Bank in its agenda to harmonise post-trade processes across Europe. Following on from the TARGET2 (T2) initiative, which was created to streamline cross-border payments, T2S aims to achieve similar efficiencies in the cross-border securities settlement process. T2S will go live in 2015 with four major on-boarding phases for the participating central securities depositories (CSDs) from June 2015 to February 2017, with the majority of the volume being migrated in 2016.

The full study is available here.

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