Back office costs for T2S to run as high as EUR27 million

Back office costs for T2S to run as high as EUR27 million

European banks and broker-dealers are lagging in their understanding of the impact of the European Central Bank's plans for harmonising settlement under the Target2Securities platform, with migration costs for back offices estimated at anywhere between seven million euros and EUR27 million.

The implementation of the T2S infrastructure by the ECB, coupled with the impact of new regulations on central securities depositories (CSDs), will require market participants to undertake a thorough review of their current back office system capabilities.

Research commissioned by Swift and conducted by analyst group Celent finds that the post-trade providers most impacted by T2S - CSDs and custodians - are furthest advanced in their preparation. However, market participants that will be impacted to a lesser extent, such as banks and broker/dealers, are still navigating the complexity of T2S.

The study estimates that the level of investment required to adapt a back office to the T2S ecosystem will range from EUR7 million for a market player that modifies its existing system using a communication hub plus adaptation layers, to as much as EUR27 million for a firm that decides to revamp its back office systems for both settlement and custody.

A significant portion of IT investment for T2S will be driven by communication complexity, the report finds. "Market participants will have to operate in an ecosystem that relies on disparate messaging formats, and where many local specificities remain. This situation not only generates additional cost but also raises some concerns about the operational risk incurred by market participants in case of communication failure and mismanagement," it states.

The T2S infrastructure is set to go live in three waves within 18 months from the June 2015 commencement date. The ECB has warned that fees for trades passed over the harmonised platform may yet be revised upwards as settlement volumes in depressed Eurozone markets continue to languish.

Comments: (4)

Gary Wright
Gary Wright 06 March, 2013, 11:04Be the first to give this comment the thumbs up 0 likes

The Bank of England has made the decision for the UK not to be a part of T2S so no worries for UK FS firms. I presume this research was on a main land Europe view and then only those countries that have agreed to enter. I wonder what the cost would be if the UK was in? Huge i expect 

A Finextra member
A Finextra member 06 March, 2013, 11:371 like 1 like

Agree with the sentiment about short- mid term cost to the industry. Any broker-dealer operating in pan european markets have to reconsider their settlement and clearing model. Intra-day liquidity will be an issue as if you use an agent bank model largely speaking you are shielded from the capital/ Collateral requirements currently. This will change in the next few years, so the cost of doing business will rise. There is also an opportunity to rationalise your agent bank network and look at the overall cost base for clearing and custody. Asset servicing provision also a factor to consider as well. Messaging will need upgrading from ISO15022 to ISO2022 if you want to be direct participant and therefore realise more of the benefits offered by T2S. I don't think any firm should assume the do nothing approach will be suitable. Would welcome other views on the subject.

A Finextra member
A Finextra member 07 March, 2013, 10:30Be the first to give this comment the thumbs up 0 likes

Also, it would be oversimplifying to say that T2S messaging just "is ISO 20022". While some of the T2S messages are implementations or variants of messages that are already fully registered under ISO 20022, a good number are new messages that are not yet registered - and there is a third group which will never be registered, being wholly specific to the T2S project, though they will use ISO 20022 syntax. However this is all currently being documented in a SWIFT MyStandards project, we understand.

A Finextra member
A Finextra member 08 March, 2013, 12:27Be the first to give this comment the thumbs up 0 likes

Savvy T2S participants will be able to mitigate their costs by judicious selection of their VANSP.