Payment and settlement systems - changing dynamics Reserve Bank of India Pune, 30 September – 1 October 2013 T2S Programme Office European Central Bank

Table of Contents Global trends in the field of market infrastructure Payment and settlement systems – changing global dynamics Global trends in the field of market infrastructure 3 Use of global standard for local systems 2 European context and challenges 1

EU: a single market An area without internal frontiers where goods persons services capital can circulate freely.

SEPA for retail and card payments Cashless payments in euro in the EU (EEA) should become as easy, efficient and reliable as domestic payments “One account, one card, one terminal”

EU Fragmented Infrastructure In securities and large value payment market infrastructure

EU Fragmented Infrastructure Securities Market Infrastructure in numbers trading reporting clearing settling 65 regulated markets 1 trade repository 9 CCPs 25 CSDs 58 multilateral trading facilities   3 systemic internalisers

EU market infrastructure challenges The integration of European market infrastructure is a political priority for EU governments Major efforts are being made to facilitate integration, through harmonisation and interoperability Usage of global standards is a must Three actions possible for ECB/Eurosystem: regulations, catalyst for change, operator of market infrastructure

Table of Contents Global trends in the field of market infrastructure Payment and settlement systems – changing global dynamics Global trends in the field of market infrastructure 3 Use of global standard for local systems 2 European context and challenges 1

Use of global standards Providing an integrated market infrastructure For EU… ISO 20022 a common element A common platform for payments large value: TARGET2 A common securities market infrastructure: T2S Standardising retail payments for creating a single euro payment area (SEPA)

2nd user consultation and provision of GFS Use of global standards TARGET2 migration to ISO 20022 2013 2014 2015 2016 2017 2018 Go-live 1st user consultation 2nd user consultation and provision of GFS

Use of global standards Maximising the reuse of investments for market participants There were a number of initiatives in Europe related to ISO 20022 already before TARGET2 approved its migration strategy: SEPA: the Single Euro Payments Area has replaced domestic retail credit transfers and direct debits with standardised European payments by using ISO 20022 messages T2S: as announced by the T2S program, ISO 20022 messages will be used from the outset (new messages had to be developed for T2S, as no international standards previously existed) EU: in the securities industry the EU is driven by the Giovannini Protocol, aiming at eliminating barriers that hamper efficient cross border activities in Europe (harmonising different standards and communication protocols is one way to achieve it)

ISO standard 20022: UNIFY Universal financial industry message scheme Registration Management Group ISO 20022 users ISO 20022 Registration Authority ISO 20022 Standards Evaluation Groups TARGET2 T2S ISO 20022 Financial Repository Securities Universal financial industry message scheme CLS Business models Payments Data Dictionary SWIFT Trade services Candidate ISO 20022 messages Euroclear Forex Business Process Catalogue other Cards

One integrated settlement process (domestic and cross-border) Use of global standard T2S: a business case One integrated settlement process (domestic and cross-border) Market Participant CSD CSD NCB Market Participant Market Participant Custodian CSD Market Participant

A Service offered to CSDs for Settlement only Scope of T2S Purpose of T2S A Service offered to CSDs for Settlement only Notary Function Custody/ asset-servicing Function Banking Function Settlement Function Registration of issuer indebtedness and investor holdings e.g. coupon payments, redemptions, stock splits Change of ownership among investors e.g. lending and borrowing only in some (I)CSDs

Advantages of T2S for Europe Purpose of T2S A single pool of securities To harmonise fragmented and inefficient financial markets To enhance competition in settlement services Making Europe a better place to trade and invest

Account Structure in T2S Functioning of T2S TARGET2 CENTRAL BANK MONEY VALIDATION and MATCHING SECURITIES OPTIMISATION of SETTLEMENT and REALIGNMENT CSD A CSD B CSD C NCB A NCB B NCB B ACCOUNTS NCB A ACCOUNTS NCB C Other RTGS CSD A ACCOUNTS CSD C ACCOUNTS CSD B ACCOUNTS NCB A ACCOUNTS NCB C ACCOUNTS Technical platform of all securities and cash accounts to settle all securities transactions in central bank money

Optimisation Features Functioning of T2S Reduction of the need for cash and securities on transactions to minimize the use of resources Creation of extra liquidity for settlement via collateral on flow and stock Notary Function Technical netting Autocoll-ateralisation Partial settlement Additional optimisation algorithms Consideration of all transactions with equivalent ISINs to identify chains of transactions, empty circles, etc. Splitting of transactions in the case of limited availability of resources

User Connectivity Functioning of T2S Two T2S network providers to maintain competition: Eurosystem licensing procedures led to selection of SIA/Colt and SWIFT as the two value-added network providers Additionally, internet access in U2A mode is also planned

The T2S Programme Plan Status quo of T2S Start Mon 17/07/06 Finish Tue 31/07/17 SP17 SP13 SP6 SP5 SP4 SP3 SP2 SP1 T2S Go-Live Migration Phase (SP14 - 16) User Testing Phase (SP7-12) EAT Development & Testing Phase Specification Phase Preparation Phase 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 We are here Development of software for core functions is complete Focus is now on testing

T2S Community 23 CSDs have confirmed their participation, representing nearly 100% of settlement volume in euro T2S remains an open system: other CSDs can still join, but will have to pay an entry fee So far only the euro and DKK (as of 2018) will be settled in T2S, but other currencies may join later

T2S governance since 1 July 2012 Status-quo of T2S Decision-Making Central Bank Bodies Non-euro central banks’ governors / boards Governors’ Forum ECB Governing Council Steering Level Bodies T2S Board Non-euro Currencies Steering Group (NECSG) CSD Steering Group (CSG) Market advisory bodies National User Group (NUG) Advisory Group (AG) Technical Groups ECB Reporting Escalation CRG reporting to CSG Technical Groups reporting to T2S Board Operations Managers Group (OMG) Project Managers Group (PMG) Change Review Group (CRG)

Financial Equilibrium in T2S Status-quo of T2S Tariff Structure Investment cost Volume estimates PLUS TIMES Running costs Prices

Market integration CSDR A new securities settlement landscape Three streams shaping the new European securities settlement landscape CSDR

The new framework will lead to increased competition A new securities settlement landscape The new framework will lead to increased competition T2S CSDs regulation Harmonisation DVP will no longer be a bilateral relationship between one CSD and one NCB. Any CSD in T2S is potentially in a DVP relationship with any NCB in T2S Same safety and efficiency rules all over Europe Same market practice all over Europe: national boundaries will be broken down

Benefits for CSDs A technologically advanced, state-of-the-art, and robust settlement engine Economies of scale by pooling together settlement volumes across Europe New business opportunities through access to new markets Long-term savings from efficient re-shaping to T2S

Benefits for Users Same processing and reduced settlement fees for domestic and cross-border transactions Possibility to access all securities from one account in one CSD Potential to optimise collateral and liquidity requirements Reduced back-office costs by centralising settlement and thus streamlining interfaces New business opportunities through access to new markets

Benefits for Markets Higher level of competition in post-trade industry A Single Market for financial services in Europe through harmonised clearing and settlement Reduced settlement risks on cross-border transactions to positively affect financial stability Investors can more easily diversify their portfolios Issuers can more easily reach European investors Reduced costs of capital for firms lead to economic growth

Use of global standards Across products… For outside EU… ISO 20022 a common Element? Making Euro area market infrastructure more accessible for all Preparing for answering the globalisation challenges?

Table of Contents Global trends in the field of market infrastructure Payment and settlement systems – changing global dynamics Global trends in the field of market infrastructure 3 Use of global standard for local systems 2 European context and challenges 1

Global trends in the field of market infrastructure New challenges New challenges Managing globalising markets High volume of information from multiple sources Reporting for multiple purposes to multiple parties Only one source of information the transactions and assets of financial institutions

ISO 20022 amongst other standards can help Global trends in the field of market infrastructure New challenges Reusing existing investments Optimising existing information and systems Increasing transparency for internal reporting Increasing meaningful access to information for competent authorities ISO 20022 amongst other standards can help

Global trends in the field of market infrastructure Capitalising on investments made ISO 20022 for payments Clearing & settlement Interbank transfers via correspondent banking or ACHs, high value payments, low value bulk payments, RTGS, etc. Payment initiation Communications between the ordering customer and its bank, etc. Cash Management between various actors: Account opening, standing orders, transaction and account information, advices & statements from … ...the account servicing institutions to account owners, including reporting from the financial institution… …to the ordering & beneficiary customers, reconciliation, exceptions & investigations handling.

Global trends in the field of market infrastructure Capitalising on investments made ISO 20022 for securities Clearing & settlement Trade Initiation, pre-trade Trade, post-trade Securities Issuance Collateral management Custody Account opening, standing orders, transaction and account information, advices & statements, queries & investigations Collateral, repos, securities lending & borrowing Income, corporate actions, market data, proxy voting

Global trends in the field of market infrastructure Capitalising on investments made ISO 20022 for forex Trade: order, execution, allocation, affirmation, etc. Post-trade: confirmation, matching, assignment, novation, etc. Pre-trade: IOI, quotes, etc. Clearing and Settlement, including netting and related reporting Notification of trades to third parties Trigger events, option exercises

Global trends in the field of market infrastructure Capitalising on investments made ISO 20022 for trade services Associations providing rules and master agreements (eg IFSA, ICC) Private and corporate customers (treasurers) Financial Institutions Risk management entities Trade facilitators: chambers of commerce, insurance co, freight forwarders, carriers, customs, factoring co Application providers

Global trends in the field of market infrastructure Capitalising on investments made ISO 20022 for card and retail payments Transactions between merchants and acquirers, and cardholders and issuers that support authorization, clearing, reversal, chargeback, dispute processing, etc. Transactions between acquirers and card issuers ATM processes such as authorization, processing, ATM management and inventory POI messages for payments, administrative and device related services Similar messages transacted on internet or from mobiles or other personal devices

ISO is providing technical committee and working groups Global trends in the field of market infrastructure Other standards Other global initiatives are popping up LEI - an ambitious project coming to reality ISIN already a reality in most markets … mapping all needs ? ISO is providing technical committee and working groups

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