1. Payment System Department
The IT-NUG view
Paolo Bramini
Banca d’Italia
Payment System Department
Set-up for settlement, auto-collateralisation and client collateralisation in T2S
Frankfurt , 29 November 2013
ECB

2. Background information
At the end of 2012 an Italian NUG Task Force started analysing the account set-up in T2S
The TF, among other things, identified a major issue: a technical constraint in the use of BIC for the CMB.
The outcome of this analysis was submitted to the ECB in March 2013
In June 2013 the NUG approved a CR aiming at removing this constraint for the first release of T2S
In July the CR was informally sent for consultation to the other Eurosystem NCBs; in October it was formally forwarded to the CRG, which discussed it in its October meeting; the CR is currently “on hold”

3. The current Monte Titoli autocollateralisation offer
Similarly to T2S the Monte Titoli settlement system Express II offers to settlement agents access to autocollateralisation :
in the night-time settlement procedure
on stock (firm coll)
on flow (self coll).
ExpressII do not offer autocollateralisation during the daylight settlement
The payment banks (PBs) with a ‘short’ cash position might access the autocollateralisation both for its own and for its clients’ business : in other words PBs might use their own collateral and re-use the clients’ collateral to access the Banca d’Italia intraday credit facility.
ExpressII automatically take the collateral out from the accounts that the PBs has earmarked. The PB might earmark its account and the clients’ ones

4. The current Monte Titoli clients’ account structure
Client Segregated Accounts (Conto liquidatore)
the client is not an ExpressII participant
the settlement agent/ custodian assigns a segregated account to its clients and also acts as PB
the client has a contractual relationship with its settlement agent/ custodian only
Cash settlement via agent (Tramitato contante)
the client is an ExpressII participant
the client uses the payment bank as a cash agent
the client has a contractual relationship with Monte Titoli for settlement and a contractual relationship with its cash agent for cash management
Operated account
the payment bank provides cash and operates also (on the client’s behalf) the securities account
the client has a contractual relationship with Monte Titoli for settlement and a contractual relationship with its agent for cash management and for instructing and managing the securities account

5. The T2S world
A link between a DCA and the SACs must be established to ensure that settlement and auto-collateralisation are possible
Prior to linking a securities account to a DCA, a Credit Memorandum Balance (CMB) needs to be set-up.
Activity
Responsible A
The Payment Bank open a DCA
NCB B
The Central Bank creates the primary CMB as a link between the PAYMENT BANK DCA and the PAYMENT BANK BIC8 (i.e. all the branches are included) and sets the autocollateral limit  C
The Central Bank links the T2S Dedicated Cash Account of the Payment Bank:
to the T2S Central Bank Account which provides intraday credit to the Securities Account to be used as regular securities account for the Central Bank collateralisation
to the Securities Account belonging to the CB (as a CSD Participant) to be used as receiving Securities Account for the Central Bank collateralisation D
The Payment Bank as a CSD Participant
opens one or more securities accounts to settle its own business
CSD E
The Payment Bank as a CSD Participant /Client opens one or more securities accounts F
The Payment Bank as a CSD Participant creates collateral receiving securities account G
The Payment Bank grants its client the access to its DCA creating the non-primary CMB as a link between the PAYMENT BANK DCA and the BIC11 of the client and indicating also its receiving collateral account
Payment Bank / or NCB H
The Payment Bank client links its SACs for settlement (and collateral in case applicable) purposes to Payment Bank’s DCA I
The Payment Bank configures CMB credit Limits, including the one for client-collateralisation service, for Payment Bank clients
Payment Bank

6. The current set-up …. in the T2S world
BANK AAAAITMMXXX is a PB and a CSD participant
BANK AAAAITMMXXX opens a DCA to settle its own and its clients’ business.
As far the clients’ business is e concerned, AAAAITMMXXX wishes:
To grant credit to each client via client auto-collateralisation and/or via secured/unsecured credit lines by setting up different limits for each client;
To re-use the collateral received by its clients to access the CENTRAL BANK intraday credit via autocollateral in case of lack of cash on its DCA.
To settle its clients’ business using segregated ‘credit lines’ AAAAITMMXXX cannot use its own BIC already set in the primary CMB (where no limits are applicable)
In the following the two AAAAITMMXXX clients are therefore identified by two different BIC11s:
AAAAITMZXXX (so called “conto liquidatore”)
BBBBITMMXXX (so called “tramitato contante”/ “operated account”)

7. The current set-up …. in the T2S world (2)
From a legal /operational point of view, we can consider:
AAAAITMZ as a second BIC of AAAAITMMXXX bought by the participant to segregate its client business (segregated accounts for each client /client category using specific branch codes and linking them to the DCA via specific non-primary CMBs) ;
BBBBITMM as the actual BIC of the AAAAITMMXXX client. BBBBITMM has its own securities account and avails itself of AAAAITMM as a cash agent (PAYMENT BANK) providing also collateral facilities. In this case, BBBBITMM has a contractual relationship with the CSD for settlement in T2S and a contractual relationship with its PB for cash and client collateralisation management in T2S.

8. The current set-up …. in the T2S world

9. Model 1: one CMB for several accounts in several CSDs

10. Model 2: several accounts in several CSDs ;
one CMB for a specific client (XX2) in a specific CSD using a specific DCA (DCA2)

11. Model 3: different securities accounts in different CSDs
Model 3: different securities accounts in different CSDs. All accounts belonging to the same BIC11 are linked to a specific CMB, but all CMBs are linked to the same DCA

12. Model 4: several securities accounts with the same BIC of the PB (the first 8 digits) and two securities accounts with different BIC linked through two CMBs at the same DCA

13. The Italian NUG CR T2S 0429 SYS … background
Primary CMB is set-up by NCB using the PB’s BIC8. This implies that:
It is not possible with only one BIC8 to manage its own business and the clients one and segregating the exposure by using the limits : all securities accounts linked to this DCA, associated to parties, located in any CSD, that have their first BIC’s 8 characters equal to such a BIC8, cannot be managed through a non-primary CMB.
It is not possible directly access the central bank collateralisation from a unique DCA by using SACs stemming to parties with a different BIC8 (i.e. open in CSDs located in different countries): all securities accounts linked to this DCA, associated to parties, located in any CSD, that have their first BIC’s 8 characters different from such a BIC8, can only be managed through a non-primary CMB

14. The Italian NUG CR T2S 0429 SYS
The constraint on the primary CMB as a link between the PAYMENT BANK DCA and the PAYMENT BANK BIC8 should be removed, allowing the link between the PAYMENT BANK DCA and any BICs
The possibility to use the BIC11 together with the wild card pattern should be granted.
This would ensure more efficiency in BIC allocation when payment banks wish to segregate their client business by setting up different non-primary CMBs and, at the same time, easing the reuse of clients auto-collateral into central bank auto-collateralisation.
The technical constraint could indeed limit the possibility of a PB in its operating set-up (notably for PBs operating through branches located in different countries, whose different operating offices are identified by different BIC 8 in which the country code is defined by digits 5 and 6 of the BIC).