T2S promises fund settlement revolution
TARGET2-Securities (T2S), the single securities settlement system for Europe built and operated by the European Central Bank (ECB), is live. In the summer of 2015 the first four central securities depositories (CSDs) migrated their settlement activities to the T2S platform. It marked the start of a process which will see 24 CSDs and international CSDs (ICSDs) migrate to T2S in four successive waves ending in February 2017.
WATCH: T2S for Funds roundtable discussion:
You can download the full paper here: T2S for Funds
Designed to reduce the cost of settling cross-border securities transactions in Europe, T2S is already affecting the funds industry indirectly, as buy and sell orders initiated by mutual fund portfolio managers settle through T2S. However, T2S will in the longer run affect the funds industry directly as well, as a system designed initially for equities and bonds extends its services to the settlement of mutual fund transactions as well.
Most CSDs in Europe offer mutual fund settlement services, and the CSDs in two of the largest domestic fund markets in Europe will migrate to T2S this year. Euroclear France, the domestic CSD for French securities and funds, is expected to join T2S on 29 March 2016. Clearstream Banking Frankfurt, the domestic CSD for German securities and funds, will follow on 11 September 2016. Fund managers already settling fund transactions through Euroclear France and Clearstream Banking Frankfurt will in future settle trades via T2S.
At present, neither Euroclear France nor Clearstream Banking Frankfurt settle many trades in domestic funds that originate outside their home markets. Nor do they settle any transactions in which neither the buyer nor the seller is based in France or Germany. However, mutual funds domiciled in Luxembourg are distributed not only throughout Europe, but around the world, and they have to be delivered not only into CSDs (such as those of France and Germany) and international CSDs (such as Clearstream Banking Luxembourg and Euroclear Bank in Brussels) but also into the registers maintained by fund managers or their transfer agents.
As more CSDs and international CSDs (ICSDs) join T2S in 2016 and 2017, fund managers and transfer agents are likely to face an increasing number of requests from fund distributors and investors to settle transactions in T2S. Eventually, as other CSDs migrate to T2S, the new settlement system is likely to service a rising proportion of the mutual funds issued and settled in Europe, both domestically and across national borders. In other words, T2S for funds will comprehensively re-shape the infrastructure that supports the European mutual fund industry.
Investors or fund distributors, and fund managers or transfer agents, will be affected by this change, and must decide how to position themselves for it. One of the early decisions to be made by is how to access T2S. The new system settles transactions not between accounts held at commercial banks but in central bank money. Fund managers and transfer agents owned by banks, many of which will have direct access to central bank money, will find it relatively straightforward to adapt to requests from distributors to settle in T2S. However, fund managers and transfer agents without direct access to central banks money will have to appoint a bank as their T2S agent.
In reality, settlement in commercial bank money is likely to continue alongside settlement in central bank money for some time. It is therefore almost certain fund managers and transfer agents will have to support a dual settlement system. They will have to do this while continuing to collect data on which distributors are selling which funds and to whom, not only in order to calculate commission payments owed to distributors, but to gather intelligence on investor behaviour and fulfil their Know Your Client (KYC) and anti-money laundering (AML) compliance obligations.
In short, fund managers or their transfer agents must in the coming months decide how to gain convenient access to T2S; how to continue to support settlement in commercial bank money as well as central bank money; and find the least disruptive ways of fulfilling their KYC and AML, distributor commission calculation ad payments and sales reporting obligations. To help them, the Association of the Luxembourg Fund Industry (Alfi) has established a Working Group on T2S, which is publishing an evolving set of guidelines on T2S for funds, in the form of continually updated Questions and Answers (Q&As). See page 17 for a summary of the first iteration.
Michael Weber, head of mutual fund distribution operations at Allianz Global Investors in Frankfurt, chairs the Working Group, alongside Pierre Mottion, global head of transfer agent and fund dealing services product at BNP Paribas Securities Services in Luxembourg. To discuss the implications of their work, they were joined by Paul Bodart, a member of the T2S Board, the management body for T2S; Olivier Lens, head of funds and investment management at SWIFT in Brussels; and Olivier Portenseigne, chief commercial officer at Fundsquare, the international fund industry market infrastructure body, based in Luxembourg. The discussion was moderated by Dominic Hobson, founder of COO Connect, the peer group network for operational fund management industry.