T2S, envisioned as a system that would usher in an era of seamless post-trade processing in Europe, is perceived as a significant milestone toward achieving a single European financial market.
Its impact on market structure may be gauged by an in-depth understanding of the T2S core services and its operating model, which include the following:
- Settlement services to Central Securities Depositories (CSDs)
- Real-time settlement services guaranteed by the Central Bank
- Direct connectivity for market participants
One of the fundamental changes to the traditional operating model of custodians will be the way cross-border trade is handled operationally. Post the advent of T2S, the difference between cross-border and domestic trade, for custodians, will be minimal. It will not be obligatory for custodians to establish relationships with agents in the various European markets for security settlements.
The second significant change with T2S is the impact of direct connectivity. Direct connectivity will enable institutional clients with high transaction volumes to route trades to T2S directly through local market CSDs. This model enables buy-side firms with high trading volumes to centralize securities settlement operations at a single location for all of Europe.
T2S is a significant change and like with any change, it brings along threats and opportunities for all the market participants involved. Market participants who can adapt and realign their business models will emerge successful and strong. Though the challenges with respect to a successful implementation remain, T2S will undoubtedly usher in a new era for the European custody business.