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[Opinion] New report reveals “significant gaps in industry’s T2S adaptation plan”

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Many market players have ‘unknowns’ about impact of T2S on back office systems; migration costs could range from €7m- €27million

The key findings of a new report from Celent, produced in conjunction with SWIFT, the financial messaging provider for more than 10,000 financial institutions and corporations in 212 countries and territories, show some “major discrepancies” among market participants when it comes to their readiness for T2S.

The implementation of the Target2-Securities (T2S) platform by the ECB, coupled with the impact of the CSD Regulation (CSDR) proposed by the European Commission, will require market participants to undertake a thorough review of their current back office system capabilities.

We have found that while most market participants have a good high-level understanding of the T2S platform, there are some significant gaps in the industry’s T2S adaptation plan,” says Axel Pierron, the author of the report, The European Post-Trade Ecosystem under T2S: Dealing with Complexity.

The research, which is based on detailed interviews with major participants in the European post-trade environment, finds that the post-trade providers most impacted by T2S – central securities depositories (CSDs) and custodians – are the most 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.

While the long-term benefits of T2S in improving the efficiency of the European capital markets are clear, the report looks closely at the short-term challenges that banks, CSDs and custodians are facing. It 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 player 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.

Alain Raes, Chief Executive, EMEA and Asia Pacific, SWIFT, comments: “Celent has clearly confirmed that many players require more information about the impact of T2S on their business models and operations. This new report provides excellent insight on the questions market participants must answer as they determine their approach to T2S readiness. It comes at just the time when the industry really needs to be able to tap into recognised sources of solutions and expertise, to help create standardized, streamlined and robust post-trade communications infrastructures, and support cost-effective, efficient adaptation to major market change.”

The European Post-Trade Ecosystem under T2S: Dealing with Complexity examines the impact of T2S and CSDR on market participants’ back offices, explores the options for back office adaptation, analyses in detail the cost implications of different approaches and looks at the potential to tap into new sources of revenue in the T2S ecosystem. For a copy of the report please contact the SWIFT press office. 2

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