TARGET2-Securities could potentially reduce capital shortfall by EUR 33 billion

We know that capital efficiency is at the forefront of many of our customers’ minds as they strive to find the most effective way to meet new regulatory capital requirements. It might be surprising to some to learn that one possible way to help you meet this challenge could be through TARGET2- Securities (T2S), and the new operating models it helps facilitate.

In fact, a new PricewaterhouseCoopers (PwC) study, commissioned by Clearstream earlier this year, has shown the significant potential T2S has to help reduce banks’ estimated capital shortfall in the Eurozone under Basel III rules by EUR 33 billion. This shortfall, projected by the OECD to total EUR 295 billion, is required to meet the Basel III capital adequacy requirements rule, potentially affecting all European financial institutions.

The primary reason for this 11%  saving is the opportunity offered by T2S to pool cash accounts. This enables participants to centralise and net off all their cash payment obligations resulting from settlement activity within T2S-participating markets. In short, this means reduced liquidity consumption.

Clearstream has run a bottom-up analysis of cross-border settlement data across a number of European countries which showed that by pooling cash settlement into a single account, Clearstream’s own daily liquidity requirements could be reduced by an average of 15% during peak settlement periods.

T2S offers increased opportunities

Other T2S-related benefits our study with PwC identified include reduced risk in the custody chain due to the opportunity to centralise safekeeping of securities with one or a handful of CSDs, without, in the process, sacrificing settlement efficiency or counterparty reach. This will be made possible through some CSDs’ plans to establish direct links with one another.

Fragmentation and overcollateralisation can also, to a certain extent, be eliminated leading to enhanced collateral optimisation; essential to help meet capital requirement demands from other new regulations, such as the Alternative Investment Fund Managers Directive (AIFMD), Undertakings for Collective Investment in Transferable Securities Directives (UCITS V) and the European Market Infrastructure Regulation (EMIR). And, of course, the introduction of T2S is already expected to bring efficiency gains and cost savings associated with lower settlement fees and harmonised post-trade processes.

Good news indeed and all the more reason to make T2S central to any plans to adapt the operating model to meet new regulatory requirements.