Transforming EU TARGET Market Infrastructure for Payments and Securities

This article shortly describes some of the its drivers and impacts of the replacement of TARGET2 with the new RTGS module, the new Credit Liquidity Management (CLM) and enhanced T2S and TIPS functions by the Eurosystem. Knowing the topics have a large scope, focus is on recent items discussed key participants in media and forums.

Audiences are B2B, B2C and C2C core service providers in the banking and financial institutions industries active in Payment, Collateral and Securities Services (2S) industry. Objective of the article is to some of the Eurosystem TARGET capabilities given to market players to better understand its fullest potential and give room for thought for these participants about current and potential business models.

Written by Venturexpert domain experts it reiterates ongoing EU commitment to create a single EU Market Infrastructures (MIs) for financial stability and compete internationally. Additionally this paper provides an overview of key items to be addressed. Venturexpert can provide free information sessions virtually, via email or in person (when COVID allows).

Elephant in the room

Business models undergo constant change. Management deals with constant strategy and roadmap changes to ensure customer and shareholder support.

With TARGET2 the Eurosystem embarked on establishing a liable financial Market Infrastructure. Over time it got complemented with TIPS and TARGET2-Securities. Current programs include the consolidation of the platforms to include liquidity management and collateral capabilities. Complemented with Information-and Cybersecurity, it is vital to stability and efficiency.

Creating an European infrastructure, where core services providers are able to provide customers a single process to pay, settle and collateralize transactions is core to Eurosystem mandates. Many market players are to take into account the impacts of EU market infrastructures. Venturexpert focuses on creating roadmaps for banks and FIs to include in their strategy a roadmap for consolidation of payments, collateral and securities. It is currently expected that 1200 direct TARGET participants and 1000 in Co-Management will be impacted.

Future of the Market Infrastructures and Payments

Market Infrastructure for Securities Services will endure more transformation in the coming years, not only due to further expansion of T2S related TARGET functions and its overlap with other TARGET services, but there is an increasing data and technology impact becoming more visible to its core services and key customer demand. For example, Digital Assets, Digization, new Blockchain/DLT technology and Big-Data and Big-Techs require to be taken into account. Besides related risks and advantages, these can be disruptive to Market Participants.

If the creation of T2S is representable to what might happen in the Payment landscape, the full lifecycle of Payments is under scrutiny. The segregated EU landscape with the establishment of TIPS and further enhances with enhances RTGS and CLM functionalities will not only impact financial and securities industry payments but potentially also Peer-2-Peer and Point-Of-Sale payments.

Information-and Cyber security have become increasingly important. Driven by data, new technology and digital assets most key players have it now integrated in the organization and/or put on the agenda of Chief Officers. Practically, the first changes are already visible with Internet based serviced for A2A or GUI will not be possible after T2/T2S consolidation live data for existing NSPs connecting to TARGET. Two other items to mention are the Securities and Payments Digital assets (e.g. Payment, Securities and Utility tokens) and the COVID impact of employees working from home 50% or even more.

Key Consolidation Opportunities

Although the general Eurosystem opportunities given to its participants are to further improve efficiency, optimize liquidity management, get easier access to harmonized interfaces, use enhanced services to RTGS, align message standards and further reduce operational costs, some other key items are:

  • Harmonization of Account Models across all services, whereby increasing the Quality of Service internally and for customers
  • Reduces the different risks (e.g. operational, credit and exposure)
  • Improve treasury model
  • Streamline operational EU footprint and create STP wherever possible (e.g. via bots)
  • Create pan-European Payment and Securities processes, data and dashboards (long-term cost reduction)
  • Leverage of new functionality and technology to enlarge product offering.

Best practice for Banks and Financial Institutions

First best practice, at this stage, is to know your current business model, why your customers are with you and where the market is moving. External assistance for Senior Management to have this external sounding board is valuable to ensure strategy is well informed and key programs can be maintained or adapted by having an out-of-the-box view. Although most Central Banks have monitoring to ensure progress is made, your internal strategic positioning with its products and service changes consistently.

Second best practice, at this stage, is for management and analysts to take note of given information and create internal program(s) (non-exhaustive as it depends on your existing configuration) ensuring key impacts are identified:

  • 2021 March: Eurosystem testing of internal applications and Network Service Provider (NSP) => Customers to create project roadmaps and complete first high level impact analysis
  • 2021 June: Eurosystem T2 application changes and NSP selection completed => Finalize project roadmaps, list requirement GAPs and finalize business/functional analysis
  • 2021 September: Training for User testing started => Finalize internal and external readiness. Onboard key departments to support these activities
  • 2021 December: User testing started => Ensure all internal and customer test cases are finalized and ready for deployment using the appropriate tools
  • 2022 August: Eurosystem pre-migration activities on production started => Include Eurosystem change management items in own roadmap and assess impacts on own services and products
  • 2022 September: Eurosystem procedures and contractual agreements completed => Complete sign-off of new organizational model and IT infrastructure.

Some Key impacts

Depending if you are currently using TARGET services, or that you are currently thinking of using the platform opportunities to connect, the impacts are different:

  • Account Management models and procedures change
  • Existing business processes, information usage from internal reports and external GUIs will change
  • Appoint an NSP (or instructing party). When currently working in A2A mode, the usage of new GATEWAY “ESMIG” is mandatory. Further Customers working in Y-copy need to work in V-copy when going live
  • Create common Reference Data across organization and IT infrastructure
  • Changes to Business Day Management, Billing, Contingency and Archiving
  • Most important; A participant who has not completed the required changes by Big-Bang going live-date;
    • Will no longer be able to participate in Eurosystem political operations,
    • Is no longer able to meet his minimum reserve requirement,
    • No longer has access to central bank money,
    • Is excluded from the ancillary system settlement,
    • Must realize access via another (direct) participant
  • Eurosystem Collateral system (ECMS) will further impact the above with its implementation in November 2023.

Closing remarks

Replace the existing TARGET2 infrastructure with a new Real Time Gross Settlement provides participants to further improve efficiency, optimize liquidity management, get easier access to harmonized interfaces, use enhanced services to RTGS, align message standards and further reduce operational costs.

Venturexpert UG main expertise’s are Market Infrastructure and Payments making Venturexpert ideal to further inform, and assist, its Customers in transforming your organization and IT infrastructure to best serve existing Customers and make sure your current business model is future proof. With its Senior Management ability to serve Customers in multiple languages as a single team our communication standards can serve you well.