Insight & News

T2-T2S consolidation – Implementation difficulties

Be Think, Solve, Execute GmbH14.10.2020

Some reminders about the project

  • T2-T2S Consolidation project

The Eurosystem has launched a project to consolidate TARGET2 and T2S, in terms of both technical and functional aspects. The objective is to meet changing market demands by replacing TARGET2 with a new real-time gross settlement (RTGS) system and optimising liquidity management across all TARGET Services. The new consolidated platform will be launched in November 2022. The new RTGS system will offer enhanced and modernized services to the market. The messaging standard ISO 20022 will be used, which is also the case for T2S and TIPS.

 

  • Timeline for implementation

The calendar and its different milestones is under the responsibility of the Governing Council of the  European Central Bank. Since the postponement announced on July 31st, 2020, which now sets the start date at November 2022, no complete changes of the calendar and its different milestones have been published. Only the User Testing Step has been announced for December 2021. The timing of other project milestones is currently under review.

 

  • T2-T2S Consolidation and CBPR+ alignment

The time lag (postponement of T2-T2S Consolidation to November 2022) has allowed for the two projects T2-T2S Consolidation and CBPR+ to be aligned. This will facilitate a better integration of ISO 20022 payment messages, which are used either in correspondent banking (CBPR+) or in HVP (High Value Payment).

 

Prerequisites for carrying out the project

  • Having a complete and up-to-date impact study

The completeness of this often neglected document is a guarantee of success for the subsequent stages. This will avoid having to redo an analysis of certain applications along the way.

 

  • To be familiar with the impacted applications

Knowing the functions and inputs/outputs of an application is essential to be able to propose new workflows or processes. In the same way up-to-date documentation is a plus.

 

  • Having access to the regulatory documentation to understand deeply the mechanisms of the new T2 system

Two sources are essential:

. ECB documentation in particular UDFS documents (User Detailed Functional Specifications) that describes Real-time Gross settlement, Central Liquidity Management, Business Day Management, Common Reference Data, … .

. SWIFT documentation that describes the structure of the messages used in CBPR+.

 

Errors to be avoided

  • Consider the project only as a format migration project

It is not only a question of converting MT messages (legacy FIN messages) to MX messages (ISO 20022 XML messages) and vice-versa.

It is also necessary to consider new types of messages (e.g. R-Messages) that do not exist in the current T2 system, for this purpose a more detailed analysis is required, which can lead to the design of new workflows involving (an) investigation system(s).

However in some cases the use of a converter can be considered.

 

  • Wanting to adapt applications to MX format at all costs

The applications in scope of the T2-T2S Consolidation project are often old (10 years or more), so a renewal is not superfluous. Decommissionning and replacement has to be considered as a credible alternative.

 

  • Treating the project as a monobloc is not desirable

The complexity of the task, implies a parallelisation. As the implications are numerous, streaming of the project is inevitable. This parallelisation of tasks will increase the work force. Thus T2-T2 Consolidation has an impact on many core subjects in the bank, including for example SWIFT Network, Market and Liquidity Management  and Compliance and it also has consequences on Reporting or Channels used by the customers.

 

Multiple skills to be owned

It is important to bring together a wide range of skills to implement all the necessary adaptations to T2-T2S Consolidation.

 

  • Knowledge and practice in Payments area

It must be dual:

. Knowledge in Correspondent Banking & Target 2 i.e usage of MT messages,  

. Knowledge in SEPA type payments – SCT and R-Messages  i.e. usage of ISO 20022 messages.

  • Knowledge and practice in the treasury area

It is necessary to have a deep knowledge in the current mechanisms and its local connotations to be able to design the new mechanisms to be implemented.

  • Knowledge and technical ease

It is important to know :

.  Message Broker / Messaging Software applications

 

Conclusion

By avoiding the errors presented above and by having the necessary skills, the realisation of this complex project should lead to substantial gains, for example:

  • At the technical level

Simplification of the IT landscape (decommissionning)

and reduction in the number of formats used (standardisation towards ISO 20022) should increase ease of system management but in the same time it should require other technical skills. 

  • At the financial level

This project is an opportunity to completely regain control of liquidity management.

Thus intra-group management facilities allow for re-centralisation of such liquidity management.

It is also an opportunity to re-examine the possibilities of direct or indirect participation to T2.

 

More information

To go deeper into this subject

 

European Central Bank

https://www.ecb.europa.eu/paym/target/consoconsolid/html/index.en.html

Bundesbank

https://www.bundesbank.de/en/tasks/payment-systems/target2-t2s-consolidation/target2-t2s-consolidation-723780

SWIFT

https://www.swift.com/news-events/news/banks-prepare-for-far-reaching-changes-in-the-european-payments-landscape

 

By Jean-Noël Prost | Be STF GmbH