ECB’s anticipated ‘magical triangle of liquidity’ - Catalyst of European Integration

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Impressions from the ECB Focus Sessions in Paris on 13 December in Paris

Written by: 
Erik Veerman, Market Infrastructure expert, ABN AMRO Bank
Charles Bunnik, Market Infrastructures Manager, ABN AMRO Bank
 
15 January 2018

At a Glance

The ECB is working towards a European integrated Market. A harmonised financial industry is an important driver for growth and funding. To push the European Single Market, the ECB is working on 3 major projects that will impact the financial industry in the Eurozone and beyond:
  • Target Instant Payment Settlement Service (TIPS)
  • Target 2 (T2) and Target to Securities (T2S) consolidation
  • European Collateral Management System (ECMS)
The above should result in a so-called “magical triangle of liquidity” allowing financial institutions to manage cash, securities and collateral in one system, giving full insight into the EUR position at any point. 

Where do we come from? A step back in time

Twenty years ago, the Capital Markets in Europe were highly fragmented along national lines. Each member state had its own system for (high-value) inter-bank payments clearing and settlement, for securities settlements and for collateral management. In 2007, this situation started to change when Target2 a pan European Real-Time Gross Settlement (RTGS) system for of high-value payments in Euro went live. Also on the securities side, major steps were taken to establish an integrated European market. The go-live of Target2Securities (T2S) in June 2015 made it possible to harmonize the settlement regime across the Member States.  With the last T2S migration wave  20 markets are now connected.

What needs to be done to achieve European integration?

To support the completion of a single European market the following building blocks have to be realised: 
  • Target Instant Payment Settlement Service (TIPS) to create a common area for real-time payments in euro per November 2018;
  • T2 and T2S consolidation. The merger of the systems results in major cost efficiencies. In addition, consolidation result in better liquidity management, common procedures and more standardisation (ISO 20022) Deadline is November 2021;
  • A common system for collateral management, called the Eurosystem Collateral Management System (ECMS), replacing the 19 different systems of central banks for collateral operations. Deadline is November 2022. 
 
The ECB aims to establish a “magical triangle” of liquidity to manage cash, securities and collateral in euro.

What are the implications for the banking industry?

Picture 1: Eurosystem consolidation

First assessment of the work to be executed:

  • the ECB TIPS contact group that sets the functional and technical standards for TIPS;
  • the RTSG contact group established to support the Eurosystem in customising the ISO 20022 messages for the future RTGS. Notwithstanding the fact that the implementation date looks far away (November 2021). The magnitude of the consolidation of T2 and T2S and the migration to ISO 20022 calls for close monitoring and alignment with the grids;
  • The Eurosystem’s migration to ISO 20022 is evidence of the global move towards the new and richer standard. Industry participants that want to reap the benefits of migration the impact will need to reassess their data model and systems;   

The ECB decided to have a “big bang” implementation of ISO 20022 in Q4 2021

Conclusion

The Eurosystem is moving towards ISO 20022. The industry cannot ignore the migration towards the new standard. The impact on systems must be assessed and can be translated into commercial opportunities. The Eurosystem is supporting a single market, which offers the possibility to serve the banking industry in the Euro area. Ultimately, the new integrated platform will offer new commercial opportunities for market participants, e.g. in the Repo market.

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