Investors have been eagerly monitoring the rollout of TARGET2-Securities (T2S), the real-time securities platform that aims to drive harmonization across European markets, and they now have a better understanding of how these changes will evolve.  The European Central Bank (ECB) launched T2S in 2006 as a multi-year project to harmonize settlements across Europe with one engine for delivery-versus-payment settlement in central bank funds.

The T2S transition plan is organized around five waves as 23 European Central Securities Depositories (CSDs) migrate to the new platform. The first wave, completed in August 2015, demonstrated that there is flexibility to the plan, as witnessed by the interim migration of the Italian CSD, Monte Titoli. The market had largely expected that CSDs unable to meet their timetables will be postponed until the fifth wave, which had been reserved for any delays.

Wave 1 Migration a Success

Leading up to the first migration, the level of testing that was performed by CSDs, as well as the need to include local and global participants, demonstrated the enormous amount of cooperation needed to facilitate a smooth migration.  As part of the first wave, the CSDs of Greece, Malta, Romania, and Switzerland successfully migrated to the new platform in June 2015. Monte Titoli pursued a slightly delayed timetable, migrating to the platform in August 2015 with some of the initial functionality taken out of scope.

The delay provided participants with a gradual transition, as Monte Titoli represented a large percentage of the settlement activity of the first wave. Challenges relating to the timing of settlement messages and the use of legacy standing settlement instructions rather than T2S settlement instructions during the migration affected the settlement efficiency in the market post-launch.

Though manageable, the challenges experienced during the first wave provided participants with a roadmap to prepare for future waves. Most importantly, the disruptions highlighted the importance of communication and interconnectivity among stakeholders.  T2S allows for several connectivity models, including routing instructions to T2S indirectly via the local CSD.  During wave 1, the importance of understanding the linkage among entities at both the depository and sub-custodian level was evident as a key aspect of ensuring seamless processing.

Cascading delays

With wave 1 representing 15% of the T2S settlement flow, the industry eagerly awaited even greater market harmonization with the roll out of wave 2 markets which was set to include Belgium, France, Netherlands, and Portugal.  Together, these markets would contribute another 25% of T2S settlement flow. 

In the wake of the first transition, however, several delays have already been announced for future waves. Chiefly, Euroclear, the CSD for the Euronext-zone (Belgium, France, and the Netherlands) has announced that it will not be able to meet the deadline for wave 2 and will need to delay their transition to T2S.  As a result of Euroclear’s announcement, a new migration plan has been drafted for approval by the T2S Governing Council.

Due to the level of interconnectedness, it is likely that Euroclear’s delay will prompt further delays to future waves as well.  These larger CSDs can have a meaningful impact in the form of shorter testing cycles for future conversions, and a concentration of major CSDs in one transition wave may pose additional migration-related risks.

T2S provides a roadmap for harmonization

With settlement functions transitioning from local settlement systems to a centralized pan-European platform, complexities associated with cross-border trades are expected to be resolved. In addition to the standardization of a settlement platform, the rest of the trade life cycle is also being aligned (e.g., in the form of alignment of best practices around asset servicing).  These market changes are similarly time-consuming. From a practical perspective, delays in regulatory approval or adaptation will have an impact on T2S migration. 

Together, these items illuminate the level of interconnectedness of the markets and the significant amount of work needed for true market harmonization. The T2S migration waves provide the industry with a clear timeline and a solid road map for harmonization, but the level of complexity should not be underestimated.

The ECB’s nearly decade-long work towards creating market harmonization is starting to come to fruition, but investors should expect the process to include many learning experiences ahead, as the transition of several large CSDs will add to the complexity and interoperability.  The first transitions highlight the importance of industry cooperation and flexibility in the form of good communication and extensive testing, which together promise a smooth transition through the next stages of T2S migration.


This article was originally published in the 2016 Regulatory Field Guide. The guide features insights from a number of our experts on key regulatory developments that will have the greatest impact for asset managers in the year ahead – and beyond. Visit to explore the guide.