Static data set-up for Settlement and Auto-collateralisation in T2S

Workshop Frankfurt, 29 November 2013

T2S Programme Office European Central Bank ECB-PUBLIC

Table of Contents

1 Introduction 2 Parties static data setup 3 Management of securities settlement process 4 Management of liquidity and collateral pools 5 T2S Auto-collateralisation 6 Implementation models

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Organisation’s BIC structure in T2S

Varying usages

Management of securities settlement process

BIC structure

Management of collateral and liquidity pools

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Set-up for Settlement and Auto-collateralisation

Constraints

For covering all scenarios efficiently in T2S, we need flexibility Some constraints are hindering flexibility

1. Legacy BIC structures

 Mergers, acquisitions, policies, laws & business strategy/services have led to different BIC set-up in different countries for different organisations

2. Technical constrains in T2S:

 The BIC 8 of the owners of the dedicated cash account and securities account:  • • Must be the same for offering Central Bank auto-collateralisation Must not be the same for offering client collateralisation The same link is used for the definition of securities account for collateral provision and settlement purposes

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Organisation’s BIC structure in T2S

How do we find the optimal target BIC structure in T2S?

Legacy BIC structure Efficient securities settlement process

Target BIC structure in T2S

Flexible management of clients for client collateralisation Optimised pools of liquidity and collateral

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Table of Contents

1 Introduction 2 Parties static data setup 3 Management of securities settlement process 4 Management of liquidity and collateral pools 5 T2S Auto-collateralisation 6 Implementation models

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Static data configuration

Party Hierarchical Model

Level 1

T2S Operator

Level 2 Level 3 Party BIC Parent BIC Level 4

CSD A CSD B CSD n NCB Bank PBAADEFF123 CSDAAAYY123 CSD Participant Broker Securities Account 1 Securities Account 2 Securities Account 3 Central Counterpart Securities Account n Bank PBAADEFF123 NCBAAAYY123 T2S Dedicated Cash Account 1 T2S Dedicated Cash Account 2 T2S Dedicated Cash Account n

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Static data configuration

T2S Party concept  A T2S Party is a legal entity or individual that has a contractual relationship with a CSD/NCB in T2S for the processing of its settlement related activities in T2S T2S Party T2S Party Securities Account T2S Dedicated Cash Account

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Static data configuration

Party identification  An institution can establish multiple business relationships with different CSDs and/or NCBs in T2S while using the same 11-digit Party BIC  An institution may be defined as different participants within the same CSD, e.g. to segregate securities settlement activities related to different departments of the same legal entity, provided different 11-digit BICs are assigned for each different participant

T2S hierarchical party model

T2S Operator TRGTXE2SXXX

Party BIC Parent BIC

CSD A CSDAAAYY123 TRGTXE2SXXX

Bank A

PBAADEFF123 CSDAAAYY123 Securities Account 1

Bank A

PBAADEFF789 CSDAAAYY123 Securities Account 2 CSD B CSDBBBYY123 TRGTXE2SXXX

Bank A

PBAADEFF123 CSDBBBYY123 Securities Account n NCB NCBAAAYY123 TRGTXE2SXXX T2S Dedicated Cash

Bank A

PBAADEFF123 NCBAAAYY123 Account 1 T2S Dedicated Cash Account n

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Static data configuration

Entity and BIC Relationship  A T2S actor, e.g. a Custodian bank, can be defined as a T2S Party using its own BIC, or its clients BIC 

Although BICs in T2S are validated against the SWIFT BIC directory, T2S does not verify that the BIC actually belongs to the party

CSD Participant’s clients

CSD CSDADEFFXXX T2S

CSD Participant

T2S Actor CSD CSD BIC: CSDADEFFXXX T2S Party identification

CSD BIC: CSDADEFFXXX Party BIC:

PBAADEFF123 PBAADEFF123

Note:

PBCLDEFF456

could also be used as Party BIC

PBCLDEFF456 9

Table of Contents

1 Introduction 2 Parties static data setup 3 Management of securities settlement process 4 Management of liquidity and collateral pools 5 T2S Auto-collateralisation 6 Implementation models

10

Management of securities settlement process

Instructing Party and Securities Account owner  Securities Account owner: Party BIC 11 linked to the Securities Account in T2S. A CSD Participant may link a Securities Account defined in T2S with its own Party BIC 11 and operate as the securities account owner. In this set-up the CSD Participant can instruct on the securities account as de-facto account owner without the need of third party privilege.  Instructing Party: Originator of the settlement instruction in T2S, either on its own behalf or on behalf of its clients. It may or may not be defined as the Securities Account owner in T2S. In the latter case, privileges must be setup in T2S to be able to instruct and query on the account

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Management of securities settlement process

Party and Account structure  Segregation of proprietary and clients businesses can be done at the level of the accounts without setting up a specific party for the CSD participant’s client CSD Participant defines Securities Account 87654321 with its own Party BIC 11

CSD CSD Participant Customer name: CSD PART Securities Account: 1234 5678 T2S T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBAADEFF123 Account on behalf of CSD part.’s client having own BIC: PBCLDEFF456 Customer: CSD PART CL Securities Account: 87654321 Securities Account: 1234 5678 Securities Account: 87654321 12

Management of securities settlement process

Party and Account structure  Segregation of proprietary and clients businesses can be done at the level of the party when a specific party is created in T2S for the CSD participant’s client CSD Participant defines Securities Account 87654321 with the BIC 11 of the client

CSD CSD Participant Customer name: CSD PART Securities Account: 1234 5678 T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBAADEFF123 T2S T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBCLDEFF456 Account on behalf of CSD part’s client having own BIC: PBCLDEFF456 Customer: CSD PART CL Securities Account: 87654321 Securities Account: 12345678 Securities Account: 87654321 13

Management of securities settlement process

Party and Account operational models “Account owner model”

Instructing Party T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBAADEFF123 Account owner T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBAADEFF123 T2S

Sese.023

SecuritiesSettlement TransactionInstruction

Securities Account: 87654321

No third-party privilege must be granted to Instructing Party PBAADEFF123 to send Settlement Instruction on SAC 87654321

“Account operator model”

Instructing Party T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBAADEFF123 Account owner T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBCLDEFF456

Sese.023

SecuritiesSettlement TransactionInstruction

Securities Account: 87654321

Privilege to send Settlement Instruction on SAC 87654321 must be granted to Instructing Party PBAADEFF123

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Management of securities settlement process

Matching Concept – Mandatory and Optional matching fields  Mandatory matching fields: Delivering and Receiving CSD, Delivering Party and Receiving Party BIC (11-digit, Party1 block) Mandatory Matching Fields Additional Matching Fields Optional Matching Fields T2S Matching fields  Optional matching fields: Delivering and Receiving CSD participant’s client (11-digit, Party2 block). If inputted by both parties, the fields need to match

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DELI

Management of securities settlement process

Matching – Account Owner model “Account owner model” RECE

(87654321) Delivering CSD CSDADEFFXXX Delivering Party PBAADEFF123 Receiving CSD CSDADEFFXXX Receiving Party PBABDEFF111

Mandatory fields Optional fields

(CSDADEFFXXX) (PBAADEFF123) (PBCLDEFF456) (PBCLDEFF456) (CSDADEFFXXX) (PBABDEFF111) (PBCLDEFF111) (PBCLDEFF111)

CSD Participant BIC e.g. PBAADEFF123 used for mandatory matching

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DELI

Management of securities settlement process

Matching – Account Operator model “Account operator model” RECE

(87654321) Delivering CSD CSDADEFFXXX Delivering Party PBCLDEFF456 Receiving CSD CSDADEFFXXX Receiving Party PBABDEFF111

Mandatory fields Optional fields

(CSDADEFFXXX) (PBCLDEFF456) (CSDADEFFXXX) (PBABDEFF111)

Mandatory matching performed with the BIC of the client e.g. PBCLDEFF456

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Management of securities settlement process

Allegement  The Allegement process sends a message* to advise an account owner that another T2S Actor has instructed against it, whereas the account owner has no corresponding instruction.

T2S Party PBABDEFF111

Sese.023

SecuritiesSettlement TransactionInstruction

Business Validation Matching X Securities Account: 87654321 “Account owner model” T2S Party PBAADEFF123

The Instructing Party (SAC owner) will receive the allegement

*It is not possible for a third-party to receive a copy of the message

“Account operator model” T2S Party C PBCLDEFF456

The Instructing Party will NOT receive the allegement

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Management of securities settlement process

Message Subscription and Routing Configuration • The “message subscription” allows to define whether a message has to be sent or not to a given T2S Actor

Message Subscription

• “Message subscription” offers the possibility to configure a selection of outbound messages and inbound message copies from T2S, to be received by a T2S Actor • The message subscription does not define to which technical address (destination) of a recipient (i.e. T2S Actor) the message is actually delivered

Routing

• The “routing configuration” specifies the technical elements (i.e. a technical address) T2S uses to send a given outgoing message to the relevant T2S Actor • A Routing configuration does not specify the actual set of messages T2S has to send to a T2S Actor

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Table of Contents

1 Introduction 2 Parties static data setup 3 Management of securities settlement process 4 Management of liquidity and collateral pools 5 T2S Auto-collateralisation 6 Implementation models

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Management of liquidity and collateral pools

Liquidity pool - Centralised into a single Dedicated Cash Account  A liquidity pool in T2S is a collection of Dedicated Cash Accounts that can be used for settlement of transactions involving a cash component

SAC 12345678 T2S Party PBAADEFF123 SAC 87654321 T2S Party PBAADEFF123 SAC 12345678 T2S Party PBCLDEFF456 SAC 87654321 Dedicated Cash Account (DCA) 77777777 Dedicated Cash Account (DCA) 77777777

Multiple Securities Accounts may be linked to the same Dedicated Cash Account independently of the underlying T2S Party in order to centralise liquidity

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Management of liquidity and collateral pools

Liquidity pool - Split on several Dedicated Cash Accounts

SAC 12345678 T2S Party PBAADEFF123 SAC 87654321 T2S Party PBAADEFF123 SAC 12345678 T2S Party PBCLDEFF456 SAC 87654321 DCA 8888888 DCA 99999999 DCA 77777777 DCA 8888888 DCA 77777777

Each Securities Account may be linked to one or several Dedicated Cash Accounts for the purpose of splitting liquidity independently of the underlying T2S party

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Management of liquidity and collateral pools

Collateral pool  A Collateral pool in T2S is a collection of Securities Accounts that can be used for the provision and/or receipt of collateral against intraday credit in the context of auto collateralisation

T2S Party A PBAADEFF123 SAC 12345678 SAC 45678912 T2S Party B PBCLDEFF456 SAC 87654321 T2S Party B PBCLDEFF456 SAC 87654321 Dedicated Cash Account (DCA) 777777777 Dedicated Cash Account DCA 77777777 Dedicated Cash Account DCA 88888888

Same linking configurations are possible between Securities and Cash Accounts as for liquidity pools

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Table of Contents

1 Introduction 2 Parties static data setup 3 Management of securities settlement process 4 Management of liquidity and collateral pools 5 T2S Auto-collateralisation 6 Implementation models

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T2S Auto-collateralisation

Static data, liquidity and collateral pool setup Party Account Relationship model Management of Liquidity Pools T2S auto collateralis ation Management of Collateral Pools

Party setup, Account structure, configuration of Liquidity and Collateral Pools are key components of the auto-collateralisation process in T2S

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T2S Auto-collateralisation

BIC structure - Entity Relationship  CB The BIC structure governs the flexibility and control in the settlement and auto-collateralisation processes

CSD Participant with same BIC8 as the PB CB Auto-

PB

collateralisation CB links BIC8* (PBAADEFF*) of the PB to primary CMB

PBAADEFF123

(Primary CMB)

PBAADEFF789 NCBAXXYYAAA

CB links PB DCA to CB cash account

PB PBAADEFF123

CSD Participants with different BIC8 as the PB PB authorises BIC4* (PBCL*) of client for the use of DCA

Client1 of PB PBCLDEFF456 Cash Accounts Securities Accounts PBCLCLFF456

PB authorises BIC8* (PBC2FRAA*) of client for the use of DCA and/or

Client2 of PB PBC2FRAA001 PBC2FRAA111

Client collateralisation (Secondary CMB*) and/or

(*)Securities account of different clients can be linked via one CMB or several CMBs.

PB authorises BIC11 of client for the use of DCA

Client3 of PB PBC3NLYY220

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Table of Contents

1 Introduction 2 Parties static data setup 3 Management of securities settlement process 4 Management of liquidity and collateral pools 5 T2S Auto-collateralisation 6 Implementation models

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Implementation Models

Optimal target BIC structure in T2S  Institutions must assess their needs for securities settlement, management of cash flows and auto/client collateralisation processes  Institutions must consider the impact of the implementation of the BIC structure on the management of settlement flows, liquidity and collateral pools, in conjunction with the T2S Party identification  Following (non-exhaustive) models/alternatives can be assessed with regards to BIC implementation choice:    Decentralise liquidity pools in T2S Centralise liquidity and collateral pools without client collateralisation Centralise liquidity and collateral pools with use of client collateralisation

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Implementation Models

Decentralise liquidity pools in T2S – No auto-collateralisation   Management of liquidity via different pools for segregating client and proprietary business Management of liquidity via different pools, according to their business and organisational needs

Securities Accounts

Proprietary A/C 1 PBAADEFF123 Main Branch A/C 2 PBAADEFF789 Primary CMB 1 DCA 1 PBAADEFF123 CB Cash Account NCBAXXYYAAA Proprietary A/C 3 PBAAGHI1XXX Branch A/C 4 PBAAGHI12AA Primary CMB 2 DCA 2 PBAAGHI1XXX

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Implementation Models

Centralise liquidity and collateral pools without client collateralisation     Aim of centralising of liquidity and collateral pools is met Implement/assigning institution’s own BIC codes to the securities account of their clients in T2S Less flexibility in implementing the management of settlement flows like matching and allegement, e.g. greater risk of implications such as cross matching.

Potentially easier to set up with regards to the set-up of privileges and routing configurations

Securities Accounts

Proprietary A/C 1 PBAADEFF123 Client 1 A/C 1 PBAADEFF789 Primary CMB DCA PBAADEFF123 CB Cash Account NCBAXXYYAAA Client 2 A/C 1 PBAADEFF201

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Implementation Models

Centralise liquidity and collateral pools with use of client collateralisation     Aim of centralising of liquidity and collateral pools is met Model requires multiple BICs to associate multiple clients More flexibility in implementing the management of settlement flows More complex with regards to the set-up of privileges and routing configurations

Securities Accounts

Proprietary A/C 1 PBAADEFF123 Main Branch A/C 2 PBAADEFF789 Primary CMB DCA PBAADEFF123 CB Cash Account NCBAXXYYAAA Proprietary A/C 3 PBC2FRAA001 Client 1 A/C 1 PBCLDEFF456 Client 1 A/C 2 PBCLCLFF456 Secondary CMB 1 Secondary CMB 2

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Set-up for Settlement and Auto-collateralisation

Conclusion 

Institutions should carefully consider the trade-off between the management of settlement flows and management of liquidity and collateral pools



Is there an appropriate trade off within these current constraints?

 • The BIC 8 of the owners of the dedicated cash account and securities account: Must be the same for offering Central Bank auto-collateralisation • Must not be the same for offering client collateralisation  The same link is used for the definition of securities account for collateral provision and settlement purposes

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Thank you for your attention

www.t2s.eu

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