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Target2 and Target2 Securities Consolidation
Rouble Saha Senior Business Manager, Banking Domain, Financial Services | May 19, 2020
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For more than a decade now, Target2 has been running successfully but with the recent modernization of the payments landscape coupled with higher customer expectations, the cost structure of the banks has been highly challenged.

As a part of Vision 2020, the Eurosystem has embarked on a journey to consolidate TARGET2 (T2) and TARGET2-Securities (T2S), in terms of both technical and functional aspects. The main objective is to replace the existing infrastructure of Target2 systems with a new real-time gross settlement (RTGS) system along with a new Central Liquidity Management system to bring in optimization in liquidity management across all TARGET Services (T2S, TIPS, and the new RTGS).

The key aspect of the technical TARGET2/TARGET2-Securities consolidation is to achieve very easy access to services via a harmonized interface. The enhanced synergies between the systems will help to improve the overall efficiency and greatly reduce the operational costs.

The key aspect of the technical TARGET2/TARGET2-Securities consolidation is to achieve very easy access to services via harmonized interface.

TARGET2/TARGET2

  • The complete suite of Target services will include the Central Liquidity Management (CLM) which would also include central bank services, a new RTGS system, Target2 securities, and Target Instant Payment Settlement (TIPS).
  • The Central Bank Liquidity Management will act as the central point for all liquidity across the Target services where participants will be allowed to manage the funds, monitor in a single screen, and steer the funds between the dedicated technical settlement accounts (RTGS, T2S, and TIPS) 
  • The consolidation will also leverage on common components which will be shared by CLM, TIPS, T2S, and the new RTGS. The European Single Market Infrastructure Gateway (ESMIG) will provide a network provider-agnostic access to the Target services which will be complimented by Common Reference Data to avoid maintenance of multiple copies of reference data, a single data warehouse to access historic information, a billing component for the invoices and a Legal archiving component as well.

Messaging Standards

ISO20022 compliant messages need to be used for Target2 services. This is part of the larger initiative among SWIFT, central banks, and market infrastructures across the world which are replacing the legacy networks with IS020022-based messages and solutions to promote interoperability.

Examples of other key initiatives embarking on the IS020022 journey are SWIFT MT to MX conversion, US Fedwire and CHIPS, and UK New Payments Architecture.

Potential benefits of adopting the ISO20022 message standard are greater efficiency, innovation, resilience, security, and harmonization among the schemes and market infrastructures.

Launch Date

The launch of the new consolidated platform is scheduled for November 2021 with a big bang approach. Central Bank and Community testing will commence from January 2021.

As we read, SWIFT has delayed the ISO 20022 migration date for cross-border payments by one year, from November 2021 to the end of 2022, as banks struggle with decommissioning and modernizing existing infrastructure for the transition.

If an institution fails to make changes by November 2021, it will no longer be able to carry out central bank operations or send/receive payments from central bank accounts.

HCL Analysis on Current Challenges and Potential Benefits

Current Challenges

Target consolidation benefits

High operational costs

Reduction of operational costs due to consolidation of platforms

Single currency settlement

Enhanced RTGS services with multi-currency settlement

Multiple interfaces to connect to T2, T2S, and TIPS

Single unique interface to access all Target services

Participants can connect only through single network service provider i.e. SWIFT

Participants will be able to connect through multi network service providers

Operating hours suited only for European Markets (i.e. 0700 CET to 1800 CET)

Extended operating hours to service customers in different time zones (i.e. 0300 CET to 1800 CET) 

Use of dedicated cash accounts (DCAs) for each Target service with no liquidity management across the services 

Use of a CLM main cash Account (MCA) for liquidity management across T2 services and dedicated cash accounts (DCAs) for payments. Each DCA will be linked to an MCA. This will lead to better cash management.

Usage of ISO15022 messaging standard e.g. SWIFT MT messages

Usage of industry standard ISO20022-compliant messages for communication which can contain more information than any other type of transactions.

Multiple data warehouse

Single date warehouse allowing participants to access historic information across T2 and T2S

Multiple reference data resulting in duplication of information

Maintenance of common reference data, reducing the effort to create and maintain multiple copies of data

 

Impacted Applications

The impacted applications will be from Treasury, Accounting, Payments and Risk & Compliance.

HCL Point of View (PoV)

We believe that the consolidation project is a logical step toward the evolution of a highly integrated financial market infrastructure pan Europe. The main objectives are increased efficiencies, optimized technologies, tightened security, and improved interoperability.

The impact from the requirements of the consolidation project will greatly affect the banks’ treasury role. However, banks can turn this regulatory compliance into an opportunity to deliver real digital transformation by adopting newer technologies that will allow them to automate manual processes, make robust systems to adapt to new requirements, and evolve real-time processes to enable intra-day monitoring and forecasting and improved regulatory compliance.

The major challenge of the TARGET2 consolidation is not only migration of the messaging standards but also the technical standardization of T2 services and redesign of the account structure in the central banks. Since the migration will happen simultaneously for all financial institutions, any delay will have a negative economic impact on the banks. With less than a year left for industry testing, banks should prioritize the Eurosystem Consolidation as a strategic project for regulatory compliance purposes and take help from the application providers and system integrators to expedite the project.

For a successful implementation, banks must have a clearly defined strategy for treasury (for the new accounts structure), analytics and reporting, back office efficiency, digitalization, and data management.

How can HCL help?

HCL has more than 20 years of experience in implementing payment projects across geographies. With more than 100 industry experts in payments, HCL has helped in implementing SEPA CT, SEPA DD, PSD2, and various other schemes and regulations for large banks.

HCL solutions ranges from message transformation to end-to-end payment processing using IS020022 libraries. Below are the solutions we offer:

IS020022 migration and solution

  • An ISO20022 message transformation tool capable of transforming any message to and from the ISO 20022 standard with built-in support for high value payment services (HVPS), cross-border payments, and reporting plus (CBPR+) specifications
  • An ISO20022 message simulator to validate different standard or proprietary message types, versions, and variants and simulate the corresponding incoming/outgoing SWIFT and TARGET messages

Application Development and Maintenance (ADM)

  • Our deep industry payments knowledge and technical expertise help to deliver transformational results.
  • We offer a gamut of services from the development of initial payment application requirements to the management of the entire application portfolio across geographies.
  • We help in the modernization of applications and also accelerate digital transformation using newer technologies.

Unified payments processing solution

  • An end-to-end processing solution which will natively support SWIFT MX and TARGET2 MX messages and is provisioned to support all ISO and non-ISO based payments/messages
  • Our solutions range from message transformation, validation, enrichment, processing and integration with ancillary applications like AML, core banking, regulatory compliance, FX etc.
  • Support of SWIFT, SEPA, and various domestic libraries
  • Support for all payment rails i.e. real-time payments, domestic payments, cross-border payments, and SEPA
  • Automated exception queues to reduce manual intervention