Finland’s Long Journey To T2S Is About To End

In September Euroclear Finland will fulfil its decade-long ambition to join T2S. Christine Strandberg, Head of Investor Services Banks Product Management at SEB and Ulf Noren, Client Relationship and Sales Manager at SEB, explain why it took so long, what risks the migration represents and what network managers can expect once the transition is complete.

A long-running Nordic saga reaches its denouement over a long weekend that starts on Friday 8 September with no settlements taking place for one day only in Euroclear Finland, the Finnish central securities depository (CSD). By Monday 11 September, Euroclear Finland will have moved all its CSD accounts, including those of sub-custody clients of SEB, to the TARGET2-Securities (T2S) platform, and all transactions in Finnish securities will thenceforward settle in T2S.

Network managers are relieved rather than excited

Custodian banks and their clients in Finland have worked and waited for this outcome for a long time. Euroclear Finland started preparations to join T2S in June 2012, and originally expected to complete its migration in February 2017. Once, network managers would have struggled to conceal their exasperation that a eurozone market had taken so long to accede to T2S.

Today, they are relieved rather than excited that another market will now operate in a roughly comparable way to 19 other European CSDs. With their initial hopes that T2S would yield lower settlement fees and savings on cash and collateral shattered by their experience of other markets over the last eight years, many will be thinking privately that they could afford to wait even longer.

But the chief concern of every network manager in the coming weeks will be that the migration goes smoothly. The clumsy accession of another Nordic market to T2S in October 2018, when the Danish CSD attempted an unstable “layered” compromise between its end-investor account structure and the omnibus account model of T2S, remains a discouraging memory.

The tortuous path the Finnish CSD has taken to T2S offers little to offset it. The 2012 decision to expand a corporate actions upgrade into a complete replacement of legacy systems made sense at the time – it future-proofed capacity and functionality as well as opening access to T2S – but embarked Euroclear Finland and its users on a massive, multiyear, multi-phase technology project.

It took 22 months, from the summer of 2013 to the Spring of 2015, to migrate fixed income securities on to the first iteration of the new Infinity platform (Infinity release 1). Equity securities and registration, which were scheduled to migrate in 2016, did not complete the transition (Infinity release 2) until May 2018. So a degree of anxiety about the passage of the Finnish markets into T2S (Infinity release 3) is understandable.

An anxious migration weekend awaits

The migration timetable is certainly ambitious. Over a single weekend, Euroclear Finland and its users must cancel unsettled transactions, transfer 2.3 million accounts, link securities and cash accounts, invite counterparties to re-send cancelled settlement instructions and be ready to settle a higher than usual volume of pending trades from the previous week on Monday 11 and Tuesday 12 September.

Although Finland has eschewed the main cause of the Danish debacle – leaving retail accounts on legacy systems of the CSD - it does mean the migration is huge: every CSD account will migrate and every transaction will settle in T2S. The links between securities and cash accounts must be made manually and nobody can be confident that they will work until the first batches of transactions are actually processed.

Preparations are commendably thorough. The project scope is frozen. Testing cycles and migration rehearsals are proceeding. Volume tests anticipate the knock-on effects of closing settlements for a day on Friday 8 September. Staff are being trained to use the new platform. Go-live readiness is being measured against agreed criteria across systems, vendors, users and the European Central Bank (ECB).

Infrastructurally, the timing is well-judged. The liquidity management-enhancing consolidation of the T2 Real Time Gross Settlement (RTGS) system and T2S went live successfully on 20 March this year. The long-awaited Eurosystem Collateral Management System (ECMS), which will unify collateralisation of central bank credit throughout the eurozone, will not go live before April 2024.

Yet, however favourable the initial conditions, just 78 hours will elapse between the shutdown on the Thursday night at 21.00 and the reopening at 03.00 on the Monday morning. It leaves minimal room for error corrections and delays before settlement resumes on Monday 11 September, and there is no obvious path back to the status quo ante if the worst fears are realised.

Client services will be insulated but not enhanced by the migration

SEB aims to minimise the disruption by insulating clients from as many of the migration activities as possible. There are some unavoidable changes. A night-time settlement cycle imposes new demands. Matched but unsettled instructions, which are currently recycled indefinitely, will – in line with T2S practice – now be cancelled after 60 days, necessitating reinstruction by the counterparties.

But SEB clients will not have to change their CSD and custody account structures or numbers or change their SWIFT settlement instruction message formats or update their Standing Settlement Instructions (SSIs). There will be no change to trade matching criteria (except for free-of-payment transactions), tolerance matching, cancellations or hold and release arrangements either.

On the other hand, the Finnish migration to T2S does not create that many opportunities for service enhancements. Nordic custodians such as SEB have the ability to offer a fully integrated regional service already, despite the fact that Norway and Sweden remain outside T2S, but the benefits for clients of non-euro countries joining the ECB settlement system are naturally less compelling than they are for euro markets.

Although Norway and Sweden are unlikely to join T2S soon, the idea is under discussion in both markets. Membership of T2S is being actively canvassed in Sweden as part of the programme to harmonise the workings of the Swedish financial infrastructure with other EU countries. Discussions about joining T2S have also restarted recently in Norway.

Whatever happens, T2S remains expensive to use. Contrary to initial expectations, T2S has not cut domestic settlement or safekeeping costs, and custodians pass these on to clients. In the case of Finland, costs are further inflated by the ten-year transition period, throughout which users have paid an additional impost to fund the T2S project. From September, users will also pay the T2S communication fee.

The universal dissonance of T2S is particularly marked in the Nordic markets

The degree of harmonisation with T2S standards will – as elsewhere – be lower than the ECB intends. In Finland, the main divergence is the continuing payment of cash dividends in commercial rather than central bank money, partly to prevent a new tax regime disrupting the migration, partly because issuers are opposed and partly because mistakes in payments are awkward to reverse in retail accounts.

So the Finnish migration to T2S will not be complete even on 11 September 2023. Indeed, Euroclear Finland told the Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo) in January that it does not expect to comply with T2S corporate actions standards until December 2029. After 11 years of postponements, an end to promises is prudent. But there is another reason to reserve judgment.

The European securities services industry has learned an important lesson from the Danish and Finnish migrations to T2S. It is that a settlement platform based on the indirect holdings model of western European CSDs is hard to adapt to the Nordic direct holding model, in which millions of accounts are held and tens of thousands of them are amended and opened and closed every year.