1. Static data set-up for Settlement and Auto-collateralisation in T2S T2S Programme Office European Central Bank Workshop Frankfurt, 29 November 2013 ECB-PUBLIC

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

3. 2 Organisation’s BIC structure in T2S Varying usages BIC structure Management of securities settlement process Management of collateral and liquidity pools

4. 3 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

5. 4 Organisation’s BIC structure in T2S How do we find the optimal target BIC structure in T2S? Target BIC structure in T2S Efficient securities settlement process Optimised pools of liquidity and collateral Legacy BIC structure Flexible management of clients for client collateralisation

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

7. Static data configuration 6 Party Hierarchical Model T2S Operator CSD ACSD B Bank PBAADEFF123 CSDAAAYY123 CSD Participant Securities Account 2 Securities Account 3 Securities Account n Broker Central Counterpart CSD nNCB Bank PBAADEFF123 NCBAAAYY123 T2S Dedicated Cash Account 1 T2S Dedicated Cash Account 2 Level 1 Level 2 Level 3 Level 4 Party BIC Parent BIC Securities Account 1 T2S Dedicated Cash Account n

8. Securities Account T2S Dedicated Cash Account Static data configuration 7 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 Dedicated Cash Account T2S Party Securities Account

9. 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 T2S Operator TRGTXE2SXXX 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 Bank A PBAADEFF123 NCBAAAYY123 T2S Dedicated Cash Account 1 T2S Dedicated Cash Account n Party BIC Parent BIC T2S hierarchical party model  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 8

10. 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 T2S Actor CSD CSD BIC: CSDADEFFXXX T2S Party identification CSD BIC: CSDADEFFXXX Party BIC: CSD Participant CSD Participant’s clients CSD CSDADEFFXXX T2S PBAADEFF123 PBCLDEFF456 could also be used as Party BIC PBAADEFF123 PBCLDEFF456 Note: 9

11. Table of Contents Parties static data setup 2 Introduction 1 Management of securities settlement process 3 T2S Auto-collateralisation 5 Management of liquidity and collateral pools 4 Implementation models 6 10

12. Management of securities settlement process 11 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

13. 12  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 Securities Account: 1234 5678 T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: CSD Participant BIC11: Customer name: CSD PART Securities Account: 1234 5678 T2S CSD Account on behalf of CSD part.’s client having own BIC: Customer: CSD PART CL Securities Account: 87654321 PBAADEFF123 Securities Account: 87654321 PBCLDEFF456 PBAADEFF123 Management of securities settlement process Party and Account structure CSD Participant defines Securities Account 87654321 with its own Party BIC 11

14.  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 Securities Account: 87654321 T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: CSD Participant BIC11: Customer name: CSD PART Securities Account: 1234 5678 T2S CSD Account on behalf of CSD part’s client having own BIC: Customer: CSD PART CL Securities Account: 87654321 PBAADEFF123 PBCLDEFF456 Management of securities settlement process Party and Account structure Securities Account: 12345678 T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBAADEFF123 CSD Participant defines Securities Account 87654321 with the BIC 11 of the client 13

15. Management of securities settlement process Party and Account operational models “Account operator model” Securities Account: 87654321 T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBAADEFF123 Instructing PartyAccount owner Sese.023 Privilege to send Settlement Instruction on SAC 87654321 must be granted to Instructing Party PBAADEFF123 “Account owner model” No third-party privilege must be granted to Instructing Party PBAADEFF123 to send Settlement Instruction on SAC 87654321 Securities Account: 87654321 T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: T2S Party Identification: CSD BIC: CSDADEFFXXX Party BIC: PBAADEFF123 Instructing PartyAccount owner Sese.023 SecuritiesSettlement TransactionInstruction SecuritiesSettlement TransactionInstruction PBCLDEFF456 T2S 14

16. Management of securities settlement process Matching Concept – Mandatory and Optional matching fields Mandatory Matching Fields Additional Matching Fields Optional Matching Fields T2S Matching fields  Mandatory matching fields: Delivering and Receiving CSD, Delivering Party and Receiving Party BIC (11-digit, Party1 block)  Optional matching fields: Delivering and Receiving CSD participant’s client (11-digit, Party2 block). If inputted by both parties, the fields need to match 15

17. Management of securities settlement process Matching – Account Owner model DELI RECE Delivering CSD Delivering Party Receiving CSD Receiving Party (PBAADEFF123) (87654321) (CSDADEFFXXX) CSDADEFFXXX PBAADEFF123 CSDADEFFXXX PBABDEFF111 (PBABDEFF111) (CSDADEFFXXX) (PBCLDEFF456) (PBCLDEFF111) (PBCLDEFF456) (PBCLDEFF111) “Account owner model” Mandatory fields Optional fields 16 CSD Participant BIC e.g. PBAADEFF123 used for mandatory matching

18. Management of securities settlement process Matching – Account Operator model DELI RECE Delivering CSD Delivering Party Receiving CSD Receiving Party (PBCLDEFF456) (87654321) (CSDADEFFXXX) CSDADEFFXXX PBCLDEFF456 CSDADEFFXXX PBABDEFF111 (PBABDEFF111) (CSDADEFFXXX) “Account operator model” Mandatory fields Optional fields 17 Mandatory matching performed with the BIC of the client e.g. PBCLDEFF456

19. 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. Business Validation Sese.023 SecuritiesSettlement TransactionInstruction Matching X T2S Party Securities Account: 87654321 PBAADEFF123 “Account owner model” The Instructing Party (SAC owner) will receive the allegement T2S Party C PBCLDEFF456 “Account operator model” The Instructing Party will NOT receive the allegement *It is not possible for a third-party to receive a copy of the message T2S Party PBABDEFF111 18

20. Management of securities settlement process Message Subscription and Routing Configuration Message Subscription The “message subscription” allows to define whether a message has to be sent or not to a given T2S Actor “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 19

21. Table of Contents Parties static data setup 2 Introduction 1 Management of securities settlement process 3 T2S Auto-collateralisation 5 Management of liquidity and collateral pools 4 Implementation models 6 20

22. Multiple Securities Accounts may be linked to the same Dedicated Cash Account independently of the underlying T2S Party in order to centralise liquidity T2S Party PBAADEFF123 T2S Party SAC 12345678 SAC 87654321 Dedicated Cash Account (DCA) 77777777 PBCLDEFF456 Management of liquidity and collateral pools Liquidity pool - Centralised into a single Dedicated Cash Account T2S Party PBAADEFF123 SAC 12345678 SAC 87654321 Dedicated Cash Account (DCA) 77777777  A liquidity pool in T2S is a collection of Dedicated Cash Accounts that can be used for settlement of transactions involving a cash component 21

23. 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 T2S Party PBAADEFF123 T2S Party SAC 12345678 SAC 87654321 PBCLDEFF456 Management of liquidity and collateral pools Liquidity pool - Split on several Dedicated Cash Accounts T2S Party PBAADEFF123 SAC 12345678 SAC 87654321 DCA 8888888 DCA 99999999 DCA 77777777 DCA 8888888 DCA 77777777 22

24. 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 Same linking configurations are possible between Securities and Cash Accounts as for liquidity pools 23 T2S Party A PBAADEFF123 T2S Party B SAC 12345678 SAC 45678912 SAC 87654321 Dedicated Cash Account (DCA) 777777777 PBCLDEFF456 T2S Party B SAC 87654321 PBCLDEFF456 Dedicated Cash Account DCA 77777777 Dedicated Cash Account DCA 88888888

25. Table of Contents Parties static data setup 2 Introduction 1 Management of securities settlement process 3 T2S Auto-collateralisation 5 Management of liquidity and collateral pools 4 Implementation models 6 24

26. T2S Auto-collateralisation Party setup, Account structure, configuration of Liquidity and Collateral Pools are key components of the auto-collateralisation process in T2S T2S auto- collateralis ation Party - Account Relationship model Management of Liquidity Pools Management of Collateral Pools Static data, liquidity and collateral pool setup 25

27. T2S Auto-collateralisation BIC structure - Entity Relationship  The BIC structure governs the flexibility and control in the settlement and auto-collateralisation processes PBAADEFF789 PBC2FRAA111 PBCLCLFF456 Client1 of PB PBCLDEFF456 Client2 of PB PBC2FRAA001 Client3 of PB PBC3NLYY220 PB PBAADEFF123 CB Auto- collateralisation (Primary CMB) Client collateralisation (Secondary CMB*) CSD Participant with same BIC8 as the PB PB authorises BIC4* (PBCL*) of client for the use of DCA PB authorises BIC8* (PBC2FRAA*) of client for the use of DCA PB authorises BIC11 of client for the use of DCA CSD Participants with different BIC8 as the PB CB links BIC8* (PBAADEFF*) of the PB to primary CMB CB links PB DCA to CB cash account PB PBAADEFF123 CB NCBAXXYYAAA and/or (*)Securities account of different clients can be linked via one CMB or several CMBs. Cash Accounts Securities Accounts 26

28. Table of Contents Parties static data setup 2 Introduction 1 Management of securities settlement process 3 T2S Auto-collateralisation 5 Management of liquidity and collateral pools 4 Implementation models 6 27

29. 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 28

30.  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 Implementation Models Decentralise liquidity pools in T2S – No auto-collateralisation DCA 1 PBAADEFF123 DCA 2 PBAAGHI1XXX Proprietary A/C 1 PBAADEFF123 Main Branch A/C 2 PBAADEFF789 Proprietary A/C 3 PBAAGHI1XXX CB Cash Account NCBAXXYYAAA Branch A/C 4 PBAAGHI12AA Primary CMB 1 Primary CMB 2 Securities Accounts 29

31.  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 Implementation Models Centralise liquidity and collateral pools without client collateralisation DCA PBAADEFF123 Proprietary A/C 1 PBAADEFF123 Client 1 A/C 1 PBAADEFF789 CB Cash Account NCBAXXYYAAA Client 2 A/C 1 PBAADEFF201 Primary CMB Securities Accounts 30

32. 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 DCA PBAADEFF123 Proprietary A/C 1 PBAADEFF123 Main Branch A/C 2 PBAADEFF789 Proprietary A/C 3 PBC2FRAA001 CB Cash Account NCBAXXYYAAA Primary CMB Secondary CMB 1 Client 1 A/C 1 PBCLDEFF456 Client 1 A/C 2 PBCLCLFF456 Secondary CMB 2 Securities Accounts 31

33. 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 32

34. 33 Thank you for your attention www.t2s.eu