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Enhancing collateral, cash & liquidity management

Enhancing collateral, cash & liquidity management

Enhancing collateral, cash & liquidity management

T2S is bringing about sweeping change with new opportunities for firms to access liquidity and finance their activity more efficiently.


As a catalyst for harmonisation, Target2-Securities (T2S) will play an important role in helping market participants meet their collateral requirements and access vital liquidity.

“T2S creates an environment in which it will be easier to mobilise collateral, centralise cash management, and generate liquidity more cost-effectively,” says Olivier de Schaetzen, Head of Product Solutions - Collateral Management at Euroclear. “The timing is right given the pressure firms are under to post more collateral to finance their activity, as well as to lower costs and risk. At Euroclear, we will provide a single access point for our clients to leverage the opportunities presented in T2S in an efficient way.”

Easing collateral mobilisation

Increasing access to collateral is one of the key areas of focus for firms in the new T2S environment. The harmonisation of settlement windows, messaging and deadlines in T2S will significantly improve the ability for firms to move assets between the different central securities depositories (CSDs), and between the CSD and international CSD (ICSD) environments.

With collateral mobilisation made easier, the speed at which collateral can be deployed between various European markets will also improve. This enhanced collateral velocity and mobilisation across different business lines, processes and markets will thus enable firms to avoid collateral blockages and improve their collateral management.

Centralising cash management

Another benefit of T2S lies in the possibility to centralise cash into a single TARGET2 cash account to cover all settlement activity across T2S markets. “Cash liquidity is more than ever linked to collateral liquidity,” says Cédric Gillerot, Director of Global Collateral Management Products at Euroclear. “Since cash liquidity is only received against collateral, being able to centralise cash management for pan-European settlement activity will help minimise the consumption of increasingly precious collateral resources.”

With liquidity more dependent on collateral, there is a greater need to optimise cash liquidity in order to save collateral. “While collateral is not scarce today, regulations and also more cautious post-crisis behavior will increase the need for collateral in the coming years,” says Frédéric Hervo, Director of the Payment Systems and Market Infrastructures Department at Banque de France.

“T2S will offer users state-of-the-art optimisation arrangements, like auto-collateralisation, to save collateral and liquidity in the context of DVP Model 1 settlement in central bank money,” he adds. Auto-collateralisation will provide fully collateralised intraday credit dedicated to T2S securities settlement and will be available to all T2S eligible participants for domestic and cross-border settlement.

Improving liquidity management

Many firms today use multiple cash clearers in Europe to settle their activity and to ensure they have rapid access to large liquidity sources in stressed market conditions. By centralising activity in either a CSD or ICSD, firms will be able to reduce the costs associated with these liquidity sources, while maintaining or even strengthening their access to immediate and scalable liquidity using the auto-collateralisation functionality in T2S.

Moreover, new rules that remove the requirement to repatriate assets locally before they are mobilised as collateral for Eurosystem credit operations have helped pave the way to more efficient liquidity management in T2S. Indeed, it is now possible to consolidate collateral management activities (financing, securities lending, etc.) through a single (I)CSD and post securities to a single central bank, acting as Correspondent Central Bank, in order to access TARGET2 liquidity. This way firms can automatically and dynamically optimise collateral to meet their needs and more fully integrate their collateral management with their settlement and auto-collateralisation activities.

Making T2S work for you

Given the ever-increasing demands on collateral, efficient collateral management services are more important than ever to enable collateral to be mobilised where and when appropriate and to ensure it is put to its best use within and outside of Europe.

“Euroclear has an established track record in providing innovative collateral management solutions,” says Gillerot. “Our collateral management systems and services follow an open architecture model and are settlement-location agnostic. This means, for example, that firms can settle in a T2S CSD but still run their financing book out of Euroclear in either the CSD or ICSD environment. If two counterparties want to settle transactions in commercial bank money, they can use the triparty services of Euroclear Bank; if they want to settle transactions in central bank money, then the triparty services provided in the ESES CSDs are available. Even when counterparties are in different settlement locations, we have established triparty interoperability between Euroclear Bank and ESES to ease our clients’ access to liquidity and collateral held in both environments.”

The harmonisation T2S will bring about will have benefits beyond settlement. “We aim to help our clients take advantage of the new opportunities T2S will bring to more efficiently manage their collateral, cash, and liquidity,” says de Schaetzen. “This way they can hit the ground running and stay agile as their needs continue to evolve.”

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