T2S reporting of multiple pending reason codes –
Follow-up of CRG meeting on 6/7 July 2016
ECB T2S Programme Office
European Central Bank
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Description of the issue
T2S does not consider auto-collateralisation when reporting MONY

In case a transaction failed to settle for both securities & cash, T2S reports all
pending reason codes to both counterparties. Different to the settlement attempt,
potential use of auto-collateralisation is not considered for the reporting of reason
codes.
CSD
Example:
DvP,
BANK1 
BANK2
Quantity: 100
ISIN X,
Amount 1000€
NCB
BANK1
BANK2
BANK1
SAC1
SAC2
DCA1
100
ISIN X
ISIN X: 0
ISIN C, type
EEUR: 3,000
BANK2
1000€
DCA2
Cash: 0€
Auto-coll
limit: 10,000€
T2S Reporting:
T2S  BANK1: sese.024 PEND, LACK/CMON
T2S  BANK2: sese.024 PEND, CLAC/MONY
Lack of cash is reported, even if
sufficient auto-collateralisation credit
could potentially be available
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Background
CR621 was raised by Euroclear to respond to that situation
The topic of reporting together LACK and MONY was already discussed in a workshop
on Cash Forecast and message volumes. Two issues were identified

Both parties involved in a DvP transaction receive status update messages on the
change of the cash provision status, even if the overall status of the transaction (e.g.
pending due to lack of securities) does not change. It was reported in the workshop
that this would result in a lot of status messages which only provide limited additional
value

Treasures are informed about insufficient liquidity, even if auto-collateralisation is in
place. This might lead to over-funding
T2S-0621-SYS - Multiple pending reason codes (combination of lack of securities and
lack of cash) raised by Euroclear now formally addresses this topic

In the CR, it is requested that T2S should not report MONY/CMON but only
LACK/CLAC, if there is a lack of securities already preventing settlement of a
transaction. It is expected that this solution would reduce the amount of status
messages considerably
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Discussion of CR621 in the CRG
Penalties regime might have to be considered
CR621 was also discussed in the CRG
 CRG members highlighted that reporting of lack of cash has to be considered also
from the perspective of the Settlement Discipline/CSDR. If auto-collateralisation is not
checked before reporting of MONY/CMON, the cash party might be charged a penalty
based on ‘incorrect’ lack of cash information, in case the settlement instruction
remains unsettled at the end of the intended settlement day or beyond.
 It is currently under discussion in the CSDR TF whether auto-collateralisation should
be considered in the context of settlement penalties in the aforementioned scenario.
As all the options discussed so far which would change the reporting behaviour of
MONY would have an impact on the scope of instructions subject to settlement
penalties, any decision taken in the CRG would have to be validated by the CSDR TF.
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User requirements on the reporting of pending statuses
Two potentially contradicting User Requirements
URD v5.04, section 7.3.2 Validation and requirements for the provision check
Reference ID T2S.07.270
T2S shall perform the provision check in the following sequence:
1. securities, 2. cash on DCA, external guarantee limit, auto-collateralisation, unsecured credit
When the provision check 1 is not successful, then T2S shall indicate that insufficient securities
are available to settle the transaction, end the provision check and trigger the termination of
the settlement process for the transaction. When the provision check is successful, then T2S shall
indicate that a securities account has sufficient securities to settle the transaction and initiate the
provision check for the cash leg(s).
URD v5.04, section 5.1 High level description of life cycle management and matching
1.5 Communication of settlement status
Settlement status message: ‘T2S shall provide multiple-statuses reporting that gives more flexibility
and brings more efficiency than single-status reporting.’
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Possible solutions
No reporting of lack of cash
1. No reporting of lack of cash if there is a lack of securities
a) Funding process: treasurers would not get any information whether they still have to
provide cash or not. On the other hand they do not receive misleading information.
This might only be of a minor disadvantage as some treasurers might rely on cash
forecast information rather than provide liquidity based on status update messages
b) Number of messages: The CR initiator expects volumes to be much lower compared
to the current design. Doubts were raised on that by 4CB. To be analysed further
c) Impact on the T2S system: impact is expected to be lower compared to other
solutions
d) Settlement Discipline related status reporting: Instructions which would actually have
MONY are not reported and thus they might not be considered for Settlement
Discipline (SD) calculations
Open points for clarification if option is chosen:
•
Should reporting only be changed for DvP/RvP or also for DwP/RwP?
 Option 1 with equal treatment of DvP/RvP and DwP/RwP is the preferred solution
from a 4CB perspective
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Possible solutions
Taking auto-collateralisation into consideration
2. Constant check for auto-collateralisation in case of insufficient securities
a) Funding process: settlement managers and treasurers would always know if more
liquidity or securities have to be provided
b) Number of messages: potentially volumes to be lower compared to the current design.
Doubts were raised on that by 4CB. To be analysed further
c) Impact on the T2S system: potentially a significant change required and likely least
performant solution
d) Settlement Discipline related status reporting: Instructions for which autocollateralisation would have been available are not reported and thus they might not
be considered for Settlement Discipline (SD) calculations
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Possible solutions
Taking auto-collateralisation into consideration
3. Check for auto-collateralisation in case of insufficient securities only at/right before the
DvP cut-off (4pm)
a) Funding process: settlement managers and treasurers would have to analyse their
auto-collateralisation setup and related positions after receipt of PEND LACK/MONY.
The status update after the cut-off potentially does not help, as LACK/MONY would be
reported again on the next business day. Instead, cash forecast could be used for
calculation of required cash amounts
b) Number of messages: potentially be even higher than today. All messages that would
be sent today would continue to be sent. In addition, there would be messages sent at
the 16:00 DvP cut-off
c) Impact on the T2S system: potentially a significant change required and likely
reduction in performance around 16:00 (DvP cut-off)
d) Settlement Discipline related status reporting: Instructions for which autocollateralisation would have been available are not reported and thus they might not
be considered for Settlement Discipline (SD) calculations
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Possible solutions
Summary
Possible solutions
1.
No reporting of lack of cash if there is a lack
of securities
•
Number of
messages
(
Funding
process
Impact
on T2S
)
To be clarified: Inclusion or exclusion of
DwP/RwP
2.
Constant check for auto-collateralisation in
case of insufficient securities
3.
Check for auto-collateralisation in case of
insufficient securities only at/right before the
DVP cut-off (4pm)
( )
(Current situation / no change)
To be considered:

As long as it is not clear whether or not auto-collateralisation should be considered in the context
of settlement penalties, it is not possible to evaluate the different options from the perspective of
Settlement Discipline.

Combinations of the options might also be feasible, but are not considered explicitly by this
presentation
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Thank you for your attention
www.t2s.eu
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