In October 2022, the ECB announced the postponement of the T2/T2S consolidation by 4 months to 20 March 2023. It did not really come as a surprise to the banks, as it had already become clear in the weeks before that the new platform was not yet capable of what had been imagined. Resentment among the banks grew significantly. This was not only felt in the German market, but also at the European level. It was therefore not surprising that, in addition to Germany, the French national bank, another major player in the processing of TARGET2 payments, had indicated its status as "red" in readiness report query.
The signals from the other European countries were no better. Some central banks reported "green", but this was rather the exception. Since June, it had become apparent in the status reports that a go-live in November was being viewed increasingly critically. The main points of criticism were the test platform, which had been unstable for months, the unmanageable number of errors and defects, and the extremely time-consuming creation of master data in the Common Reference Data Management (CRDM). Particularly the large banks which act as co-managers for their indirect participants had to deal with a considerable amount of work here. The instability of the test platform was no help, and cost unnecessary effort. Another point was the installation of Go-Sign in the technical infrastructure of the banks, which is indispensable for the release procedure and ensures access to the new interfaces of the individual T2 services. This has also led to additional work for banks that had not been foreseen, especially in connection with distributed work environments (which have become more common due to Covid). By the end of 2022, individual banks were still struggling with this and had not been able to install and activate Go-Sign. Many have been able to use the newly found time to finalise these activities.
But what does the postponement mean for the banks and for the ECB? The answer to this is ambiguous. Reactions in the market were mixed. The big financial institutions would have liked the go-live to take place as planned, even considering the likelihood of considerable complications. But they were prepared to put up with that. For other banks, a go-live would have ended in disaster, as it was foreseeable that the necessary activities could not be completed by the time of the go-live. Ultimately, however, concerns about the stability of the Eurosystem were decisive for the postponement. It is hard to imagine what would have happened if, for example, SEPA payments could no longer be processed because banks were unable to provide liquidity in time.
The ECB has been working fast to improve the points criticised by the banks and to eliminate the defects classified as critical with hotfixes. But for the banks, this meant that testing had to continue. Even banks that had already successfully completed the mandatory testing activities could not sit back and wait, but continued testing in their own interest. Unfortunately, it turned out that with the delivery of fixed defects, new errors had crept into the new version.
Nevertheless, it is clear that not all bugs and defects will be fixed by the time of the go-live. Financial institutions must therefore be prepared for the fact that not everything will work smoothly from the start and that workarounds will have to be used. But which bugs have been fixed and which have not? What workaround must be prepared for? This too, at least that is what the banks hope, will be communicated to them in good time by the ECB. Because this has been another point of criticism in recent months: lack of communication and transparency.
The Sword of Damocles hanging over everything was the go/no-go decision that was made on 22/02/23. Even though the signs had turned in the go direction, there was still no certainty that another postponement would not be needed. Since SWIFT had already clearly communicated beforehand that they did not want to postpone their own migration again, the situation would have arisen that SWIFT would have already migrated to ISO 20022 while TARGET2 would still have had to be supplied with MT messages. This mixed operation would have caused major problems for many banks, especially those that forward payments in their function as "intermediaries", as many implementations implicitly relied on a simultaneous conversion, and a separation would only have been possible with renewed effort.
In recent months, SWIFT has been working intensively on the handling of cut-off data, i.e. data truncation. SWIFT has developed corresponding recommendations and rules, but banks could well do without them. A compliance department in a financial institution is likely to break out in a sweat at the idea of truncated or even deleted data in a payment transaction. In times when regulation has increasing influence and impact on banks, this scenario is unthinkable. But unfortunately, the reality is that this is exactly what can happen, especially in the initial phase when all participants have to get used to the new situation.
The bottom line is that the T2/T2S consolidation has turned out to be as complex as was feared from the beginning. The number of banks that have to manage the migration is enormous and the most sensitive area of all, the Eurosystem, is affected. Nevertheless, there is reason to look forward to the changeover date with confidence. The last few months have given banks more faith again, as the measures introduced by the ECB have increased optimism. It is also important to bear in mind that the activities will not be completed with a go-live, but the banks will have to continue them immediately – the next release has already been announced by the Eurosystem for June. So there is no time for banks to take a breather – the pressure remains unchanged and the next issues are already around the corner.
Sabine Aigner
Thomas Ambühler
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