Over the past few years, the ISO 20022 migration has been a dominant topic for the global payment industry – and the Euro market is no exception. As a business analyst working on the migration of the Eurozone’s leading Real-Time Gross Settlement (RTGS) system – TARGET2 – I would like to take this chance to reflect on my experiences and share some of the key lessons that I have learned over the past three years, as well as outline the upcoming activities as the new go-live date (March 2023) approaches.

In 2019, TARGET2 announced its plans to migrate to the new ISO 20022 messaging standard, which forms part of its broader T2–T2S consolidation programme. Unlike SWIFT’s migration in the correspondent banking space or the migration of high-value payment systems in other markets, such as Australia, Malaysia and Singapore, which have each taken a gradual approach to the ISO 20022 migration, the Eurosystem has instead decided to follow a “big bang” approach. This means that there will be a switch to data-rich ISO 20022 messages from “Day One”, with MT messages not supported thereafter.

Key changes by T2–T2S consolidation

The scope of T2–T2S consolidation programme goes far beyond a typical ISO 20022 migration – adding far more complexity to the project. Some of the key changes introduced by the T2–T2S consolidation are as follows:

• New guidelines. T2 User Detailed Functional Specifications (UDFS) usage guidelines have been created. Although the UDFS specifications are, for the most part, aligned with the guidelines for High Value Payments Plus (HVPS+) and Cross-Border Payments and Reporting Plus (CBPR+), local variations remain and will need to be taken into account.
• New model. The InterAct V-shape communication model (with a network vendor agnostic approach) will replace the SWIFT FIN Y-copy mode communication model.
• New interface. A harmonised interface with the Eurosystem Single Market Infrastructure Gateway (ESMIG) will be introduced, which will bring T2 (for settling payments and centralised liquidity management), T2S (for settling securities) and TIPS (for instant payments) services together in one place. This not only introduces a new user interface, but also several new shared services. This includes, for example, Common Reference Data Management (CRDM) for all TARGET services, which do not exist in today’s TARGET2 world.
• New account structure. The existing account structure of TARGET2 participants at their supervising central bank will be renewed with the respective segregation of central bank operations. The co-management participation concept, which allows a participant to delegate the liquidity management of its Main Cash Account (MCA) to another actor, will be enhanced to allow more flexibility and better control for all participants.
• New procedures. There are several procedural changes for payment and liquidity transfers, for example:
  • Payment cancellation requests may now be submitted to T2 directly, whereby T2 will forward the request on to the receiving bank if the payment has already been settled.
  • Certain fund transfers, which were previously conducted using MT202, are no longer permitted. Instead, the camt.050 message type must be used for liquidity transfers to the Main Cash Account (MCA).
• New operating hours. Extension of the operating hours (opening at 2:30am CET).

Given the high complexity of the project, the T2–T2S consolidation is introducing challenges, as well as opportunities, for all participants. On the one hand, the new T2 infrastructure and message standard will necessitate fundamental changes to IT systems, and the new procedures will lead to significant business and operational changes. Implementing these requirements will by no means be easy – especially given the time pressure.

On the other hand, the consolidated TARGET services are expected to enhance operational efficiencies; early opening hours should help to reduce delays on payments initiated in the Asia-Pacific time zones; and participants that are ready from “Day One” may acquire new business relationships with those that are behind with their preparations and are seeking partners to support their T2 payment traffic.

Five key points for consideration

At the beginning of the year, the T2–T2S consolidation project entered the user testing phase, with banks – including Deutsche Bank – and ancillary systems taking part. From our testing experience over the past several months, I have noted several points of attention, which may serve as lessons for the future:

1. Testing resource planning
   As mentioned already, the ISO 20022 migration has a global reach. A number of the world’s clearing houses, as well as SWIFT, are running ISO 20022 migration projects with similar timelines. Given our global presence, we faced a situation where our backend systems would have to run testing for different ISO 20022 migrations in parallel. These conflicts, combined with resource constraints, represented a challenge – and thorough preparation and effective prioritisation was necessary. Going forward, more payment market infrastructures around the world will introduce the ISO 20022 standard and the shortage of qualified resources might become a challenge for the whole industry. As such, we believe that proper and prompt resource planning will be an important success factor.
2. Involvement across stakeholder groups
   Due to the complexity of the T2-T2S consolidation project, various stakeholder groups need to be involved in the testing phase. At a functional level, Product, Operations and IT teams all need to contribute to testing activities in both the account-to-account (A2A) and the user-to-application (U2A) modes. At a domain level, Cash Management and Treasury teams must be deeply involved in the account and liquidity topics. All relevant stakeholders should be fully engaged at an early stage, with clear responsibilities set out in the testing phase.
3. Static data setup in new T2 platform
   The registration and static data setup in CRDM, which was the pre-requisites for starting user testing, was one of the challenges in testing practice. Several aspects should be considered: start preparations as early as possible; define specific roles and responsibilities and clearly assign tasks; find out who the in-house Subject Matter Experts (SMEs) are and engage them; don’t hesitate to ask for support from central bank when encountering difficulties. Although the CRDM setup for user testing (and for most participants for Production as well) has been completed, similar activity might be required in other migrations/projects – and similar issues can hopefully be avoided.
4. Collaboration with co-managees
   Having opted for the co-management participation model, the majority of Deutsche Bank’s European branches has become a co-managee of our Frankfurt Head Office. At the very beginning, we did not have a sufficient understanding of how involved the branches would need to be in user testing. As testing progressed, more and more activities have been identified. This includes scenarios in which branches are requested to participate in U2A testing themselves, as well scenarios that include end-to-end, joint testing with the co-manager. For testing to be a success, and for the new co-management processes to be properly understood, collaboration between the co-manager and co-managees is key.
5. Format deviation and data truncation risks
   While the T2 UDFS standard for ISO 20022 is well aligned with HVPS+ and CBPR+, format variations remain – and not all of these are fully understood by our backend systems. As such, issues were found in user testing due to the misuse of different standards. Certain format differences, such as field length, might, for example, cause data truncation in instances where the payment goes through different market infrastructures during its lifecycle. This potential data loss risk needs to be recognised for IT enhancement and operational handling.

Upcoming milestones

With the latest announcement from the European Central Bank (ECB) to postpone the T2 go-live to March 2023, we are now running in the final miles of the marathon. So, what do we need to do next?

As a participant bank, the additional four months should give us time for more thorough testing. Besides mandatory test cases and basic scenarios, we will now bring in more complicated testing scenarios – such as those involving more agents along the payment chain, the combination of CBPR+ or other market infrastructures, the mixture of MT and MX format along the chain, among others. These complex scenarios are usually the real instances where issues might occur. Of course, we can never say that we have tested “everything” – but we do have the ambition to test as much as possible.

The prolonged timeline will also impact the release planning for go-live, especially given that the release management needs to be coordinated and adjusted across several different systems. For the CRDM setup, to avoid a big surprise on go-live day, we will make sure to check all the tiny details in the production environment – as there won’t be many opportunities to verify the production setup as we have in testing.

March 2023 is not far away. Let’s do our best in terms of preparation to make the T2 go-live a success.

An unprecedented journey

Before finishing, let me close with a personal note. We should all remember the initial go-live was set for November 2021, which then moved to November 2022 and finally is confirmed for March 2023. As you can see, the complexity of the project, the series of unforeseen global developments (such as the challenges of the Covid-19 pandemic), the dependency on external stakeholders (vendors, market infrastructures, ancillary systems, as well as more than 1,000 participants) all contributed to an unprecedented – and slightly stressful – journey.

However, be assured that I would not trade in this journey for the world. This has been – and continues to be – the most exciting project to work on. It has been a continuous learning session across payment processing, liquidity management and reporting. What I have enjoyed the most is the interaction with the various internal and external stakeholders, market infrastructures, peers and clients, where we have all joined forces to reach a single objective – the new normal in payments.

  By Wenzhou Xue,
  Business Analyst, Deutsche BankBack