Sibos 2008 in Vienna — 15-19 September 2008

European Custodians & CSDs: adapt or perish?

> Tuesday 16 September - 11:00-12:00

The European asset servicing ecosystem is undergoing an evolution. CSDs are expanding to compete directly with custodians, CSDs are collaborating to offer cross-market post-trade services and large banks are building pan-European custody networks.

Who will lose or gain in the face of this competition and consolidation? Can smaller custodians/CSDs survive through innovation? Is there still a place for traditional custodians in the EU? Are banks ahead of the game in locking in local customers across widespread networks? Is absorption or collaboration the wave of the future?

Vienna, Tuesday 16 September 2008

The weakest link

Despite public and private initiatives to ease the pain of clearing and settlement in Europe local investor habits continue to dictate the pace of change.

In July the Governing Council of the ECB took the decision to launch the TARGET2- Securities (T2S) project and commit resources to its completion. This significant addition to the ‘value chain’ in European custody formed the background context to a wide-ranging discussion under the rather dramatic title ‘Adapt or Perish’. Representatives of European CSDs, ISCDs and subcustodians, moderated by Dominic Hobson, Editor-in-Chief of Global Custodian Magazine, began by responding to a straw poll of the audience which suggested that T2S would provide opportunities for custodians, but that local CSDs could be the ‘weak links’ of the new extended chain.

David Penstone, Managing Director, Unicredit Markets and Investment Banking, spoke for all the panelists when he suggested that in fact CSDs would be affected differently, based on their overall business and local market environment. “For OeKB (which operates the Austrian CSD) T2S offers few opportunities to reduce costs but will probably lead to a loss of cross-border business with the result that short term costs for ‘domestic’ Austrian investors in Austrian securities will probably increase.” All agreed that it was, in the words of Sveinung Dyrdal, Executive Vice President, Verdipapirsentralen (the Norwegian CSD) “a wake-up call for all European CSDs which would lead to a reevaluation of their business models, competitive landscape and new opportunities.”

“Implementing the Code of Conduct is complex, especially in the critical area of risk management.” Mark Gem, Clearstream

Despite some reported concerns, none of the panelists suggested that any CSDs had been reluctant to embrace T2S. “All CSDs were given the option of joining and have voluntarily agreed to join in principle,” was the summary offered by Adolfo Garcia, Head of Securities Forums, Banco Santander. “Custodians have always sought to lower costs and are used to competition. CSDs will possibly offer a new challenge but one that custodians are happy to take on,” he added.

Structured collaboration
The response of the European ICSDs has been less consistent. Clearstream has been a major force behind Link-Up Markets, an initiative that allows CSDs to build bilateral links using low cost ‘convertor’ technology that is relatively quick and cheap to deploy. Dyrdal contrasted this “structured collaboration based on standards” approach with the ‘single platform, user choice’ model being created by Euroclear. Mark Gem, Head of Strategy and Business Management at Clearstream, suggested that “Link-Up offers a practical solution to the question of interoperability.” He further added that “implementing the Code of Conduct (on interoperability) is complex, especially in the critical area of risk management. Apparent lack of progress should be seen in this context and the Code of Conduct remains an important initiative” – a position that was endorsed by another audience vote.

“CSDs will possibly offer a new challenge but one that custodians are happy to take on.” Adolfo Garcia, Banco Santander

While providing a valuable insight into how the market is evolving, the panel mostly chose, perhaps understandably, to avoid consideration of more difficult longer-term developments in European capital markets that might identify all the weak links in the custody value chain. The growth of MTFs was regarded as primarily a problem for local exchanges and a benefit for custodians.
The recently approved option allowing for issuers to use a CSD of their own choice rather than the one in the country of listing was too new to think about.
Investors were seen as still being, and for the foreseeable future remaining, creatures of habit; still wedded to investing in their securities in their home country rather than considering themselves ‘citizens of Europe’. As Penstone commented: “Individual behaviour must change if a genuine European capital market is to evolve.” Despite the best efforts of the EU to speed up this process, it seems that all market participants will have plenty of time to adapt and even longer before they have to worry about perishing.