Twin regulations have sparked a slow revolution in the division of labour between the CSDs and custodian banks of Europe, which is likely to end in some unexpected alliances.
Regulation is forcing the central securities depositories (CSDs) of Europe to reinvent themselves. TARGET2-Securities (T2S) is absorbing the core settlement revenues of domestic CSDs, while the accompanying CSD Regulation (CSD-R) is fostering competition between CSDs, by standardising the settlement timetable, opening them to cross-border participants and encouraging the development of delivery-versus-payment (DvP) links between them.
Although a July 2016 report by the European Central Securities Depositories Association (ECSDA) confirmed that activity through the links that exist already is limited, T2S will overcome this inertia. It is encouraging global investment and custodian banks to rationalise their networks of sub-custodians as routes into national CSDs.
However, decisive shifts in post-trade business models are unlikely to happen before 2018, although we are beginning to see the emergence of new business models. The transition to T2S is not yet complete. Only a small number of banks and CSD’s have disclosed their plans for adjusting to it. With many of the legal and practical barriers to a single European securities market identified by the Giovannini reports of 2001 and 2003 yet to be cleared – they remain the subject of the European Post Trade Forum, established as part of the Capital Markets Union (CMU) project - circumventing local market idiosyncrasies still requires local market expertise.
Despite the slow start, two disruptive forces are perceptible. The first is the unbundling of settlement and asset-servicing occasioned by T2S. This is already leading to component-based post-trade services, in which buyers create their own combinations of service providers to fulfil different needs. This breaks with the integrated offerings of the past, and creates new dependencies and service demands, as multiple providers must exchange information with each other in real-time. One consequence is likely to be data copying mechanisms, of the kind familiar already in real-time cash payments.
A second potentially disruptive force is the likely growth of specialist providers. CSDs and custodian banks may choose to become specialist providers of issuance or investor services, or regulatory reporting, or asset-servicing, or collateral management. Such specialists might form partnerships with other specialists to deliver a complete set of services to brokers or fund managers, or elect to remain purely domestic providers, or form regional alliances or partnerships.
The outcome will be determined by the choices of customers, and these are difficult to predict in detail. What is virtually certain is a steady concentration of post-trade activity in the hands of a set of larger players, created by alliance and partnership as well as mergers, since the economies of scale created by amalgamating asset portfolios and transaction volumes will deliver competitive advantages.
These three forces - unbundling, specialisation and combination – will re-shape the securities safekeeping and transaction processing networks of Europe. They will gather momentum as the European Central Bank (ECB) will merge T2S with the T2 cash settlement system, accelerating the trend towards the single communications standard (ISO 20022) both platforms use, and creating room for new technologies (blockchain) to make an impact on existing networks too. To survive, CSDs will need to be agile, and make good strategic choices, especially in terms of the technology platforms they rely on to inter-operate with other networks.
