In the 1990s, the Nordic markets were a laboratory. They pioneered electronic trading in the cash and derivatives markets. The entrepreneurial OMX was the model of a modern commercial exchange. It tilted at the London Stock Exchange, founded a multilateral trading facility (MTF)—Jiway—two years too early, and sold trading and clearing platforms around the world. The firm pioneered a regional exchange and then a global one when OMX sold itself to Nasdaq in 2007. There was enterprise in the back office too. The Nordics conceived a regional central securities depository (CSD) in the 1990s before anyone else thought of it. They were even the first to experience a proper financial crisis, in 1991-92. Only in their sluggish appreciation of central counterparties (CCPs) did the Nordic markets lag rather than lead the world. So it was sobering to encounter the resigned demeanor of Nordic bankers this Fall. Like custodians everywhere, their banks are awash with cash printed by central banks but unable to find a remunerative home. Bloated balance sheets await with trepidation the collateral squeeze that must follow the withdrawal of quantitative easing. On the exchanges, listings are static and turnover is listless. The fear that liquidity will migrate to London has yielded to an elemental concern that Nordic markets are simply uninteresting to international investors. If that proves permanent, volumes will not recover even as monetary conditions normalize, and fewer companies will have initial public offerings (IPOs).
This is a depressing prospect for Nordic custodians servicing inbound business. They also sense they are feeding their nemesis, as they sink an estimated 100 million Swedish krona into T2S. They fear T2S will bring penalties for failed trades, without compensating price reductions, even if it delivers savings in sub-custody and liquidity. DNB, Handelsbanken, Nordea and SEB proclaim their readiness for T2S without being confident they can use it to expand into other markets. In fact, they expect to cede revenue to CSDs armed with banking licences and to global custodian and investment banks using T2S to switch to self-clearing.
Even the local franchises of custodians are unsettled by T2S, fearing it will raise the cost of domestic settlement as surely as it cheapens cross-border access, which is of limited interest to local investors anyway. The omnibus accounts favored by T2S also threaten to denude the Nordic infrastructure of its most distinctive characteristic—end-investor accounts. These lend CSDs a socio-political character absent elsewhere, and in an era more alert to asset safety, Nordic investors are reluctant to lose the assurance they offer. A compromise looms, in which institutions access T2S directly while the rest retain something like the current system. Its sustainability, given that post-T2S competition will force the sub-scale CSDs of the region to consolidate, is less certain.
One CSD that intends to survive is the Danish VP Securities, which led the regional CSD initiative at the turn of the century and retains its appetite for innovation. Unlike its Finnish and Swedish counterparts, it escaped immersion in Euroclear and exclusion from the eurozone by setting up VP Luxembourg. This enables banks to use Danish bonds as collateral in the euro-system, with which the Danish krone has an iliofemoral relationship. VP also owns vp.FUNDHUB, a mutual fund order routing, matching and settlement service. It is the kind of utility Nordic custodians are minded to support. Here, as elsewhere, fund managers have trapped custodians in low-margin fund accounting and transfer agency, while expecting them to swallow the processing costs of automated faxes and accept a shift in distribution from banks to online platforms. As they proved by allowing CSDs to operate end-user accounts, Nordic custodians are happy to outsource even client-facing functions, if it helps contain costs.
Pooling costs is the preferred alternative to reinvention. Shrunken return on equities are forcing Nordic custodians to change, but their capacity for innovation is currently devoured by compliance, which generates few offsetting opportunities. The liabilities that come with acting as Alternative Investment Fund Managers Directive (AIFMD) depositaries are seen as greater than the rewards. All Nordic custodians are skeptical of collateral management, foreseeing nothing but prodigious investment in technology. Custodians would prefer expansion of the system operated by the central banks of Denmark, Norway and Sweden, by which a Swedish bank can use collateral in Riksbanken to secure liquidity for its Norwegian branch from Norges Bank. The future in prospect here is utilitarian. If that sounds quintessentially Nordic, the real opportunity for the banks does not: it lies in the rising personal wealth of the region.