By Harry Newman, T2S Programme Director, SWIFT.
The only certainty about the impact of T2S on CSDs is that all will be forced to invest in it one way or another, argues Harry Newman, T2S Programme Director, SWIFT
One of the liveliest debates around the impact of T2S is how it will reshape the CSD landscape. A number of key questions are being asked. Will the number of CSDs fall as some struggle to compete on higher-value services in a world in which settlement is commoditized? Or will it rise, as new entrants look to secure a share of those value-added businesses, such as asset servicing? How many CSDs are really capable of providing pan-European services, and successfully competing with agent banks in multiple local markets? From a risk perspective, is it even desirable for CSDs to rise up the value chain? What might be the implications for CSDs that do not sign up for T2S from the outset? And how will the forthcoming CSD Regulation (CSDR) further impact the CSD landscape, and influence the way in which CSDs can respond to T2S?
The difficulty of answering these questions with any certainty was amply demonstrated during two recent conference sessions on the impact of T2S. At NeMa 2012 in Budapest in June the audience was fairly divided on the issue of how T2S and CSDRwill affect the number of CSDs in the marketplace. In a digivote, the biggest proportion 47% – said it would decrease slightly though a substantial 23% and 18% respectively said it would remain unchanged or would decrease substantially.
An audience poll during the European Clearing & Settlement conference in London in the same month focused on the issue of competition between CSDs, and yielded a similarly inconclusive result. Asked, If the result of T2S is competition, how big is the chance that users will really change CSDs in the medium term?, the majority 58% said there was a 50% likelihood of this happening.
If EU harmonisation of core business functions like settlement is a success, market forces will likely determine the number of CSDs that remain. But this process is not going to be a rapid one: based on what has happened with similar harmonisation processes in other areas of the market, this is likely to take several years, because the starting point will be each CSD seeking to shape its own independent future.
What is certain is that T2S and CSDR will enforce change to the environment in which CSDs operate in Europe. Both are designed to foster harmonization, with CSDR focused on achieving a level playing field from a legal perspective, and T2S doing this from an operational perspective. Together they will shift the landscape. Few if any CSDs will be immune to the impact of the outsourcing of settlement to T2S, which could impact business models especially where revenues are based on settled transaction volumes. And the more uniform setting of boundaries around their activities by the new regulation will limit the activities of some CSDs and broaden the horizons of others.
In short, all CSDs will be forced to re-shape their businesses, and to make some degree of investment to achieve this transformation.
One key area of investment will be in segregating settlement and booking/asset servicing systems. Those CSDs that are successful in raising the funds will likely invest in extensions to their business models, for example to enable multi-geography asset servicing. Some CSDs may consider outsourcing their remaining functions and processes to other CSDs or even banks, and this will require upfront investment.
Even CSDs that decide not to join T2S at the outset are likely to need to invest to ensure settlement efficiency is comparable to that in T2S markets, and its also possible they will decide to invest in joining at some point down the line.
In all instances, investment will be needed. The good news is that there are areas of potential collaboration between CSDs: there are common requirements that could be served on a utility basis, with all participants benefiting from cost mutualization. These could include asset servicing, collateral management, access to T2S and the management of that access such as the translation of transactional information between different formats.
To identify these opportunities, CSDs are engaging now in assessing the impact of T2S and CSDR on their business models, and in formulating their strategies to respond. Some tough choices need to be made in the next 12 months, to ensure CSDs can make minimum investment for maximum return, and ensure their future role within the shifting European securities landscape.