BNY Mellon is hoping to obtain a license from the Belgian banking regulator to establish a CSD by year-end, Global Custodian understands.
The US custodians plans to establish a CSD in Belgium come amidst regulatory moves to harmonize the European post-trade infrastructure through TARGET2-Securities (T2S), CSD Regulation (CSD-R), mandatory clearing of OTC derivatives with CCPs by the end of 2012 and the soon to become effective Alternative Investment Fund Management Directive (AIFMD).
These regulatory changes will have a direct impact on the custodians business model. As one of the largest providers of tri-party collateral management for institutional investors and banks, BNY Mellon manages that collateral, which is deposited with a CSD. With the European Market Infrastructure Regulation (EMIR) set to push derivatives clearing through a CCP, collateral managers need to calculate the net exposure of those counterparties moving to a CCP. These net exposures need to be fully collateralized and margin has to be deposited with a CCP. The role of a CSD in efficiently debiting and crediting between accounts of the counterparties as they move towards centrally cleared transaction is understood to be one of the reasons why BNY Mellon wants to set up a CSD, a source with knowledge of matter told Global Custodian.
Additionally, BNY Mellon, along with about 18 other banks, acts as paying agent, fiscal agent and warrant agent for Eurobonds, which are held by ICSDs Clearstream and Euroclear as notaries. Regulators have questioned the riskiness of the model. On the other hand, as a result of lower risk appetite, more vanilla Eurobonds are being used with pressures on these banks performing the notary functions to reduce their fees. BNY Mellon is concerned about losing revenues should one of the ICSDs decide to insource this function and become notaries or investor CSDs, said the source.
Separately AIFMDs level two measures, expected at the end of the year, stipulates that hedge funds should appoint a depository bank and safe-keeper of their assets. If these assets are lost, the depositary needs to replace them, thereby increasingly the custodians liability. Similarly a custodian who appoints a sub-custodian in another country for asset safekeeping is still liable for those assets should the sub-custodian default or lose the assets. A CSD function would help mitigate against this risk.
The decision whether to award a license rests on the Committee on Payment and Settlement Systems International Organization of Securities Commission’s (CPSS IOSCO) publication of guidelines for organizing market infrastructures and CSD-R.
While not commenting directly about its plans, BNY Mellon sent the following statement: BNY Mellon takes a proactive stance to the initiatives to integrate and unify the European financial infrastructure, specifically in terms of clearing & settlement, TARGET2-Securities and collateral management. As a major financial services company that is active in the post-trade space, we continue to look at all options available to us.”
J.P. Morgan is also reported to be setting up a CSD, although the timings of this CSD are not known. The custodian declined to comment.
(JDC)