As the securities services industry grapples with regulatory change, providers’ interaction with the buy side is changing considerably. Opportunities have arisen for tailored services and custodians who provide them. Commerzbank’s Robert Scott shares some of his observations of these trends in the last year.
GC: Market infrastructures have been partnering together to ascend the value chain. How does that affect the custodians?
RS: Regional banks can offer clients something different in the way of regional services. Custodians have a role in areas such as margin movements, connectivity and providing a framework with bank services. A key differentiator is market advisory. We are moving toward a cleared world and collateral execution and product are becoming core.
GC: What role can they play?
RS: There continues to be challenges among investment banks and transaction banks that have merged teams and organizations together. The last tier of clients were all things to all men but movements in regulation have played a key role in redefining models and they have challenged them. The average age of a securities technology platform is 18 years. Due to the explosion of equities and bonds – all they have being doing in scaling up is making bolt on acquisitions.
Front offices are moving from fix costs to variable costs. Due to T+2, T2S and CSDR there will be a need for one stop shop for post trade needs.
Mittlestand economies have different platforms and a sausage factory approach of listening to clients and solving problems for them. For some it suits more specialized and tailored standard service but its different approach to sales to the client – we provide a personalized service where they start to redefine who they want to work with because the big banks are pulling out of vast business and clients given very short notice.
GC: What will be the key themes for 2015?
RS: In terms of collateral the buy side is not aware of the implications of moving to a cleared world. Studies from Clearstream say there is enough collateral but it needs to be in the right place. They are unaware of the effort of moving to a cleared world. Costs are pushed out by existing CSAs. In clearing you need to think about posting margin next year.
Asset managers don’t want more unbundling – they just want to understand the costs. They are under pressure to go to the lowest price point of things like intraday liquidity. The whole industry must indicate the costs. People are not ready for unbundling but they are ready to have a conversation about the risk you take on.
With Wave 1 T2s the jury is still out on the things like technical specs. Lowering cross border settlement costs as it moves out of ECB testing CSD – there are still questions about that and the interoperability CSDs. Still many CSDs are on the fence. But the cost of implementation will be significant.
There will be more partnerships along similar lines as APTP, FIS, CAPCO and Euroclear for outsourcing. Studies say the costs for corporates and market participants need to reduce by 40-50% to driving cost out.
Volumes are not going up, we are seeing margin compression and those companies that have grown by acquisition are seeing further costs. There will be the emergence of further collaborations and partnership to get a handle on costs. Every tier one has offshored but we are seeing cost arbitrage is not working.
The collaboration between a global transaction bank and investment bank will see challenges. There will be the emergence of credible tier two organizations. Next year you will see the big organizations looking to outsource because the industry cannot sustain the status quo.