GC Interview: Sub-custodians Make Case for Collateral Services Under T2S

The role of sub-custodians in the environment of TARGET2 Securities (T2S), the pan-European settlement platform, has come under fire recently. However the solution for its survival could be in managing collateral and liquidity from T2S.

One reason why the survival of sub-custodians is coming into question is the extent to which settlement is becoming more commoditized, whereby the global custodians can directly connect to the central securities depositary (CSD) in any market without going through the local sub-custodian.

However sub-custodians are strongly defending their case in the post-T2S world, in which collateral and liquidity management could be the key differentiator for them.

“The key for sub-custodians is a combination of maintaining the level of services we provide on the custody side, and leveraging the whole functionality of T2S on the liquidity and collateral side,” says Philippe Ruault, head of clearing, settlement and custody products, BNP Paribas Securities Services.

“T2S has brought up opportunities in intraday collateralization and the pooling of cash, so these are some of the functionalities custodians are able to leverage for clients within T2S.”

With competition most likely to increase between both custodians and the CSDs in Europe, a key challenge for sub-custodians is how to manage the pooling of settlement collateral.

“One example of what we do for our clients is to offer connectivity to the various collateral pools which sit with the ICSDs. So we provide a passport for clients to leverage the assets they have in sub-custody with us and to bring it to the CSDs,” adds Ruault.

As well as managing collateral and liquidity needs Alistair Jones, head of custody for Europe at HSBC Securities Services, says asset servicing will keep sub-custodians highly relevant in the T2S world.

“It (collateral and liquidity) will be the one thing that clients will need most, alongside corporate actions,” says Jones.

“What T2S will increase is the pressure around other post-trade services, such as how corporate actions will be facilitated, tax handling, and new issues settlements. So on the asset servicing side, sub-custodians will play a more critical role in the post-T2S world. While there are still certain aspects between markets that have not been standardized or harmonized yet, I do think the differentiator will be how corporate actions will be managed.”