GC Interview With BNY Mellon’s Tom Casteleyn On T2S

With the first wave of TARGET2 Securities (T2S), Europe’s new settlement system, now just six months away, Global Custodian speaks to Tom Casteleyn, managing director for T2S and market infrastructure at BNY Mellon, about their focus for 2015 and what the post-T2S environment will look like for the securities services industry in Europe.

GC: Where is the focus for BNY Mellon this year with T2S?

TC: We are using T2S to fundamentally change the way we process settlements and safe-keeping in the European markets. If we don’t adapt, that will be detrimental to our European franchise. Today we have a model where we generally use sub-custodians in Europe; tomorrow we will be much more directly connected to the CSDs. We believe we have to do that to compete with the other global custodians.

On top of the settlement layer, we are developing a portfolio servicing layer (i.e. income tax, corporate actions processing etc.), where we have two options: go it alone, or work with a local provider in the market that has experience in those matters. The end model will probably be a combination, where our own preference, from a pure strategic point of view, is to own that part of the value chain completely.

Once the market and the participants digest T2S and the system proves to be robust, we will then move our client positions over from existing sub custodians. We are looking at the end of 2015/early 2016, but it depends how the market responds to the first wave of T2S.

GC: What implications will T2S have on sub-custody in Europe?

TC: Sub custody, and especially settlement, in Europe is getting more and more commoditized, and especially with T2S it will be very hard to establish differentiators. It is fair to say at the moment, while not everything will be harmonized, harmonized settlement is going to be a big part of it. Over time, harmonization may make sub-custodians less relevant in the core European markets. T2S is somewhat taking away the added value of a sub-custodian, so it makes the case for us to go to the direct route clearer.

However that does not mean sub-custodians don’t have value; they have a lot to offer in the emerging markets, for instance. Nevertheless, it is logical that in, say our top 10 largest and most developed markets for us to be a direct custodian. But we cover 106 markets, so there will still be 96 markets where we will use sub-custodians.

GC: Are we at a point where we have regulatory certainty with T2S?

TC: As it stands, T2S will definitely work within the framework of CSDR. T2S start modestly, with only Italy and a few smaller markets going live in wave 1. It will really come into full effect when three or four really big markets go live and you start to see a lot of cross-CSD settlement. I don’t think it will be that crucial in the early months that CSDR level 2 is finalized, but equally it is important that we get through that process and we have good market consultation. It will be important to get some clarity before wave 1, but I don’t think it will be that crucial to have it completed.

GC: And finally, how will T2S affect competition amongst other CSDs and global custodians?

TC: As an organisation, we are looking to make a leap forward with T2S, so naturally we are also looking to leave a few players behind. The combination of settlement efficiency we offer, as well as the integration of asset servicing with triparty collateral management, is something nobody else will have. And with the CSDs, they don’t have the commercial bank optionality, and vice versa. We have both the CSD and bank component, so I am confident we are well positioned to be one of the leaders in Europe.