London Stock Exchange Group (LSEG) is setting up a CSD in Luxembourg to provide settlement and custody services, based on the existing infrastructure of its Monte Titoli CSD.
J.P. Morgan’s collateral management business intends to use the Luxembourg CSD as its provider of settlement, custody and asset servicing services. It will be the first client of the new CSD.
Monte Titoli will provide technology, operational services and access to T2S for the new CSD. Subject to regulatory approvals, the new CSD is expected to launch in the first half of 2014 in order to provide services to CCPs when they become authorized.
The new CSD will operate an open-access model and will help enable customers to meet changing regulatory obligations, such as the European Market Infrastructure Regulation (EMIR). Under EMIR, central counterparties (CCPs) are required to hold collateral assets posted as margin or as default fund contributions at a securities settlement system, such as a CSD, where possible.
“We have been working on this initiative probably for the better part of the last year in terms of monitoring the regulations, having discussions with the various regulators about EMIR, we considered all options,” says Kelly Mathieson, global head of Collateral Management at J.P. Morgan.
“We considered the option of building or creating a CSD directly, we considered the option of having a different form of partnership. But ultimately we concluded that the best solution and best when we consider time to market, the stability and track record of the entity that we would be using and the scope of services that we felt would help us help our clients best comply with EMIR was by using the LSEG as a solution for holding our collateral management assets.” The choice of the LSEG was also the most commercial and time sensitive option, Mathieson adds.
J.P. Morgan already has an existing relationship with the LSE for CSD services via Monte Titoli. “We are very excited about them setting up a CSD in Luxembourg, for the purposes of the EMIR regulations we’re helping our clients with the collateral they need to post to a CCP as reflected in EMIR,” says Mathieson.
Mathieson says J.P. Morgan’s move to outsource settlement and custody for collateral management to a CSD became apparent over a year ago and became a key initiative as the collateral management business became part of a new line of business within the Corporate and Investment Bank called Agency Clearing Collateral and Execution (ACCE).
“Prior to this decision, our collateral management client assets were serviced through our global custody business, which then utilized our CSD providers in the EU,” says Mathieson. “The way forward – and this is our interpretation of the EMIR and the recent ESMA FAQs – make it clear that in order to support our clients in collateral management and their interaction with the increasing amount of cleared transactions that need to be conducted with CCPs, the CCPs will need to comply by having those assets held directly with a CSD (Article 47 in the ESMA FAQs on EMIR). So, this change will streamline the process by working directly with LSEG as our CSD for collateral management client assets, versus going through the global custody business to use CSDs.
“We have an existing relationship with LSEG via their Monte Titoli CSD, and access those services through our custody business. As such, it was more indirect connection to the CSD. In our new solution, we are still using a CSD – through this solution, it will be a direct relationship between the collateral management business and LSEG. The commercial model with our clients remains the same.”
J.P. Morgan is hiring the LSE at arms length. “We have great confidence in their business strategy – we’re simply changing our network providers, noting that this is only for the collateral management business, and does not apply to other J.P. Morgan businesses.
“We have familiarity with the LSEG’s business model and their approach to CSD services because we have the established relationship with them already in Italy. We have confidence in their strategic direction to build a new CSD in Luxembourg and we really felt they had a good vision for building that out as on ongoing business and for what that could mean in a T2S environment.”
Raffaele Jerusalmi, CEO of Borsa Italiana and director of Capital Markets, London Stock Exchange Group said: “We are delighted to confirm our plans to establish a new CSD which will provide a broad range of custody and settlement services. The Group is well placed to provide a full range of post trade services to meet the evolving needs of our customers arising from on-going financial regulatory change and the continued focus on operational efficiency.
The announcement comes six months after BNY Mellon announced its intention to build its own CSD to help clients comply with EMIR and T2S.
J.P. Morgan to Partner with LSEG for New CSD in Luxembourg, Kelly Mathieson Explains Why
J.P. Morgan’s collateral management business said it intends to use the LSEG's Luxembourg CSD as its provider of settlement, custody and asset servicing services.