CSD Regulation [CSDR] and TARGET2-Securities [T2S] can meet many of the requirements of the securities industry, but it needs to be delivered with a commercial influence, said Phillip Brown, member of the Executive Board of Clearstream.
Brown and representatives from the sell side and buy side today debated the changes facing their businesses under CSDR and T2S, including whether regulation would lead to more efficiency in the post-trade space and whether T2S is the panacea for Europes fragmented settlement landscape.
CSDR will separate the banking functions of a CSD from the core settlement function. Like T2S, it will make life difficult for some CSDs, which will have to ascend the value chain through asset servicing as the regulation drives further competition and heaps pressure on these infrastructures to reduce their settlement costs as they move toward T+2.
Under T2S and CSDR, consolidation among Europes 26 CSDs is inevitable as only those CSDs with the strongest value proposition will survive. Furthermore, T2S has attracted criticism through several delays and the likelihood that it will take away CSDs settlement revenue by allowing financial institutions to connect directly to the new infrastructure, and increase costs for CSDs and custodians that need to adapt.
The panel debated whether Europes post-trade infrastructure could be more efficient without these regulations. Graeme McEvoy, global head of Shared Services and Banking Operations at Morgan Stanley, predicted there will be an opportunity for CSDs too, notwithstanding the provision of cross-border settlement coming, to broaden their offering in much the same way that Clearstream and Euroclear have. In the absence of regulation, private enterprise could also create that connectivity among nations, McEvoy said. But youve already seen what could happen without T2S it allows Europe to demonstrate there is an opportunity to add more to the single market by the provision of connectivity. We would like to think the market could get there by itself without the regulator, but sometimes it needs a push.
Brown added: Its too easy to beat up on T2S, and if you look at where we are relative to where I think we would be, were way further down the line, because what its done is force some recalcitrant CSDs to collectively address a commercial challenge they face as a result of their settlement revenues evaporating under T2S. Its forced dialogue, and more interoperability between CSDs and those kinds of topics, but there was no commercial need or political will to make the change. So for all the criticism of T2S, if you look at the cultural change, the philosophical change, in the way that they view their role and the way that they view their role collectively, its a big change since 2006.
Andrew Rand, head of Direct Securities Services EMEA, Global Transaction Banking, Deutsche Bank, agreed with Browns comments on the importance of private industry involvement in the regulation of the post-trade space, but noted that the role of the CSD whether it will be an infrastructure or a competitor is unclear. What we would like to see is a forced rationalizing of CSDs in Europe. MiFID managed to break down the monopolies on trading, but CSDs are fragmented. They have not communicated their plans on how they will service the industry under the new regulations.
To this, Brown said: We have changed from being a safe-keeper in 2005 to a service provider. CSDs have reduced settlement fees by 30%, they created the tri-party repo market and they have a central role in trade registration and collateral under EMIR. But there are dark clouds for CSDs, because while the infrastructure has been resilient, the tendency has been to regulate everything. A separation of the banking from the settlement functions could impact our costs.
Commenting further on whether T2S and CSDR would help the buy side, McEvoy replied: T2S is not the solution, but a framework. It is a start. It enables connectivity for a single market infrastructure, but I have several choices to connect. The question is, do I decide today or do I let the infrastructure evolve until go live?
Under post-trade infrastructure regulation, the prize will lie in asset servicing as the markets consolidate into one settlement infrastructure landscape. Tax differences within Europe mean that CSDs have to provide post-trade services such as tax and reporting once trades have settled. This could benefit an ICSD or infrastructures that provide those services. Settlement was not the problem, but asset servicing is where most of the costs and risks lay, said Brown. T2S will introduce costs, but asset servicing is where the gem will be. CSD providers, like ourselves, have the ability to serve those assets like a custodian. T2S will provide an opportunity to lower costs. Well have the financing and custody, and we can facilitate costs on the funding side.
There is a concern about the separation of banking and settlement under T2S. But we provide $75 billion of secured credit on an average day and $100 billion on an above-average day. If that is removed, the market has to fund itself. If you try to fix that, you create a bigger problem than the one you are trying to solve.
Rand argued that CSDR gives CSDs license to become moneymakers. They dont have the expertise, and they could go head to head with custodians, he said. This could be risky.
McEvoy however, was not concerned by Rands cautionary note. If there is a simplistic post-trade solution where CSDs could provide front-to-back solutions, we should look at it, he said. Market participants should have an option of how to connect to T2S. If our collateral could be priced through a single vehicle would be good.
Consolidation and further mutualization among CSDs was inevitable under the new settlement paradigm, panelists agreed. With 26 CSDs in Europe, they dont have the scale to go it alone on T2S and survive, said Brown.
Rand added: Every country wants it, but not everyone can afford it.
Commenting on competition driven by CSDR, Rand said: Competition is a good thing. We will have some CSDs enter, and some will exit. The development pipeline comes at a cost.
McEvoy added: We would like to see new entrants. The CSDs have not broadened their offering. We wouldnt want the competitive model to be changed if we didnt think CSDs could ascend the chain. CSDs have not been forthcoming with their development in this regard and what their services will comprise. The regulatory business case will present itself when CSDs say what their plans are.
Janet Du Chenne