Central Securities Depositories (CSDs) are balancing their traditional guardian roles with competitive market dynamics – including a new deal with buy side firms, maintaining friendly relations with custodians, and preparing for T2S. We spoke with Clearstream subject matter experts on how those dynamics are evolving.
Though banks have been dealing with balance sheet and leverage issues for some years now, the buy side is only just starting to be affected. On the repo side, corporate treasuries are moving into secured financing while asset managers and insurance companies are increasingly seeking out securities lending, said Richard Glen, Head of GSF Sales – UK, Ireland and Americas: “The derivatives space is the one (that) in terms of volume (is) the game changer because repo and securities lending markets traditionally have learnt to mobilize collateral effectively. A lot of the derivatives space historically has still relied on the mobilization of cash, which is convenient but also relatively easy.”
Which is why asset managers are starting to build out capability around clearing and uncleared derivatives collateralization, Glen added: “They need to make their assets work harder for them, and therefore looking to get access to a wider wholesale infrastructure that gives them more diversity of counterparty and liquidity.”
The flip side of bringing in the buy side is being careful not to disrupt existing relationships with custodians. That’s why it’s not a matter of direct competition between CSDs and custodians, said Philippe Seyll, Co-Chief Executive Officer at Clearstream Banking Luxembourg. The ICSD, he explained, is not interested in providing services like fund accounting and depository bank services. Moreover, traditional safeguarding roles in the market are not aligned with some activities.
“Credit wise, (custodians) are more adventurous than we are, because we have this essence of being one of the last resort, we are further down in the chain,” he said. “Custodians have a better feel for those buy-side firms or smaller-balance-sheet institutions that they deal with.” It’s one of the reasons that Clearstream is developing sell side partnerships, added Glen: “There are services that we will never be able to directly offer a buy side firm. Rather than trying to roll out something different, and ultimately causing more disruption, it’s preferable to work with the partners our clients are already happy with.”
Partnerships are also partly driven by technology. Clearstream’s in-house built proprietary tri-party collateral service, CmaX, interlinks its settlement platform, and eventually with T2S. The technology is franchised with third party domestic custodians like BNP Paribas, Citigroup, Standard Chartered, and in the future Deutsche Bank. There are also franchising arrangements under the Liquidity Hub GO initiative with Brazil’s CETIP, Australia’s ASX, Spain’s Iberclear and South Africa’s STRATE. “Leveraging the benefits of the technology in particular with regulation is now becoming more global rather than regional,” Glen noted.
Perhaps the most anticipated project is the link in with T2S, a pan-European settlement project that has been plagued with setbacks, sometimes frustrating participants – particularly when delays can cost some millions of euros per month, according to one estimate. There is also an industry debate whether users will actually see transaction costs go down as a result of T2S, and only the ECB knows how that might unfold. Smaller, local CSDs may also be nervously anticipating a difficult future once banks are connected to a wider network, and there’s speculation that a consolidation period will occur.
Seyll said that there are no plans for any consolidation phase and that the focus is on ensuring that all systems are ready for the T2S go-live date, currently February 2017 for Clearstream. He added that the benefits of getting up and running for the ICSD is obvious: “We suddenly become more attractive for those clients who want to deposit assets with us in order to potentially deliver collateral through the multitude of banks that are connected.”
