Securities settlement harmonisation has always been critical for Spain and Portugal, but with T2S approaching, it is vital.
Securities settlement harmonisation has always been critical for Spain and Portugal, but with T2S approaching, it is vital.
The deadline for European CSDs to indicate whether or not they would sign the T2S Framework Agreement was 30 June 2012, a key milestone in the T2S project.
On top of the first group of nine CSDs that have already signed up for T2S in May 2012, including Spain’s Iberclear, another 15 CSDs have recently announced that they will join T2S, with Portugal’s Interbolsa among them.
The to-do list for countries before the project gets underway is lengthy, with Spain’s tasks being particularly extensive. The country must examine how T2S fits with multilateral trading without a CCP, evaluate the viability of a CCP for equities to simplify the pre-settlement processes, and most importantly, to make a number of decisions to bring Spain’s current post-trade processes in-line with European standards and practices.
With T2S expected to go live in June 2015, “Spanish custody looks open to significant transformation in the next few years,” said an insider at a major Spanish bank. “In 2010, Spain had just over €1.5 trillion in eligible assets, a figure incomparable with that of the UK or US.”
“We have an odd central clearing system, with no netting and each trade settled individually; but if T2S happens like it should, this will all change.”
Other changes are set to change the face of the Spanish banking system, with the crisis leading to increased centralisation. Two years ago, more than a third of the 80 custodian banks registered with the Spanish Central Securities Depositary (Iberclear) were local savings banks—or cajas—and they were only registered with Iberclear for custody of Spanish public debt. Now, a series of deals has slashed the number of cajas from 45 to less than 10 since the country’s banking crisis took hold.
The Bank of Spain has already nationalised and sold off the troubled cajas Unnim (bought by BBVA) and CAM (bought by Sabadell). Banca Cívica, which is another merged caja that was listed on the stock market in the summer of 2011 along with Bankia, was merged with Caixabank, and three unlisted Spanish savings banks—Liberbank, Ibercaja and Caja3—will combine to create Spain’s seventh-biggest lender by assets.
Aside from the cajas, the market is dominated by Spain’s four largest banks: Santander, BBVA, La Caixa d’ Estalvis and Caja de Ahorras de Madrid.
Staying in the market requires ever-increasing capital, and insiders doubt that any of the smaller custodians will want to make this investment. Boards of small- and medium-sized custodians are looking at how to withdraw from the business, often using global custodians and administrators to pick up elements of their back-office servicing, such as collateral management and stock lending.
“Domestic Spanish investors don’t ask for such a wide range of services that investors in other markets demand, probably because we simply don’t offer them,” said the source. “[Spanish custodians] don’t tend to provide value added services commonplace in other markets, so price competition is limited to plain custody and settlement services. Again, this will change as T2S comes into place.”
View from the bridge
There are far-reaching ties that still exist between the Iberian peninsula and South America, and so major players such as State Street and BNP Paribas have settled in Portugal to access the developing Latin American markets, seeing the country as a strategic gateway to Brazil, South America and parts of Africa. Deutsche Bank also began offering custody services in 2008, with the bank establishing a direct link between its Euronext platform, Interbolsa, and Banco de Portugal.
Another rival in the Portuguese and South American custody markets is Banco Santander, with local Portuguese custody banks, including Millenium BCP, Banco de Spirito Santo, and Caixa Geral de Depositos, also offering healthy competition.
AST talks to a spokesperson from Spanish banking group BBVA, which also maintains a strong presence in Portugal, about Iberian custody.
What is the situation with sub-custodians?
From our perspective, and as per the feeling perceived from clients and prospects, the time for sub-custodians has not passed. On the contrary, we consider that, more and more, clients are demanding the local expertise of a local agent: the ‘local touch’ is a must for markets such as the Spanish one. We feel that the focus on value-added services such as corporate action and tax reclaim services will help us to differentiate ourselves, as a local agent, from other competitors.
In the following years, we are sure we will see an increasing competition scenario, in which there will be changes in the roles and business models of custodians and CSDs. We anticipate big opportunities as well as big threats for every player in the post-trading infrastructure.
We think that all of the forthcoming changes in the Spanish and European marketplaces will, in relation to infrastructures, give BBVA the opportunity to increase the service offering to those financial institutions that will not meet the minimum requirements to have direct access to such infrastructures.
What other services are clients looking for when they send out RFPs?
As per the last RFPs received, there is a strong demand on liquidity and collateral services as well as securities lending. The current situation demands a more proactive management of collateral services and local agents are key in order to provide such liquidity services. In the past, these types of services were included in the custody services fees. However, we see that unbundling as key in order to decouple such services from the pure custody services.
In addition, the most advanced technology related with the value-added services that local agents perform is highly valuated. In order to be able to cope with our clients’ and prospects’ demands, a brand new internal system called NSCV (Nuevo Sistema Corporativo de Valores) went live two years ago, covering all of the cornerstones of asset servicing. The NSCV platform is an in-house proprietary platform that is designed to provide securities and custody services for the whole bank, ie, institutional clients, retail and collective investment vehicles, as well as for domestic and foreign securities.
With the implementation of NSCV, our clients have benefited from increased STP processing, as well as from enhancements on transactional control, higher flexibility in terms of SWIFT reporting and improved management capabilities.
What changes relating to derivatives will we see in the near future?
We do foresee that regulation will be key in order to dispel some of the concerns about derivatives. In this regard, the role of central counterparties in the clearing process will be a significant factor in order to eliminate counterparty risk.
How would you describe the custody market in Iberia?
Specifically referring to Spain, the custody market is deeply changing. Irrespective of some specific features that could be not homogeneous if compared with the post-trading models of EU member states, the Spanish market has proven to be one of the most secure infrastructures within Europe. The fact of being such a controlled market has revealed its strong position to face the current crisis (ie, the Iberclear delivery guarantee mechanism applied to On Exchange Activity, the tight control of naked short selling that allows our registry system).
