The industry has seen too many regulations to name here come its way. How are they progressing, and how much more regulation is there coming down the path?
The European Market Infrastructure Regulation is a work in progress. A couple of the regulatory milestones have been reached, and there are some more to come: collateral reporting, the definition of FX-derivatives versus spot, and clearing obligations.
The Central Securities Depositories Regulation (CSDR) has not been finalised but work on the second level has already begun with a 90-page discussion paper from the European Securities and Markets Authority (ESMA), and we will see further consultation on draft regulatory and implementation standards.
Securities Law Legislation has been a hot topic for decades and still no dedicated proposal has been published. The European Commission has tried to put bits and pieces into other regulatory initiatives but the big picture is still missing.
Basel III is high on everybody’s agenda right now. The Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) are the acronyms to know here and those will highly affect the way banks can and will do business with their clients.
And there is more to come: structural reform in Europe inspired by the Liikanen report, the German Separation Law, and the Volker Rule in the US all try to establish rules around which businesses banks should be doing in the future and which should be separated from investment banking.
There are also significant additional reporting requirements on the horizon such as Securities Financing Regulation and the Financial Transaction Tax in Europe. There is no doubt that regulatory pressure will remain high across the financial sector for years to come.
What are custodians doing to prepare for T2S, and how has the euro crisis affected their preparations?
Deutsche Bank has been an active participant in TARGET2-Securities (T2S) since the beginning of the project and indeed throughout its different stages since. In so doing, we have voiced concerns on behalf of the market and our clients to ensure that the platform meets the requirements of all stakeholders.
The 2008 financial crisis has put additional pressures on budgets but T2S is a strategic project for Deutsche Bank and we will be delivering it regionally.
A lot of IT resources are spent, not only by central securities depositories (CSDs) and the eurosystem, but also by custodians preparing their infrastructure for T2S. We have invested millions to build a competitive product, which is ready from day one. A number of important decisions had to be made such as the connectivity option one wants to employ.
We are now in the final stages of our preparations and looking forward to the first testing phase for the first wave of migration in June 2015, where reality will show if the European platform meets market needs.
How is pressure on the clients of custodians affecting mandates?
Active dialogue on regulatory topics with our clients is ongoing and in the custody space we have created a dedicated team to look in particular at regulatory changes and how they affect our clients and the bank.
One of the current regulatory trends is investor protection, and we see clients asking for more segregation of assets throughout the custody chain despite final rules on this yet to be defined and so it is not fully clear at which level a segregation of assets will be required.
In this context, we believe being able to offer different parts of the asset management business from within the same firm will be essential to gain large mandates in the future.
What kind of clients are European custodians keen to pick up, and what are they doing to attract
this business?
We believe that focusing only on one client segment would not be prudent from a risk perspective. Our business model and service offering has elements that suit broker-dealers as well as large global custodian banks or retail banks.
In particular, our regional offering in the context of T2S will offer our clients a one-stop-shop model to access all T2S regions through a central hub. This helps clients to benefit from most of the opportunities offered.
In addition, being able to understand and explain the regulatory impact of relevant developments is a key differentiator to clients in being able to steer in times of uncertainty.
How do you view the market shape changing within the CSD space?
While it was anticipated that T2S would push CSDs into consolidation, we have actually seen new CSDs being established ahead of T2S going live. Whether all the CSDs will remain once T2S is up and running remains to be seen.
T2S and the CSDR will serve as a catalyst for further competition among CSDs. But it is not only CSDs that compete with each other. Some CSDs use T2S and CSDR as an opportunity to also look for additional revenues and start competing with custodians.
Before venturing into those fields it will be important that no business expansion endangers the proper functioning of the core activities of the CSDs, eg, the settlement of securities transactions in their systems. So to what extent banking services will add to their risk profile needs to be considered.
In light of the current discussion on recovery and resolution of financial market infrastructures, it will be essential to define functions which are economical critical and required for the orderly functioning of the market and which functions could actually be resolved as they are not a core function of a CSD.
What are the consequences of inefficient settlement, and how can the obstacles be solved?
In this context, the question that needs to be raised is: what is considered inefficient settlement? Based on some statistical analysis done by the European Central Securities Depositaries Association about two years ago, settlement efficiency in Europe is already quite high.
Within Deutsche Bank, we believe that T2S will act as a catalyst to further enhance settlement efficiency in Europe. Here we see in particular a standardised settlement day across Europe and a harmonised set of matching fields. This helps to sort out non-standardised communication and settlement across CSDs, which have caused some friction among participants in the past.
The CSDR, with its proposed settlement discipline regime, will provide further incentives to avoid and reduce settlement fails. However, any future regulation in this area should be developed in close cooperation with relevant industry participation in order to account for different settlement and custody models. This eventually would ensure that settlement inefficiencies will be addressed at the source and not at the intermediary level.
What are your predictions on the future for derivatives clearing?
Clearing will bring a number of currently un-cleared derivatives onto clearing platforms, thereby reducing the currently existing counterparty default risk.
However, it should be noted that the number of central counterparties (CCPs) active in the field of derivatives clearing would be limited.
To date, only five CCPs have been authorised to clear derivatives and only one has been authorised to clear credit derivatives.
It is currently unclear which derivatives will ultimately have to be brought to CCPs and a number of derivatives might be too complex or illiquid for CCPs to effectively perform a proper risk reduction function.
Given the significant concentration of clearing business on very few financial market infrastructures, it will be important that the future standards on recovery and resolution that are currently being developed make sure that the infrastructures have the right procedures in place to avoid a spill-over effects from the default of clearing participants.
How many trade repositories do you think Europe needs?
Given the broadening scope of reporting requirements we might actually see further trade repositories specialising in certain products. However, we believe that reporting should be centralised, thereby favouring a global data warehouse that can process all of the different regulatory reporting with which banks have to comply.
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