What are the advantages of early adoption?
For us, it is simple. Being part of the first wave allows us to adopt a new approach now, before the rest of the market, and to work with the systems that will define the landscape in the Europe of tomorrow. We will be testing these systems first and ironing out any of the problems with the European Central Bank (ECB) systems, which will also mean that we will use them for longer than the second- and third-wave central securities depositories (CSD), and we will understand them more intimately. This means we can pass on better value and better solutions to our customers, and build better on business opportunities.
What we are building here is knowledge, insight and experience of something that no one has used before, and I would expect that those who don’t come in to it now could be at a disadvantage. It is possible that others could learn from our experiences in the future, but that just means that we are defining how people should perform in the market.
What will the benefits be for the clients?
What Target2-Securities (T2S) and a number of other regulations are creating is a more level playing field. Where we used to have national settlement and vertical siloes, that part of the business is being treated more like a commodity and centralised to be run out of one unit. This means that a number of firms that currently specialise in settlement will have to look elsewhere to add value.
A lot of banks are moving in as well, broadening their offerings from the client-facing industry to the operational asset servicing space. There will be healthy competition in those spaces for those that are able to compete.
There are also opportunities for partnerships that could allow clients to take their pick of players. Where in the past they could only choose a national CSD, they will now be able to look at one that works across borders. It’s the market consolidation dynamic. The customer will end up with greater choice in a more competitive marketplace, which means, ultimately, better services at better prices.
The first wave of T2S is just around the corner, scheduled for 22 June. Are you ready?
For the last few months, we have been conducting mandatory community testing, where our clients get access to the solution and can test the ECB’s platform.
So far, we have had no issues with our system that would stop us from moving on. The ECB has had some issues that it has made clear, and it is working to fix those. As for the decision to go ahead or not, this is a massive infrastructure project that the ECB is working on, so their decision will have to incorporate the pan-European risk-management and exposure point of view. We don’t have the same considerations; the ECB is the central bank that is responsible for Europe’s infrastructural stability, so they have to take a wider perspective.
Theoretically, we have no reason to believe that our clients will not be happy with the outcome. We’ve got some extraordinarily talented people working for us on this project, and they are doing a great job.
Do you have any additional services that you will implement off the back of T2S?
One thing that we’re looking at is the collateral management and liquidity space. We operate cross-border and have been doing so for 20 years, and a common challenge for asset managers is that liquidity pools are fragmented and assets spread across several countries. When you start moving it from one place to another, the majority of CSDs will take the assets and supply a local pool of liquidity. This is fine on a small scale, but once you move towards large-scale assets and liquidity pools, the concentration risks become enormous.
We believe clients would be more open to the idea of keeping the assets where they are but using the crediting and debiting capabilities to move liquidity virtually, so we are working towards that. It will be a big change in the post-trade environment.
We have a number of other projects in the pipeline, which we will probably roll out over the course of the next two years.
What kinds of challenges could T2S bring for global custodians and CSDs?
Again, it’s levelling the playing field. A number of large custodian banks have set up a CSD themselves, for example. It’s flattening the landscape and blurring the lines of who does what, and who has the capabilities, now, to enter new spaces.
If a customer looks at the value chain, it’s a great opportunity. Buy-side firms are always looking for greater value-added services, they’re looking at larger competitive CSDs and they can put a lot more in to those higher-value activities such as performance analytics and hedge fund management. They can offload low-value business to organisations such as ours. We will see a lot more partnerships, outsourcing and sharing of responsibilities.
The larger banks especially should focus on defending their existing revenues or growing their cross-border revenues, because essentially, now, anyone can come in and play.
What should businesses be doing to fully realise the potential of the change?
Businesses need to look more holistically at the potential benefits of T2S, and start to engage with organisations that know what is going on with regards to implementation. I would argue that even if clients are still taking a back seat and thinking that they will engage with the second or third wave, they should start to look at it now. If they wait for two years, then by the time they can crystallise their strategy or develop real solutions and services, too many changes will have already taken place.
We will definitely see firms getting left behind. National CSDs could end up doing domestic registration of shares, and some will start offloading or outsourcing activities to neighbouring countries.
The ones that survive will be the ones that approach it with a real plan, that are ready to make partnerships and that can start adding value from the day they go live on T2S, creating new services and new solutions.
Firms must not deny that change is taking place on a very profound level in Europe, and to fail to take advantage of the opportunities this change presents would be a mistake
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