Custodian and CSD Battle Lines Drawn in Europe as BNY Mellon Enters Market Infrastructure Space
BNY Mellon has become the first global custodian bank to take the plunge and launch a central securities depositary (CSD) in Europe, in a bid to play a bigger role in the collateral management space—with sweeping regulatory reforms likely to significantly alter the post-trade landscape.
CSDs oversee the settlement of securities, the final stage of a trade’s lifecycle, and with a potential $2 billion collateral shortfall predicted once new G20 requirements come into play later this year that will bring the majority of over-the-counter derivatives trades on to centralized clearing, BNY Mellon is looking to better position itself in this new world.
And parallel to this, new regulation from Brussels is set to overhaul the post-trade space for the first time. CSDs in Europe have traditionally been national organizations that process trades within their own country but the new rules are likely to bring greater competition between CSDs and custodian banks—who act as a single point of access to national CSDs in various countries through a network of local custodian banks—as the current situation of custodians and CSDs living side by side is likely to be blown apart.
“The setting up of the CSD was, for BNY Mellon, to be able handle and manage the various regulatory changes coming towards us,” said Nadine Chakar, executive vice-president for global collateral services at BNY Mellon, in a media briefing yesterday.
A number of the new rules are likely to reduce custodians’ business opportunities as well as their potential sources of revenue, while increasing compliance costs—with CSDs the likely beneficiaries. It also means that BNY Mellon, with its new CSD, will now be able to compete against the likes of Euroclear and Clearstream for business.
“In the new European model, competition between CSDs and regional custodians will increase, as CSDs might choose to move up the value chain and banks may set up new CSDs,” noted Jean‐Michel Godeffroy, director-general of the European Central Bank, in July 2012.
Receiving regulatory approval from Belgium to launch the CSD, BNY Mellon says it will be able to offer market participants enhanced interoperability and efficiency in the global post-trade arena and will be able to offer issuer, settlement and safekeeping services for the benefit of all market participants across Europe and the wider global marketplace. BNY Mellon already offers these services, but on an individual basis to various markets.
“The idea came from analysis of the market environment and how it is changing in Europe,” said Chris Prior-Willeard, a BNY Mellon stalwart who has been appointed chief executive of the new CSD entity.
“We realized that the way in which the regulators were viewing CSDs was that they were organizations that fundamentally delivered three specific functions. One of notary, of insuring the integrity of a new securities issue and addressing the issuer market. Secondly, settlement, the transaction settlement between buyer and seller as a result of transactions between securities and, finally, fundamentally the safekeeping which is the holding and servicing of securities that have been issued.
“We found quickly that with very little extra ingredients at all that we were already on a business as usual and very well placed to put these three functions together, with existing platforms and existing technology that the bank already had which satisfied the regulatory requirements. And the key thing about our approach is that we cover the entire securities value chain.”
Other global custodians are thought to be planning similar moves to BNY Mellon.