Evolution of European Post-Trade Arrangements Under T2S: Impact on Asset Servicing and Securities Payments
Asset servicing and securities payments are two aspects in the post-trade value chain that will not be directly addressed by the Target2Securities platform. As the settlement part moves to T2S, firms are grappling with the challenges of asset servicing and securities payments.
In the report Evolution of European Post-Trade Arrangements Under T2S: Impact on Asset Servicing and Securities Payments, Celent discusses different strategies that firms in the European post-trade value chain are likely to pursue in their asset servicing and securities payment arrangements in a post-T2S world.
Dependence on local specificities has traditionally meant that asset servicing has been provided by local custodians specializing in local markets. Regardless of whether a firm decides to access T2S directly or indirectly, it must have its assets serviced, and it is unlikely that many players will try to do this on their own. Local and regional custodians, iCSDs, and to some extent the CSDs are restructuring, innovating, and in some cases building up asset servicing capabilities in preparation for T2S. Provision of asset servicing only will be part of their offerings, but some are designing more variations such as the account operator model or the direct settlement model.
Regional custodians are positioning themselves as experts in multiple local markets, while iCSDs are improving their asset servicing capabilities to be at par with the regional custodians. Typical buyers of custody services, which include global custodians, CCPs, and broker dealers, are waiting for more clarity on what the market will be able to offer them.
“Buyers of custody service are reassessing their subcustody networks and will likely consolidate them,” says Arin Ray, Analyst with Celent’s Securities & Investments Group and coauthor of the report. “However, scope of consolidation may be limited because it concentrates risk. Moreover, global custodians who acquired global custody businesses of local players usually use local firms as their local custody partners.”
For securities payments, there will be dedicated cash accounts within the T2S platform with links to the RTGS accounts of T2 for liquidity, but banks will also be able to use auto-collateralization in T2S. So the DVP will take place in the T2S platform or be enabled by T2 RTGS liquidity providing. With the unbundling of settlement, asset servicing, and custody, fees will also be unbundled. Hence where some market participants used to get their securities activities funded nearly for free by agent banks, the cost of commercial bank funding will likely increase.
“Central bank money is cheaper than commercial bank money, so many market players are evaluating new settlement and asset servicing offerings for cheaper funding of the DVP overnight activities,” says Joséphine de Chazournes, Senior Analyst with Celent’s Securities & Investments Group and coauthor of the report. “But not everyone wants to use central bank money because the administrative and legal implications may be substantial. This will also impact collateralization procedures, impacting their treasury, and the links it will have with all businesses of the banks.”
This research is part of Celent’s ongoing coverage of T2S developments and was carried out in partnership with SWIFT. This research greatly benefited from detailed discussions with 17 major participants representing the different categories of providers and customers of post-trade services in Europe, including four global custodians, four regional custodians, two subcustodians, two iCSDs, one CSD, one regional CCP, and three broker-dealers.
In this report we discuss the implications of T2S beyond settlement and what it means for asset servicing and securities payments function. We try to foresee which asset servicing capabilities will be offered in a post-T2S world, which market players will offer them, and under which models they are likely to offer them. Similarly we discuss how the securities payments function will evolve, and what would shape firms’ strategies regarding their payment arrangement.