Regulations, Collateral Management, Blockchain, T2S Launch, Cybercrime
The World Forum of CSDs Conference, which took place in Cancun last week, was fantastic! I want to commend the WFC organizers for a really great job both from a content and hospitality perspective. I saw a lot of happy (and tanned) faces!
The subline of this blog offers some of the most discussed buzzwords at last week’s conference.
“If you have ten thousand regulations you destroy all respect for the law” [W. Churchill in his second term as the PM in 1950s]
The post-trade industry has to comply with tens of thousands of pages of regulations in only few years. On top of these, there is another “perfect storm” brewing that CSDs must weather, that comes from global policies, such as CPMI-IOSCO and standards, such as ISO and SWIFT messaging. The impact is not only on CSDs but also their customers.
According to news, BNY Mellon is considering the future of its CSD and has halted further investments to its Belgium based CSD. In the statement, regulations were mentioned as one of the key issues. For CSDs and their customers, complying with new regulations is an investment without direct ROI. Innovation becomes crucial to survive! World Forum Attendees: Marcelo Wilk, BM&F Bovespa, Henri Bergstrom, Nasdaq, Steve Phillips, Nasdaq Source: http://www.wfc-2015.net/gallery
One of the most obvious areas for CSDs to provide new services is in providing collateral management. After all, collateral assets are managed by the CSD anyway! With the new regulatory initiatives and T2S, collateral management can become an exclusive service provided by the large CSDs, as concentration of assets becomes easier to manage. Smaller CSDs and ICSDs may want to consider collaboration to provide these services.
CSDs are optimally positioned to serve collateral needs because they:
- Are regulated
- Keep definite record of ownership of financial instruments
- Can ensure segregation of collateral Have the services to re-use and control the return of collateral together with managing the assets during corporate actions
- Are ideally positioned to fulfill compliance and customer reporting requirements
Some of the key areas to consider in a business case to provide these services are:
- Building necessary distribution channels and network of access
- Service capability to optimally collateralize
- Technology supporting the above with increased transaction volumes CSDs should evaluate this business case to see if it makes sense!
Many speakers and panels discussed and evaluated the feasibility of using blockchain technology in capital markets processing. Most agreed that the technology is in early stages with some significant issues to be solved, such as security and general feasibility; however, many CSDs said they are investigating the technology. One of the areas where blockchain could make sense is in collateral management due the need for real-time processing. Interestingly enough, Nasdaq recently announced a new initiative to use the blockchain concept to support its Private Market equity issuance, transfer and securities management. Despite some controversial opinions at the conference, we believe blockchain will be able to audit the market and keep robust records of all transactions supported by its Open Assets Protocol. The protocol enables the formation of a digital ledger of private market securities. Our approach to blockchain technology aims to modernise, streamline and secure typically cumbersome administrative functions, and will simplify the overwhelming challenges private companies face with manual ledger record-keeping. This project certainly alludes to some of benefits that the post-trade space could see from leveraging blockchain in the future. Watch this space.
There is a growing concern for the launch date of the T2S first wave. According to many people in the industry, one of the five CSDs in the first wave (Monte Titoli of Italy, SIX SIS of Switzerland, BOGS of Greece, Depositarul Central of Romania and MSE of Malta) may not be ready for the planned launch June 22nd 2015. This would be a telling delay if all of the “Wave 1 CSDs” are moved to later time. Despite this, T2S will soon be reality and all of its direct and indirect impacts will change the European post-trade industry and beyond.
Cybercrime is a rising concern that is threatening the whole capital markets infrastructure. Frankly speaking, I was amazed and very concerned in hearing that many CSDs have not sufficiently invested to protect them against cybercrime. After all, most of global securitized assets are kept in CSDs! I hope that the discussions in the WFC meeting put more focus on protecting CSDs against this growing problem.
My focus at the WFC conference
My topics of discussion in the technology panel were focused on:
- Agility to enable business innovation and regulatory compliance
- Systems supporting streamlined business processes and increased STP
- Decreasing total cost of ownership of technology used
- Possibilities of blockchain technology in post trade industry
Finally, I made a proposal for increased collaboration among CSDs to develop joint service offering: a Golden Source of securities and corporate actions - an information portal for capital market counterparties and investors in need of accurate and timely information to support their businesses. I According to the WFC representatives, this may become one of the WFC Task Forces going forward. Quite a few of the above topics I’ve covered in my previous blogs and the rest will be discussed soon. Stay tuned!
Henri Bergstrom is Head of Product Management for CSD Technology at Nasdaq's.