There is one idea banks traditionally stick to: the quicker you adapt to new regulatory changes, the easier you are likely to cope with them. And if you can anticipate the changes, you might even take one step ahead of your competitors. That may have been the thinking behind BNY Mellon’s launch, in January 2013, of a central securities depository (CSD) business line domiciled in Belgium.
“We looked at what was happening in Europe,” says Chris Prior-Willeard, CEO of BNY Mellon CSD. “It seemed to us that there were a number of changes – in terms of regulation, in terms of competition, in terms of the way clients wanted to buy their services – and we looked across all our businesses in Europe to identify what the common denominators of change were.”
A number of factors informed consideration of a new CSD business – from the size of the bank’s collateral pool, through confidence that it could compete with incumbent CSDs while offering a broader range of additional services, to an alignment of the CSD business with the bank’s other services.
But the true deciding factor was simple: European Commission proposals for legislation on CSDs signalled a new predominant role for those entities in the settlement process, as did the ECB’s work on Target 2 Securities (T2S). Under this system, CSDs will be the only parties involved in a contractual relation with the Eurosystem to settle trades. At the moment, 23 European CSDs, including BNY Mellon, have signed the T2S agreement.
“We recognised that T2S would have a rather big impact on our market,” Prior-Willeard says.
There was another factor, in the shape of Deutsche Boerse’s bid for NYSE Euronext. While the merger was blocked in January 2012 by the European Commission, which argued that the deal would have led to a near-monopoly in European exchange-traded derivatives, the threat was big enough for BNY Mellon to take the lead and launch its own CSD business.
“Obviously, by putting NYSE’s Liffe together with Eurex, you’d end up with a very large derivatives exchange by world standards,” notes Prior-Willeard.
Still, for all the good reasons behind it, the move was certainly not a simple one. In April last year, the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO) set new requirements for CSDs. Firms seeking to offer such business now need to conduct a thorough and deep analysis into the control system, operating capability and management functions of regulated market infrastructures to ensure they can offer appropriate services.
“Although it gave us some clarity where clarity was scarce, it is very demanding,” Prior-Willeard points out. “We have been working very hard with the regulator to make sure that we covered the whole scope of the framework appropriately.”
The future will tell whether or not other custody banks bite the bullet of legal and cost burdens and decide to undertake similar moves.