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profile of the global custodians and subcustodians. Global cus-todians, and ultimately subcustodians, will take on liabilities in the case of loss of assets, and together with shrinking margins and stalling volumes, the future market landscape will be very different than it is today. In the case of the CSDR, the shortened settlement cycle will also have an impact because all the activities that you do now from T+1 to T+3 will have to be done much quicker—from trade affirmation to trade processing, settlement instructions (including prematching with the counterparties providing the instruction to the CSD), and finally providing the liquidity. This will be a big challenge for many providers.

T2S will also bring some opportunities in terms of creating the asset-servicing function as a separate function of settlement. Liquidity provision will also have to be carefully considered by custodians. However, for the Central and Eastern European region, which UniCredit represents, T2S will have less of an impact than for the rest of Europe because you’re talking about three countries that will be impacted: Slovakia, Slovenia and Austria. We also have two other non-euro countries, Hungary and Romania, which want to join T2S. Graham Ray, director, global product management, Direct Securities Services, Deutsche Bank: We’ve looked at some of the regulations in terms of future-proofing the business and what it actually means. What we’ve seen is the real benefits that the subcustodial network has in local expertise and how that can help clients through the changes that are occurring. When you look at

A Fork In The RoadKey figures from the world of European subcustody discuss how regulation is affecting their business and changing relationships between global custodians and their network of subcustodians.

Global Finance: What does the future of subcustody in Europe look like given the wave of regulation on the way?Alan Cameron, head of global strategic broker-dealers and banks relationship management, BNP Paribas Securities Services: It is difficult for everyone in our industry to keep up with all the regulatory changes. There are three that will have a major impact. The first is the central securities depository regula-tion. CSDR should bring in some important changes such as T+2 [transaction date plus 2 days] settlement and the harmonization of ‘true’ CSD services, which will be split from the CSD’s banking services. It will also allow issuers to freely choose which CSD to issue into. CSDs should respond to this competitive marketplace by providing better services to link the corporate world with the financial markets. These substantial changes will have a dramatic impact on CSDs and the custody business.

After CSDR will come T2S [Target2-Securities]. This will technically split settlement from custody. Its impact will be sub-stantial and mainly felt by the top custody providers and the CSDs. Third, there is the regulation coming in around funds, which will probably change the relationship between custodians, depositary banks, prime brokers and subcustodians. Tomasz Grajewski, global head of global securities ser-vices, UniCredit: I agree with Alan and would add regulations such as UCITS V [Undertakings for Collective Investment in Transferable Securities] and AIFMD [Alternative Investment Fund Managers Directive]. There will be changes in the risk P

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other financial institutions. Equally, the subcustodians will have to develop new services, some of which will provide their clients with multiple access points into the services that they provide. Ray: What’s important is the expertise required in looking at the subcustody network. There is recognition from the subcustody layer of the need to examine the business model and maybe recalibrate it. Sometimes the regulations generate interest in different business models. But actually, it’s what you’re trying to address in the posttrade environment with the relationship between the subcustody and global custody network to ensure that you can cover off the regulatory changes and the concerns that the global custodians have for their end clients, as well as how the subcustodian can add value to that network for specific functionalities and solutions. This ensures the greater importance of partnerships in the future environment.

GF: Should a global custodian have its own subcustody network? Grajewski: Asking this question to three representatives of sub-custodians, the simple answer is no. However, in recent years some global institutions launched self-custody or self-clearing vehicles. Obviously it’s a decision that is driven by a strong business case based on the strategic pointers in the market, the size of the business and whether the cost optimization achieved is significant. Will we see more of this? I would say, yes. But let me stress that there are still a number of regions and markets

a multitude of the regulations, you don’t actually see risks chang-ing; you just see the burden of proof moving in the value chain to a different party, who now assumes the risk and liability. That brings a difference in the relationships that are being considered.

For all this regulation, we also see opportunities. CSDR and the reduction in the settlement cycle from T+3 to T+2 create opportunities for the lending market and the pursuit of assets that are needed to keep liquidity moving around in the system.

GF: How will the relationship between global custodians and subcustodians be impacted?Grajewski: Under AIFMD the global custodian takes on liability for the assets, which automatically means we [the subcustodians] will be the ones in the value chain that are impacted. Global cus-todians will look for stronger partners rather than single-market providers. At the core of the due diligence for global custodians will be appointing those subcustodians with proven operational integrity, deep local experience and knowledge, and—what is even more important these days—a partner with an unques-tionable reputation in terms of credit, risk and strong financials.Cameron: The demarcation between global custodians, ICSDs [international central securities depositories], CSDs and sub-custodians will be more blurred in the future. Generally, global custodians are in a position where they need to add value to their clients beyond just connecting up numerous subcustodians. To provide these value-added functions, they will need the help of

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where a local footprint and expertise is essential. In my region there are tax regulations in many countries, account structures or anti-money-laundering regulations, which are really critical. That’s why we firmly believe in the local footprint both at the bank and global securities services level.Cameron: There are good arguments both for and against a global custodian having its own subcustody network. On the one hand, it gives a degree of safety and control, but against that there is a need to be efficient and economic. Not all global custodians have the scale to make this work. The key thing is for them to work out who their target clients are and how they can build a service to meet their clients’ needs. Different models will suit different global custodians. Ray: With the significant amount of new regulation impacting every segment and market differently, now more than ever doing business in a new market requires local expertise, strong relation-ships and considerable investment. In short, you need commit-ment. In this respect the reach of a large subcustody network will not be a one-size-fits-all strategic model for global custodians. GF: Moving on to some of the specific regulations, will T2S reduce the cost of cross-border settlement in Europe?Ray: The core driver of cross-border settlement should be a reduction in fees. But whether that means the overall cost of conducting business and transactions is completely reduced is questionable. However, services or commodities that may have historically been priced into the value of a transaction will now become transparent and independent, and the true value of that solution or service being offered can be identified by the pro-vider and applicably priced. We cannot isolate just T2S. If we’re talking about liabilities and regimes around passing [along] some of that burden of proof of liability and talking about segregation of client assets, then that will increase costs. Grajewski: That’s very true because if you look at intraday credit facilities, which we provide, in most cases this is just a part of the relationship solution. We’re not charging for the intraday credit exposure. With the split of settlement and custody under T2S, it is likely we will move to a risk-based pricing model.Cameron: The first question is whether costs will go up or down. In the short term they are likely to go up, but in the long term, as we have to deal with only one settlement platform [T2S] that upgrades are being made to, the costs will go down. The second question is how these costs will be embodied in fees. We will be in a world where there is more competition for settling transactions but less competition for asset servicing. This should shift fees from settlement to asset servicing. The third area is unbundling. Most custody businesses would like fees to track their costs better, which would happen with unbundling. However, for this to work you need ‘truth and reconciliation.’ The truth aspect is working out what your costs actually are. We will all have to face up to the fact that we have more fixed costs

Graham Ray, Deutsche Bank Graham Ray is director, global product management, Direct Securities Services, Deutsche Bank. Ray is based in London within Deutsche Bank’s Global Transaction Banking division. He is the global product manager (cus-tody & cash) responsible for strategic business modeling in Europe pre- and post-T2S (Target2-Securities). He has more than 18 years of financial experience working at Northern Trust, Cantor Fitzgerald and Bank of America Merrill Lynch, where he had regional and global responsi-bilities for posttrade services. Ray specializes in developing business-related analyses in regard to securities trading and posttrading environments, providing product manage-ment leadership throughout the clearing & settlement and custody landscape.

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than we ever believed. The reconciliation element is express-ing these costs in fees, which clients can reconcile with their activities. This is a long way off, although progress is being made. GF: Is unbundling of settlement and asset servicing being looked at by your firms?Ray: Unbundling is a concept being embedded into the DNA of Deutsche Bank in terms of how we look at future relationships with our clients. The challenge is to identify transparency of the cost per trade and how that qualifies to the applicable price for the value-add that you provide to the client. We also need to ensure that it’s an item that can be digested and understood by clients who are buying the services.Cameron: CSD fees are an important component of subcustody fees, and they are actually going up, not down. When subcustodians negotiate fees with clients, they are willing to be clearer regarding this component of costs, which is effectively out of their control.Grajewski: In CEE, even though for many years we’ve talked about unbundling the business model, still we do not have it. Obviously clients want transparency in terms of the infrastruc-ture cost versus your margins, but they also want to have as simplified a fee schedule as possible. Having said that, with T2S we can expect different pricing models based on unbundling.

GF: To what extent will T2S drive consolidation of infra-structures like CSDs?Cameron: For as long as I can remember we’ve talked about consolidation of European infrastructures and all we get is pro-liferation. It’s much more likely that there will be more CSDs in the future, although they may be more specialized. Grajewski: We will have more CSDs in the future than we have today. In Central and Eastern Europe consolidating the whole market is always tough, especially for local governments, which treat it as a form of capital formation of the country. Also for the local participants this is viewed more as a competitive threat to their survival rather than a positive direction. Ray: We actually see interoperability being more of a trend. The opportunities provided through T2S and other business models mean that you will see a greater incline towards looking at access points to locations. You will see a greater focus on that for settle-ment. Then there is the question of each party in the posttrade value chain and what opportunities they have. Can CSDs move up the value chain? Do the ICSDs have to move down the value chain? The boutique products and functionalities that we all offer will become more paramount when we look to the future.

GF: Will the boundaries between custodians and CSDs become increasingly blurred?Grajewski: It is important that CSDs stay as the infrastructure. One good thing about the CSDR is that it sets boundaries, which would not let CSDs automatically enter into the subcustody field.

Cameron: The CSDs are being pushed in two different direc-tions. On the one hand, CSDR will reinforce the importance of providing traditional core CSD services, and that is their function. With T2S, the ECB [European Central Bank] seems to be pushing them into other areas, such as global custody. It would be a waste of the industry’s resources if every CSD tries to become a global custodian. Europe is a graveyard of global custodians—those that have tried to build a global custody busi-ness based on local client franchises have all failed in the past. Ray: The CSD function needs to ensure that if we look to regu-lation, we’re working in an environment where risks are taken outside of the CSD infrastructure. It would be sad for the indus-try if it ended up creating a new set of risks in the very location

Alan Cameron, BNP Paribas Securities ServicesAlan Cameron is head of global strategic UK broker-dealers and bank relationship management teams at BNP Paribas Securities Services. He has worked in custody and clear-ing for more than 25 years, gaining extensive experience in product and relationship management. He holds an MA in economic history from the University of Edinburgh and is an associate member of the Institute of Bankers in Scotland.

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that everyone assumes to be the safest place for holding assets. GF: What does the issue of liability for loss of assets under UCITS V and AIFMD mean for you?Cameron: It is going to change the relationships between the depositories, global custodians, subcustodians and prime bro-kers. It’s too early to say what the final business model will be. However, those taking risks will need to be able to control them and minimize them or to get paid for taking them. Ray: If you look to the identification of that liability and you’re the end client, then the most comfortable place for you to hold the asset is in your own name in a segregated account at the CSD, although the depositary bank is still liable. The interesting thing about these types of regulation is: Have they addressed the risk, or have they moved the burden of that risk up or down the value chain? That will potentially increase costs because each party in the chain will have to deal with it in a different manner.

GF: How are these changes shaping the solutions you offer from a market and product perspective?Ray: Over the last three to four years there is a need for greater product coverage that a subcustodial network offers outside of its pure foundation custody product. Even in our model where we are a subcustodial provider across 33 different markets, the importance of being able to transfer and harmonize that product offering and the capability of using the underlying assets where they need to be distributed is what drives our focus.Grajewski: It is important that the subcustodian has the full range of markets, otherwise you’re out of the business, especially when clients want a one-stop shop. In terms of products, from the clients’ perspective, they expect customized solutions rather than something off the shelf. With T2S and also with changes to the regulations, there is less room for single-market providers or the providers with relatively small coverage, while multimar-ket providers will strengthen their franchise on the back of it. UCITS V, AIFMD and T2S require continuous investment in technology, people and operational efficiency, and given the shrinking margins, it will be extremely challenging for a number of providers to survive in the future.Cameron: The huge ongoing need for investment in technology and capital means that scale will become even more essential—and that means fewer providers in the future. In Europe services will be more defined by processes than by geographies. There will be the outsourcing of many functions in the future. Ray: A diversification of the different operating models and the identification of the value-added processes, services and prod-ucts towards a client will become key. One thing that is most prevalent in terms of how the future landscape looks is that local expertise will never be underestimated in the value that it brings in shaping markets and the importance of that to our clients and their end clients. n

Tomasz Grajewski, UniCredit Global Securities ServicesTomasz Grajewski is global head of UniCredit Global Securities Services (GSS). He was appointed to that posi-tion in 2011 and has been a member of the GSS executive committee since 2009. Grajewski, who is based in Warsaw, is also the head of GSS operations in Bank Pekao, Poland. His responsibilities cover custody, broker clearing and fund services for global custodians, global investment banks and domestic institutions across Austria and the CEE. He has 16 years’ experience in securities services and held senior relationship management positions at Citibank Handlowy Securities Services before joining UniCredit Group.

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