Brian Bollen takes a look at Nordic asset servicing and its current CSD models following the economic upheaval of the COVID-19 pandemic and the more recent Russian invasion of Ukraine
Returning to write a feature about the Nordic custody market for the first time since 2010, mixing it with memories from similar adventures in 1998 and 2007, has proved to be a rather bizarre experience. Akin, perhaps, to how Rip van Winkle might have felt when he stirred after a 20-year nap in the Catskill Mountains.
How might a modern Rip van Winkle feel upon discovering that the companies that were born to serve their distinctly local market now bear the names of Euronext, Euroclear and Nasdaq?
There has indeed been a great deal of change in Nordic custody since 2010, reflecting a healthily developing market, observes Robert Vincent Leon Stenmark, head of Northern Trust’s Norway branch. “If you are not changing and aligning with future demand, something is wrong.”
He points to the impact of the global financial crisis of 2007-2008 on the financial industry and its service providers, singling out the waves of regulation that have followed since, aimed at enhancing transparency, harmonisation and investor protection. “Euroclear moved in on the central securities depositories (CSDs) in Sweden and Finland while Euronext followed suit in Norway (in 2019) and Denmark (2020),” he observes.
One obvious conclusion to reach while debate continues over whether these developments are a good thing or a bad thing is that further improvements in technology and advances in digitisation represent as much of a certainty as it is possible to discern in the context of the Russia/Ukraine conflict.
Norway
Some cynical long-term observers might go so far as to argue that nothing that mattered just a few weeks ago still matters in what threatens to become the worst of all possible worlds.
We can safely note, however, that Verdipapirsentralen ASA (Euronext Securities Oslo) was incorporated in 1985 in connection with the introduction of electronic securities registration to replace physical securities in Norway.
Euronext Securities Oslo is today the only CSD in Norway, providing an efficient infrastructure and services for the settlement of transactions in securities and the registration of ownership rights over securities. It delivers these services for investors and issuers through a network of investment banks, brokers, banks and fund management companies.
These entities, acting as account operators, are responsible for all customer relationships with investors and issuers, and manage day-to-day access to Euronext Securities Oslo services. Euronext NV owns 100 per cent of the shares in Euronext Nordics Holdings AS, which in turn owns 100 per cent of Euronext Securities Oslo.
Euronext Securities announced the appointment of Kristine Bastøe in 2021 as the new CEO of Euronext Securities Oslo, with effect from 1 March 2022, to lead its development and bring a decisive contribution to Euronext’s strategy to pan-Europeanise and scale up Euronext Securities.
As part of the new strategy, over the next three years Euronext Securities says it will be expanding its service offering, converging platforms across markets, scaling up its activities across Europe, and improving the customer experience, with one united team.
Among other notable items of news, Euronext Securities Oslo obtained approval from the Financial Supervisory Authority of Norway on 28 January 2022 to operate as a CSD, in accordance with the EU’s Central Securities Depositories Regulation, (CSDR).
Audun Bø, outgoing CEO of Euronext Securities Oslo, describes this as an important milestone for the exchange. “The CSDR license ensures our ability to offer a secure, transparent and efficient infrastructure with associated services to the Norwegian capital market, for the benefit of issuers, investors and market participants from all over the world.”
Sweden and Denmark
Euroclear Sweden is the Swedish CSD, contributing to safe and efficient securities management in the Swedish market since 1971. It became part of the Euroclear group in 2008 and calculates that approximately 1,800 companies, including all listed Swedish public limited companies, are affiliated to its securities system.
Around 50 banks and other financial institutions use its system on a daily basis to manage and settle securities. Euroclear Sweden’s latest development is a digital service for fund orders between fund companies and fund distributors.
Euronext announced in August 2021 that it had completed the settlement of shares under its offer launched on 23 April 2020 to acquire 100 per cent of VP Securities, the Danish CSD.
VP’s primary business areas are CSD and securities services, and issuer services. VP’s core activity is CSD services, supporting both the financial sector and its customers’ need for secure securities issuance, clearing and custody services.
VP also ensures the effective intermediation of interest, repayments and dividends to investors. Issuer services comprises the issuing agent services and investor services activities, of which VP is the leading Danish provider.
The services include issuance services, handling of corporate actions, shareholder register, annual general meetings, investor relations services, investor analyses and compliance and corporate governance services.
The Danish economy came back strongly in 2021 after the downturn in 2020, when the pandemic left its deep traces on economic activity, Nordea’s celebrated group chief economist Helge Pedersen wrote at the end of February.
Thus, GDP increased by as much as 4.1 per cent over the year. This is the highest since 1994, when GDP rose by 5.3 per cent. But the progress must of course be seen against the background of the large drop last year of 2.1 per cent.
In the fourth quarter of 2021, growth was 1.1 per cent compared to the third quarter. The development follows a corresponding increase of 1.2 per cent in the third quarter.
Growth in the last quarter of the year was driven by a strong development in exports, which increased by as much as 6.2 per cent, with both exports of goods and services increasing markedly. As imports only increased by 2.6 per cent, net exports thus contributed significantly to growth.
In turn, domestic private demand declined; private consumption by as much as 2.7 per cent and gross investment by as much as 4.2 per cent. The fall in private consumption must be seen in relation to the lockdown of parts of the service sector as a result of the increasing number of COVID-19 cases in the late autumn.
On the other hand — and perhaps as a result of the increase in cases — public consumption picked up again, as there was again a need to increase efforts against the COVID-19 pandemic.
Finland
Euroclear Finland is Finland’s CSD, connecting issuers, investors and financial intermediaries with safe, secure and efficient issuance, settlement and asset services. By holding a digital register of ownership it gives clients reliable, real-time information on their assets. Euroclear Finland says it has more than 1.4 million digital book-entry accounts, and that its issuance and settlement system is TARGET2-Securities and CSDR-compliant.
Finnish assets have felt pressure lately, but increased Finnish country risk explains only a part of those moves, write Jan von Erich and Antti Koskivuo in a recent article on the Nordea corporate research site. Finnish economic links to Russia are larger than for the Eurozone as a whole, but energy dependency is not.
The landscape of Finland’s political security has changed, with the majority of the Finnish people now supporting NATO membership. Finnish bonds have underperformed versus France, suggesting also that Finnish country risk has increased to some extent, state von Erich and Koskivuo.
“While Finnish assets could easily face more pressure going forward, especially as the tensions in the Russian war continue, any meltdown in Finnish assets is certainly not our baseline,” they write. “We also note that as the focus has lately been on including Russian energy exports to the sanctions, Finland is unlikely to be among the worst hit Eurozone countries, if such measures are introduced.”
Nordea analysts Dane Cekov, Kjetil Olsen and Lars Mouland say: “The domestic economy has been faring much better than foreseen by Norges Bank in December when Omicron clouded the outlook.
“Registered unemployment came in at 2.1 per cent at the end of February, a year sooner than Norges Bank expected. The unemployment rate will fall further ahead and the labour market will become even tighter – supporting higher wage growth and core inflation ahead.
“Core and headline inflation have been consistently higher than Norges Bank’s forecasts over the past three months. Core inflation came above the 2 per cent target in February – a year sooner than expected – and will likely rise further in the month ahead.
“Given the global price pressure, rising energy prices and the tight labour market in Norway, inflation expectations and wage growth demands have risen hand-in-hand. Still, with wage growth approaching 4 per cent, as the team now expect, purchasing power will increase more than Norges Bank assumed in December even if headline inflation is higher. The higher real wage growth will continue to support private consumption and economic growth ahead,” Cekov, Olsen and Mouland add.
“Core inflation above the target and a positive output gap warrant interest rates to come above a normal level which Norges Bank has estimated somewhat below 2 per cent,” they conclude.
