One of the anticipated effects of the implementation of the TARGET2-Securities (T2S) platform across the European securities landscape and its post-trade securities settlement processes, was a wide introduction of the account operator model. Large global custodians were expected to go direct into the local markets, altering the securities value chain by taking settlement out of the traditional operating model and handling settlement in-house, rather than appointing a local custodian. As these global custodians are not likely to have local asset servicing expertise in-house, this was expected to be provided by an external third party on a stand-alone basis. This development was regarded as a major challenge for the local sub-custodians, and once again their demise was predicted.
How has this played out in the Nordics?
We are all familiar with the postponement of Finland’s plans and preparations to join T2S, and who would have bet a few years back that the first Nordic country to join T2S would be a non-euro country such as Denmark? It’s hard to say that T2S has been a success in the Nordics so far, when the only remaining sign of the T2S project in Finland is a T2S fee still being charged by Euroclear Finland, and the implementation in Denmark has been far from smooth and easy. Eventually, more Nordic markets will probably join the T2S, which will open up the markets in a new way, and the interest for direct connections will likely grow. Given this, it is easy to believe that the conditions for a direct approach in the Nordics are very limited and hard to justify.
Although the Nordic region is still, to some extent, a protected market for the local sub-custodians, we are already seeing growing interest from international banks and international central securities depositories (ICSDs) to explore the possibilities of going direct into the Nordic markets. This is being done by utilising an account operator model with settlement in-house and asset servicing delivered on a stand-alone basis by a local third party. As a matter of fact, this does not seem to be T2S-driven at all, but rather justified for reasons of asset safety, transparency, and maybe also cost-efficiency.
The interest from foreign investors active in the Nordic region has emerged in recent times. When we invested in a brand new securities services platform a few years ago, we were clear on the need to be able to support different account operator models throughout the Nordics. The driver for us was the T2S project in Finland, which we believed had potential to dramatically alter the traditional sub-custodian model, and we made a large investment in our asset-servicing platform in order to have the capacity to offer clients different account operator models. We were quite surprised to see that the first market in which we went live with a full account operator model, where Handelsbanken is delivering asset-servicing on a stand-alone basis to the client, was in Norway.
Being the one Nordic market perceived as maybe the furthest away from a T2S implementation, we were rather taken by surprise when a client chose Norway as a pilot for going direct in the Nordic region. However, it turned out that the Norwegian central securities depository (CSD), VPS, had very flexible functionalities for providing intra-day reporting, which perfectly matched our needs and those of the client.
In order to succeed in the account operator model, the big question and challenge is how you manage the triangle of reconciliation between the client, account operator, and the local CSD. Acting as an account operator, without having the settlement and safekeeping responsibility for the client, the challenge for the CSDs is to be able to provide continuous information on positions throughout the settlement day.
There are two alternative ways of achieving the mirrored portfolio positions at the asset servicing provider: either you mirror each transaction in order to build up the portfolio position, or you read in intraday positions directly from the CSD by using a power of attorney from the client.
Alternatively, the client provides the asset-servicing agent with the same information. Different alternatives require different set-ups and connections, and will also have a different impact on the cost. The option where the intraday positions may be downloaded, or received, from the local CSD would dramatically reduce the cost, as the option where trade by trade is mirrored would result in substantial SWIFT and transactional costs. This alternative cost could potentially eliminate one of the key drivers for opting for an account operator model in the first place.
Handelsbanken is working closely together with all four CSDs in order to achieve progress in this field, and has already gained an advantage based on their modern platform and interconnectability vis-à-vis the CSD systems. However, some CSDs have advanced further in their ability to provide this intraday information.
Handelsbanken welcomes this transformation of business model in the region. As the offering evolves to become a local Nordic asset-servicing model, with the emphasis on being truly local, with an ear to the ground, Handelsbanken has everything to gain from it. As we consider ourselves as the only true local Nordic custodian, with our whole operations located within the region, unlike our competitors, we foresee Handelsbanken being in an excellent position to assist our clients going forward.
