Custody – have you chosen wisely?

September 2016

European settlement and custody are subject to disruption on many fronts, making client choices more complex. The key to choosing the most appropriate custody model lies in coming to grips with two main areas of change: infrastructure and regulation

The Target2-Securities (T2S) settlement system, and associated technology, infrastructure and regulation, represent disruptions to the traditional custody environment. As T2S is introduced across the European theatre, more and more clients have to come to terms with what it means to them and how best to serve the interests of their businesses.


Within infrastructure there are two main themes: settlement harmonisation and cash efficiencies. These are common functions being delivered across the European environment. There is a common settlement day, an overnight cycle and a real-time cycle delivered by the T2S platform. Some clients may wish to take advantage of these and consider whether they still use a provider to give them settlement access into the region, or whether they want to perform that function themselves, as the harmonised environment evolves.

In cash settlement, T2S takes settlement out of the hands of a central securities depositry (CSD) onto a common technical platform. This allows clients to be connected to one central bank rather than multiple European central banks, opening up possibilities for efficiency through consolidation. Clients can choose how they manage this cash. For example, if a client already has a relationship with one central bank, they can now leverage this across the whole region. They do not necessarily need to rely on a custodian to give them cash services as well as settlement in each market. Alternatively, if they do not have central bank access they may wish to access commercial bank money via a regional provider to give them access into the T2S market. They can do so by holding a single cash account.


Regulation can be split into four main themes: investor protection, risk reduction, asset mobility and liquidity.

Investor protection is a key driver for regulation, such as the Alternative Investment Fund Managers Directive (AIFMD), Undertakings for Collective Investment in Transferable Securities (UCITS) and the Central Securities Depositories Regulation (CSDR). Assets must be held and managed in such a way as to guarantee the assets of an end investor. This is leading to a greater level of asset segregation within the custody chain, so that individual holdings can be identified and reported.

The drive to reduce risk is placing more business onto central counterparty clearing houses (CCPs). This affects broker dealers as well as global custodians. Brokers are impacted by having to post more collateral with the CCPs to secure their trades. For global custodians, with an increasing amount of over-the-counter (OTC) trading, such as in various derivatives moving to exchanges, buy-side clients of these global custodians, such as asset managers, may now have to post collateral. So all financial intermediaries need to think about the impact that risk reduction regulation has on the conduct of their business, and how it impacts the mobility of any held assets to cover the collateral obligations.

Lastly, Basel regulation is also driving the need for strong liquidity controls, and has brought into sharp focus the need for a more secured credit environment. The central idea is that liquidity should be optimised, reducing the amount of partners’ liquidity that businesses rely on.


In this context, custody clients need to decide what their most important considerations are.

“It comes down to, what is the client’s business?” explains Mike Clarke, Director, Global Product Management, Global Transaction Banking Product & Technology Management at Deutsche Bank. “What is the balance of business that they do? And whom do they do it for? This will help them decide which of the key themes are most important to them. Clients need to decide what are the top three goals they wish to achieve in the context of pan-European settlement and these will drive their decision as to the solution that would be right for them to adopt in the custody environment for the long term.”

He goes on to sketch out some examples. A global custodian holding securities for a long-only client like a pension fund, would be unlikely to have a requirement for mobilising collateral for a CCP, whereas one supporting a hedge fund might. “So when we talk to global custodians,” says Clarke, “we have to understand the requirements of their end clients because that again will shape the solution that is right for them.”

Hedge funds need to move collateral, so collateral mobility is a trend that their global custodian would need to respond to. “A different global custodian with different types of clients wouldn’t have to respond to the same theme. They may prioritise a different theme – perhaps for a greater level of investor protection, because that is what their clients are looking for.”

For each area of consideration, different clients will look for different custody and settlement services. One shape and size definitely does not fit all in the new T2S, European landscape. Clarke says that only the client can design the solution that best suits them, but given the huge range of choices on offer they will need help and guidance.

“We’ve developed an online tool that we can use on an iPad in meetings and that we’re going to place on our website as well. The client can discover the disruptive elements that are impacting custody, and then the particular themes we are seeing in Europe. Finally, they can see how Deutsche Bank allows them to break a custody solution down and rebuild it with the components,” says Clarke.

“The tool allows clients to consider which of the key themes most resonate with them. They drag and drop their top three choices and the tool comes back and suggests a solution that also explains the benefits to them based on their choices. It also highlights when there may be additional benefits in other areas,” he adds.

“In summary, clients are tasked with recognising that there’s a lot happening in the big picture of custody, and T2S is a major part of that,” concludes Clarke. “There are many choices of solution available to custodians, and the correct choice depends on who the client is and, often, who, in turn, their clients are. Clients need to consider the trends and themes happening in the industry and choose the most appropriate model for the medium to long term. In the end, the client makes the choice, but this is often not an easy one to make and at Deutsche Bank we look to partner with our clients to make this decision more transparent.”

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