2009 marcus evans clearing&settlement final

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  • Good morning, So my name is Peter Kepel and I ’ m a consultant on Clearing and Settlement working for a firm that has a broad service offering mainly based on transformations taking place in the industry. As such, a lot has been said about clearing and settlement and as the previous presentations it will be difficult to give you any miracle answers. What we have tried to do is to give you a granular overview on T2S and what you practically could think about to change when you are a user or provider of post-trade services. For your information, Ineum is active on T2S since 2008 and, but without naming names, and has gathered practical experience on the project. Lets have a look at the agenda
  • T2S Business implications The first point gives information on the parameters impacts business, and some of the options that participants of the post-trade value chain have T2S Operational implications The second point will give you additional practical business, operations, corporate and IT examples of changes to the organisation due to T2S T2S Reality for a service provider and service taker The third point will have a look of what we think are some of the trends the can be proof for market evolution pre and post T2S Lisbon agenda The last point, under the umbrella of the Lisbon agenda, depicts the items forming clouds over the C&S industry possibly inducing more transformation that will determine if the implications of T2S are reality,
  • T2S is nothing more then a platform that should facilitate a single European capital market and allow it ’ s inhabitants to increase GDP and make the EU a competitor. It nevertheless contains some significant harmonised and new functionality, such as Account management For cash accounts immediate, predefined and standing liquidity transfer orders are possible between T2S dedicated cash accounts and RTGS accounts where the treasurer can make control the cash via net buying limits and reserve cash for specific instructions Securities accounts can be set-up for indirect and direct holding markets since the T2S can hold segregated accounts at investor level and at the same time not impacting performance Possibly not a major impact on the type of existing accounts but the linking of several markets with integrated securities, collateral and cash accounts would have a significant impact on the account management rules when linking services to the account structures Corporate actions When adapted the standards for distribution, reorganisations and transaction management need to be implemented on the CA systems In a cross-border environment where distribution of dividends can be done using liquidity on cash accounts and where common rules for e.g. market claims are applied the CA flows need to be reviewed Securities financing Global securities financing is probably historically based upon optimisation possible return, investment strategies and ensure settlement of transactions. If and when the CCBM2 collateral management can be applied on EU wide scale for settlement efficiency preventing buy-ins and optimising dormant portfolios an EU integrated flow with reasonable return against low risk can be constructed. How to combine, where and with whom has a significant impact again Product distribution Typically the costs for finding buyers for financial products issued depend on the product itself, country specifications such as regulation, the intermediaries and the possibility of establishing a distribution network. With T2S the supporting services for trading will become cheaper and more transparent making it possible to issue products. Take the fund industry for example, when integrating the market function of fund distributor, transfer agent and fund administration into local custodian, T2S and CSD it established an EU business process possibly reducing the amounts of players such as Transfer Agents and offering a wider distribution network with higher automation against lower costs Human resources The push for replacing people by systems is being enhanced by the harmonisation of clearing and settlement functionality, lower investments by price reduction and upcoming regulation of harmonised securities law. This and the remodelling of business by industry participants will lead to re-definition of the HR management agenda for retention, redundancy, communication, education and compensation program. Last point, and not the least is cash management In times where credit is expensive and deposits don ’ t earn that much, a proper cash management to fund settlement transactions and optimisation of reinvestment while reducing overdrafts can bring significant money. The cash flow now needs to integrate the CeBM payments, EU wide account account structures, linked to CCBM and T2 process flows on multiple currencies (noting that T2S does not do Forex)
  • This harmonised and sometimes new functionality will have specific direct and indirect implications on the industry participants. The trade function fed by its participants and driven by its investors will see the post-trade as cost centre, but will be very much aware that the plumbing of the post trade industry determines their distribution, profitability and effectiveness. As such a MTF, SI, crossing network or on-exchange trading venue will probably find it positive to be able to distribute, clear and settle its products and transactions European wide and will be anxious to limit counterparty exposure, enhance quality collateralisation and limit its capital requirements by choosing few interoperability options. The number of intermediaries, asset classes and means of communication will of course change. For CCPs, custodians and CSDs they will have to their disposal a platform allowing them harmonised functionality, European footprint, a possibility to offer cost-reduction and transparency to their customers. When applying on their own side good cost-control, retention of customers and finding engines of growth, the European Commission will be able to offer increased purchasing power, a step forward to a single capital market . These implications of renewing, extending and enlarging the plumbing pipes well see some new business models of water companies, new entrants, closures, mergers and possibly (but to us less likely) some joint ventures. Are these all the implications ? Perhaps not! Some industries went through similar where monopolies were replaced by a market based upon supply and demand. For example, the implications of the transformation of the Telco industry and regulatory compliance to MiFID led to Pricng battles Product launches with high costs and flops Decreased quality Increased risk Fragmented liquidity
  • Nevertheless the implications for the industry participants the project will be realised (we can even take into account that all other Eurosystem projects have been delivered in time and scope – e.g. Target2 who experienced on average a 10% daily growth in volume and value) and industry participants will take actions based upon their established strategy. For example, one can wonder if recent market decisions were not taken, or at least influence by T2S: Clearstream opening up Singapore office (Growth market) Euroclear to introduce modular service offering Rumours about a mergers and buying of competitors on the french market HSBC reviewing custody strategy (selling of HSBC securities services France) and many more but perhaps not something to discuss now Looking at the slide, the top rectangle holds a simplified overview of the post trade participants related to Clearing and Settlement, the lower rectangle provides a simplified models how industry participants can choose alternative operating models when embraces T2S functionality. When speaking about the possibilities ofcourse there will be several possibilities. The first depicts an asset manager having customers in several EU countries that traditionally use a local custodian for detailed services such as tax, registration and lssuance and relies on a global custodian for cross-border services. Local custodian holds assets at the local CSD and can rely on the global custodian for cross border assets. In this case the subcustodian in country X (purple box) of the global custodian has a cost efficient network and good relationsip with the asset manager in the other country. The asset manager then decides to outsource all assets located at the local custodian and use his network including his local connection with the CSD to server the rest of Europe. AM will concentrate all his assets at one or two providers and will demand full servicing at partnership level to be able to take the providers breath of service for full asset managing. It will also allow the asset manager to simplify his distribution network and increase time to market for when choosing an growth based strategy. The near shoring or odd shoring of post trade services is taking place. It should be noted that the sub custodian in country X and the local custodian are the same company. The second view is the one of a global custodian that again has a good relationship with the asset manager and will invest in developing the tax, issuance and registration products. It can rely on his footprint and economics of scope to be able to service the asset manager in a strong and qualitative manner. It will be able to use the direct connection to a CSD (not mandatory in the same country) to implement a EU process flow for its services and in the long run phase out his existing local connections when achieving economics of scale for certain asset classes, regions and services. The tricky part might be to maintain customer proximity to keep the level of customised and specific services that can be applicable to local and inter-regional asset manager requirements. This example is typical for mergers, outsourcing and on shoring to take place. The third part might be the most interesting and challenging as T2S has made no secret that the CSD is to move up the value chain and increase value added services. Some might have an opinion that an ICSD status next to a CSD would be the only valid option for a long term business model viability but that could be an non objective statement. This scenario sees CSD taking performing tax, issuance and registration services and working together with the global custodian to serve the local asset managers. Eventually the CSD can work with the local custodian to develop services and shorten the level of intermediation within the medium term as probably the interoperability is already in place. It should be noted that the CSD is the connection to T2S and is responsible for maintaining service relations, accounts and transaction execution, invoking a mandatory long term existence of service. As with most transformations the company with agile management and who can execute correctly will have a head start. This could be a differentiator between custodians, CSDs and ICSDs. The last option is the one of the subcustodian (local custodian) that can set out a growth strategy to increase their EU footprint by exporting their value added services and customer proximity to increase their economics of scale by becoming direct participant and bypassing the global custodian. There is evidence that this is already happening, but cost control, local regulation and non-materialised T2S functionality (e.g. will all CSDs sign, introduction of CCPs will lower revenues, real advantage of early provider and effective account set-up for all markets). This option could see a partnership with linkup markets for example. Any of these scenarios is probably by your strategic departments simulated.
  • T2S Business implications The first point gives information on the parameters impacts business, and some of the options that participants of the post-trade value chain have T2S Operational implications The second point will give you additional practical business, operations, corporate and IT examples of changes to the organisation due to T2S T2S Reality for a service provider and service taker The third point will have a look of what we think are some of the trends the can be proof for further development by the market Lisbon agenda The last point, under the umbrella of the Lisbon agenda, depicts the items forming clouds over the C&S industry possibly inducing more transformation that will determine if the implications of T2S are reality,
  • Whatever the consequences an transformation will start with a strategic evolution, followed by a decision or transaction with is followed by the transitiona and then an evaluation. Looking at possible shifting of business a small summary on aspects that need to be covered in an organisation would given more tangible evidence of the transversal impact that should not be underestimated if one wants to be successful in transforming the busines. Starting with the business Besides the strategic scenario modelling the sales department (hunters or farmers) will be daily faces with new strategic or tactical decisions by its customers. In a dynamic world this would mean quick assessment of the impact on monthly income, cash balances, transaction volumes to possibly propose new rebates or commercial goodwill Product management will probably propose a modular product approach to offer customers services as a package or individual service. This is extremely difficult in an environment where you have to make possibly new heavy investments in a changing landscape Developing products can range from including hold and release functionality in the connectivity applications till transversal inclusion of the T2S settlement eligibility rules on the mirror settlement platform Network management will be very busy when reviewing all SLA with countries where an presence need to be set-up, closed or expanded. An introduction of the T2S account structures and settlement rules will require huge medium work but in the long term could be offset by the disappearance of local specificites The on the corporate side: Marketing department will be busy with branding the footprint of the organisation for full visibility when expanding, selling or merging. The marketing T2S functionality will be an important issue as well Next is change management. This is typical and often overlooked. Where normally local regulation and specifities, togatather with the the customers request for functionality is Within each T2S service class, fees will be differentiated by: Nature of service demand, e.g. FoP, DvP Complexity of service, e.g. linked instructions Priority of service demand, e.g. daytime / night time settlement Service demand volume, e.g. queries congestion charge Level of granularity within each T2S service class currently under discussion in order to balance Transparency principle Principle of fair treatment Intention to match fees to costs “ Users not worse off than today ” Within the service classes, T2S fees per chargeable item might contain a fixed element and a variable element Whenever T2S fees contain variable elements dependant on service usage, there will be a maximum spread between the lowest per unit fee and the highest per unit fee, e.g. 20%
  • T2S Business implications The first point gives information on the parameters impacts business, and some of the options that participants of the post-trade value chain have T2S Operational implications The second point will give you additional practical business, operations, corporate and IT examples of changes to the organisation due to T2S T2S Reality for a service provider and service taker The third point will have a look of what we think are some of the trends the can be proof for further development by the market Lisbon agenda The last point, under the umbrella of the Lisbon agenda, depicts the items forming clouds over the C&S industry possibly inducing more transformation that will determine if the implications of T2S are reality,
  • The service taker wants to know at all time his profit, if hes compliant and what its his room for asset allocation
  • T2S Business implications The first point gives information on the parameters impacts business, and some of the options that participants of the post-trade value chain have T2S Operational implications The second point will give you additional practical business, operations, corporate and IT examples of changes to the organisation due to T2S T2S Reality for a service provider and service taker The third point will have a look of what we think are some of the trends the can be proof for further development by the market Lisbon agenda The last point, under the umbrella of the Lisbon agenda, depicts the items forming clouds over the C&S industry possibly inducing more transformation that will determine if the implications of T2S are reality,
  • List here the upcoming directives and their impact in comparison with what ’ s realistic and achievable T2S Version 5.9 If the CSDs maintain their status, the GC are better in economics of scope and their risk exposure and stability is seen as an integration part of T2S then it can be depicted as a US model
  • 2009 marcus evans clearing&settlement final

    1. 1. 1 Présentation d’Ineum ConsultingT2S and its practical implications for Investor Services12th Annual Clearing and Settlement ConferenceLondon, October 2009 www.ineumconsulting.com
    2. 2. Agenda 2 T2S Business implications T2S Organisational implications T2S Reality for a service provider and service taker Lisbon agenda www.ineumconsulting.com
    3. 3. Project functional scope is laying foundation for EU competition with rest of the world 3 T2S impact Human Information Account Lifecycle Resources Technology Management Management Securities Corporate Reporting Financing actions Data Network Connectivity Margins Management Management Collateral Cash Product Management Management Distribution www.ineumconsulting.com
    4. 4. that has implications on all industry participants in the value chain 4 T2S catalyst and driver Investor : Purchasing power EU: Single capital market Investor Quality of Service Trade: Cost reduction Reduction in costs Products diversity and coverage Post trade : Business model Trade One stop shop solution Real-time and online Investor Trading Standardisation Market CCP Participants Custodians Cost control and CSDs Post trade Customer retention Harmonised functionality Custodians Growth engine T2S catalyst and driver European footprint and CSDs Cost reduction Transparency www.ineumconsulting.com
    5. 5. On which industry participants can take different actions Current Local market A Foreign market X Tax 5 Trading Broker/ Asset Global Sub Central Issuance Venue Dealer CSD Bank Manager Custodian Custodian Registration Central Custodian Global Sub Central Tax CSD CSD Bank Bank Bank Custodian Custodian Issuance Tax Issuance Registration Foreign market Y RegistrationFuture Asset Manager View Global Custodian View (I)CSD view Sub custodian view Local market AM BD TR AM BD TR AM BD TR AM BD TR x x CU CSD CB x x CU CSD CB x CU CSD CB SC CSD CB x x GC GC GCx GC GCx GC x x GC GC GC xSC SC x x SC SC x x SC SC SC SC SC xCSD CSD x CSD CSD x x CSD CSD x x CSD CSD CSD Foreign x x CB X CB Y x x CB X CB Y x x CB CB x x x CB X CB Y CB Z country X Y www.ineumconsulting.com
    6. 6. Agenda 6 T2S Business implications T2S Organisational implications T2S Reality for a service provider and service taker Lisbon agenda www.ineumconsulting.com
    7. 7. Covering any aspect in an organisation 7 Business Corporate Product Product Network Pricing and Sales Marketing Projects Risk, audit, legal Mngt Dev Mngt billing Lobbying and Modular Settlement Review of Branding on Migration and Integration of CSD and/or road shows components eligibility rules SLA’s EU level testing nature of T2S contracts Customer Integration of Hold and Account T2S white Change service and Counterparty profitability CCBM2 release management paper Management complexity of liabilities and functionality function service into regulatory and T2S existing fee reinforcement Online schedule s Unbundling and transparency Operations Information Technology Settlement and Payments and Compliance Connectivity and Enterprise IT process re- Static data Strategy custody Income and controls training Architecture engineering management New deadlines Corporate Integration of T2S Helpdesk Business and IT EU structuring, Lifecycle mngt ISO20022/4217/ and transaction actions on flow monetary ISO20022 integrated analyzing and and matching 10962/4177/316 types Integrated T2 transactions instructions and vision of Target planning of Configuration, 6/18773-4/6166/ Position payment flow Investor reporting model architecture interface and ISO/IEC management compliance IT sourcing connectiviy 7002:2005 and status such as requirements Party references change registration www.ineumconsulting.com
    8. 8. Agenda 8 T2S Business implications T2S Organisational implications T2S Reality for a service provider and service taker Lisbon agenda www.ineumconsulting.com
    9. 9. The service taker will not wait to put pressure on its providers 9 QoS Transpa Profitability rancy Maximal Commun added value KQI & Testing ication KPI access Agility Valuation and Structured Costs tools and Automatio analytics n Responsive methods Asset Compliance ness allocation Open standards Low risk Reliability Customer service www.ineumconsulting.com
    10. 10. And the providers will have to respond with common sense 10 Economics of scope Economics of scale Functional driven Cost price and political driven Concentration of deposits Client proximity (Hub and Growth markets Spoke model, merger or joint Effective methodology Client integration venture Best practices programs Innovative tools (In-house, Managing change Open architecture off the shelf customised or Business performance Early adaptor Operational efficient Merger or Joint venture buying of provider) Volume discounts Commoditization and industrialisation of service offerings (e.g. back office) www.ineumconsulting.com
    11. 11. Agenda 11 T2S Business implications T2S Organisational implications T2S Reality for a service provider and service taker Lisbon agenda www.ineumconsulting.com
    12. 12. To what extend is this perspective reality 12 UDFS2.0 4CB Internal tests Software development and technical integration Migration period 2007 2009 2011 2013 Preparation phase Specification Phase Migration Phase Production Programme plan ECB acceptance testing URD5.0 1) Project risks 1) Realisation of CCBM2, T2S Online, Pricing and T2S Contracts 2) Regulatory impacts 3) UCITSIV, Harmonisation of securities law, MiFID2, new SFD, … 4) Repositioning of EU custodians, US and EU global custodians, 3) Reshuffling of business models and competition Euroclear and Clearstream 5) Legislation, lending, Risk Management, Capital markets and 4) (Un)-Materialised aspects of the credit crisis restructuring 6) Globalisation, issuance growth, automation, standardisation, T+0, 5) Market trends collateral demand, … 7) Adding of corporate actions, derivatives and commodities to the 6) T2S Version X+1 scope www.ineumconsulting.com
    13. 13. End 13 www.ineumconsulting.com

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