After four days of intensive meetings in SIBOS and also a welcome break in an industry leadership panel in Boston, I had several thoughts and action points to discuss with my colleagues on my return.
Both the major investment banks and custodians are focused on liquidity, especially in the T2S environment. The view is gaining that we need to review the structure of CSD settlement and start to think outside of the box in respect of CCP eligibility.
Most CSDs have driven settlement from the perspective of stock availability given that most settlement banks have been liberal in providing intraday cash facilities for the low risk transaction processing chain. This needs to change. We need to consider ways of reducing demands on liquidity and limiting the potential adverse Basel III capital impact. This could be done by avoiding overlapping peak periods with the relevant payment systems. We could optimise settlement algorithms and cycles, including introducing multiple batch procedures. Limiting lot sizes and introducing timing rules for all would also have a positive effect. T2S will be a case in point. The biggest values in settlements arise in the bond market and participants need to ensure they structure their auto-collateralisation processes within T2S or with their NCB appropriately. But auto-collateralisation will only alleviate the liquidity challenge and we need to further optimise the settlement process as we transition markets onto the new platform.
The CCP world needs to be extended to more markets. CCP CEE, from the Vienna market, is moving in the right direction as it seeks to extend its reach into the Czech market. Multiple small CCPs are inefficient and multi market CCPs would be ideal. Not only could they adopt a common rule book and common collateral management processes, but they would create broader pools to enable more efficient netting. And the CCP world needs to consider how to extend its reach into client side settlement. This may require an operational, rather than a legal, netting process and would remove operational risk and cost rather than counterparty risk. But it would be valuable as a path to greater efficiency in markets.
And, although this may appear premature just as we move to T+2, we do need to consider how to reduce further the lapsed time between trade and settlement. Paradoxically, little is being debated about the redundancy of activity in the separation of trade and settlement matching. This is a rich area for innovation with both SWIFT and OMGEO being lead contenders for thought leadership and action in this space.
A second area of focus across clients was in respect of the geo-political situation. Although not exclusive to the CEE, there was much discussion on its impact on our business. There was some debate about the possibility of sanctions affecting flows over the SWIFT network and discussion on contingency arrangements, although some of those proposed may not be viable in an enhanced sanctions regime. There was a clear view that one needed to ensure one dealt with well capitalised and well positioned banks in each country. In that respect, UniCredit, with its direct full service presences in the different countries of the region and the sound liability structure it operates, scored highly. It is advantageous for cross border investors to use a bank with a strong domestic institutional footprint and also one that is a material player in the indigenous financial infrastructure in the different countries of the region.
A third area of interest was future planning. We may be entering a period of calm in respect of voluntary agent change across Europe, including CEE, ahead of the advent of T2S, but that has meant that there is a clear shift of focus to long term strategies. From a UniCredit perspective, we have been working on our plans to ensure we are fit for purpose in 2020 plus. We are nearing completion of our initial work on our updated target operating model.
This has made us recognise a series of realities. First, we need to be ready for T2S, but we also need an environment capable potentially of handing a multi-currency T2S. Quite simply, we believe that, as long as T2S meets its targets, including the mooted 2018 Krone link, it will be adopted by several of our markets. We have also taken account of new needs emerging in markets. These embrace changed account management structures including CSD links. It includes demand for enhanced collateral management, as well as the potential for CEE institutions to become more active in stock lending. We expect more direct brokerage facilities and a requirement for coverage of derivative markets for both buy and sell side. We have talked about our plan to further enhance our electronic delivery vehicle and to upgrade our technology platforms.
We are aware that changing markets require a much more modular approach than in the past and believe the successful regional custodian will provide own services but also act as a turnkey operator for other products provided through sister divisions within their Group and third party partnerships.
And, as always, we discussed service quality. Many years ago this would have been structured around industry publications and their surveys. They are now of lesser importance. The new regulatory environment means that our clients are monitoring our performance in close to real time and making more regular due diligence approaches. There are clearly three critical results of this process. First, there is a demand for greater transparency around the cost of operation, the cost of infrastructure and the cost of risk. Secondly, as agents we need to share the product of the enhanced analysis we are undertaking of each of our local markets and this is helped by our strategy of ensuring skilled on the ground local staff in each of our direct presence locations. Of course, for our domestic client base, we undertake due diligence on our global network using third party tools and in house dedicated resources.
And finally, the increased dialogue means we have independent trackers of our performance in each of our markets in close to real time across our client base. Gaining feedback from clients is a core value for us as we strive for ever improved service quality.
SIBOS as always was a marathon, running from the early hours through to the networking opportunities in the evening events. We learnt, as always, much from our clients. And hopefully, we can help solve some of their issues and, through new developments and ever improved service, add value to their own client service propositions.
John Gubert
Chairman
Global Securities Services
Executive Committee