Great benefits in getting investor protection right

With the creation of a competitive environment for CSDs, along with the technical platform making it possible to transfer securities across borders, the market is changing. There is pressure from legislators and governments to protect investors, and banks are required to offer individual client segregation of assets held under custody. Likewise, from investors, there is a demand for the protection of holding their assets at the CSD level. In our experience, getting this right is a big benefit for all participants.


Greater competition between CSDs through harmonised regulation is a positive step – bringing greater choices and opportunities for investors. The industry as a whole is looking for ways to be efficient and create a transparent and stable market. Both private and institutional investors want the best possible security, and legislation and regulatory conditions are pointing towards greater transparency and increased protection.

VP’s set-up with a dematerialised securities book-entry system has, allowed banks and brokers to hold their own and their customers’ assets on segregated securities accounts, at either omnibus or direct holding-account level. The initial dematerialisation itself had a number of direct market benefits including increased investor protection due to the reduced risk of theft and fraud compared to physical securities. However, it has also lastingly worked to reduce operational risk through the automation of previously manual or paper-based procedures, and it has constantly driven increased cost efficiency. The offer of account segregation has extended these benefits, as well as asset protection, to every investor.

Segregated accounts

When thinking about stability and investor protection, client asset segregation is crucial. In light of the financial crisis, there has been an even greater focus on where and how securities are handled and held safely. The limitations of holding omnibus client asset accounts at the CSD level were highlighted in the case of the failure of Lehman Brothers in September 2008. The accompanying credit crisis highlighted the risks that can arise from highly complex financial instruments and interconnected financial markets and institutions.

Regulations mandate account segregation, and investors are also demanding even more protection than the regulatory minimum, and have the right to client segregation. The omnibus model, where one account is used for multiple clients, does not truly mitigate risk because it does not offer transparency about client’s securities. Apart from the risk of failures in client asset segregation, there is the certainty of lengthy delays before locked assets are made available to their owners. Asset management, and implementing sell decisions, would require securities financing, which would be difficult to achieve during market turmoil and with collateral in all probability locked up along with the other assets.

As a result, when custodians hold their customer´s securities segregated from their own holdings there is a huge advantage of being able to offer truly segregated accounts. VP offers segregated client accounts as its standard business practice, facilitating market stability and investor protection. In the event that the worst happens and their bank crashes, clients are able to shift deposits to another bank quickly and easily because their account is held under their individual name, with their bank as an account operator. As a CSD, VP’s approximately 3.3 million securities accounts are predominantly fully asset-segregated accounts.

Optimal workflows

With greater volumes of client asset segregation, better workflows are encouraged. Having embraced the challenges of client asset segregation from the outset, the market focus has been on cost-effectiveness. Automation and an optimal workflow are made a central and integral part of a safe and stable market. Efficient handling of investment fund subscriptions and redemptions, at the end investor level, occurs alongside other asset classes and not as a separate business activity, as in other markets. Further automation of financial market value chain activities, for example, handling mortgage bond life-cycle events, or supporting negative interest rates, becomes worthwhile. All market actors, including issuers and investors, can access benefits from scale economies, such as the direct communication and corporate governance facilitation from issuer to investor. This will support investors as well as issuers with upcoming regulatory changes to the shareholder rights and corporate governance frameworks, which promote greater transparency in both directions and mandate greater engagement by institutional investors and asset managers in corporate governance.

Secure and effective systems

From an investor and custodian viewpoint, this CSD-level asset segregation means that there is a third-party ensuring transparency between the parties. At all times, there is a clear and immediate answer to the question of what happens if there is a problem anywhere in the custodial chain: it never becomes the investor’s issue. This saves a lot of effort, especially as the safety and security of the CSD systems are verified by regulators in ways far exceeding any due diligence of a custodian. As is normal for a market institution that is systemically important, VP is assessed according to the Principles for Financial Market Infrastructures (PFMIs). These are demanding standards for payment, clearing and settlement systems defined and maintained by the Basel Committee for Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO). VP’s most recent assessment under these principles, in the February 26, 2016 report by Denmark’s National bank and the Danish Financial Supervisory Authority, confirmed that VP's systems for custody and settlement of securities are secure and effective.

The advantages of this tough external regulation are that it offers greater certainty of bullet proof investor protection when assets are held on client segregated accounts at the CSD, and it also frees up effort otherwise spent on verification for more productive uses. Thus, with the automated and optimised workflows serving client segregated accounts, there is a much greater degree of business integration between banks and custodians as “account operators” and the CSD processes. This, accordingly, lowers operational risks and costs, and means, for example that accounts can be opened very efficiently, and dividends and Corporate Actions distributed effectively, all the while ensuring end-to-end transparency and investor protection.

Getting the secure and effective systems right continues to be an ongoing comparative advantage for market participants, as international standard-setting bodies continue to contribute to creating globally harmonised rules to help mitigate risk and further protect investors. In many markets, these rules become regulatory cost items, and a source of complexity and risk, while the only benefits come from their effect of mitigating a worse case scenario. Our experience as a market is different, as the investor protection principle has been embraced from the ground up and this demonstrates that, instead, it is possible to have better, more automated, secure and cheaper business processes because investor protection has been ensured for everyone. The issuers, investors and banks can use a qualitatively better and more effective market infrastructure, thanks to their focus first on investor protection, and then on building a fair, efficient and transparent environment accordingly.

Henrik Ohlsen

Customer Relations & Sales Director

+45 2910 1202
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It is all about simplicity for our customers and thereby more efficient processes

- Henrik Ohlsen, Customer Relations & Sales Director