Will all Nordic CSDs survive?

Will you compete in the future? Is the Nordic model for CSDs sustainable in a European context? Are you able to work together? Should you be merged in to one Nordic CSD? Or should we go all European? All these questions – and more - were raised by moderator Göran Fors, Deputy Head of Investor Services, SEB, when he conducted a panel debate at Nordic Post Trade Copenhagen recently. Panellists were Executive Vice President Sveinung Dyrdal from VPS, Head of Nordic Commercial Jyrki Partanen from Euroclear, and Strategy Director Søren Rask Nymark from VP SECURITIES. Also direct polling in the audience was among the ingredients in a high-level discussion about the state of the CSDs in the Nordics.

Focus is on technology and legal

“What is happening in your companies?” was the soft opening question from Göran Fors.

Jyrki: “A lot is happening in terms of technology and legal in both Finland and Sweden. It is a huge task to get prepared for the CSDR licence filing. In Finland we plan to launch next step of Infinity programme in 2018.”

Søren: “Last year was all about T2S, while this spring has been about CSDR, which we will apply for by end of May 2017. The upgrade to T2S was an important and big project. Right now our focus is on the advantages this can bring to our customers, as we can support T2S both in Euro and DKK.”

Sveinung: “We are on the same path, but we will apply for CSDR in the second half of next year. We are working with a road map for 2019, and half of the 40 initiatives related to this road map have relation to CSDR. In addition, the Norwegian politicians are active in introducing new services to the market. ”

What do you see as key to your own companies and organisations, was the follow-up question from the moderator, and Sveinung mentioned account services and the settlement operation as the centre, and underlined the need to reduce risk. Søren focused on being competitive to retain a Nordic capital market, while Jyrki highlighted the reliable infrastructure as the key to eliminate risk.

Risk and reliability

Göran: “What is it about risk?”

Jyrki: “A reliable platform for holding and for issuance is key for a CSD. It is extremely crucial both to the investor and to the issuer side of the market.”

Søren: “Safety is important. When Lehman Brothers collapsed, more than 30 per cent of the securities were not released to their end owners more than a year after the collapse. Registration on segregated CSD accounts eliminates such a risk.”

Sveinung: “Issuers are the most important, and I agree with Søren. We need to support a competitive Nordic market. The issuers need to be happy with their local CSD.”

Competing for issuance

Göran Fors asked whether the panellists saw themselves as competitors in the future, and Jyrki responded by stating, that the Nordic CSDs will compete in the future and actually already are competing.

Søren: “The competition is about issuance. We need to sustain and win back issuance business leaving the Nordics. In this regard we will look at prices for issuance, and they will go down.”

Sveinung: “Yes. This applies for fixed income investments. We do see growing competition, and it is mainly about business in fixed income. Competition is also in play on the value added services side.”

Jyrki: “The picture is diversified as we have very different issuers. In Sweden it is a much diversified group of 1600 issuers, and competition will not be the same for everyone.”

Future of a Nordic CSD approach

Göran Fors moved on to ask the CSD representatives about the Nordic model for being a CSD and its ability to compete in Europe, and Søren pointed out, that the segregated platform model in the Nordics, as opposed to the European omnibus model, is cost competitive and has increased end-owner safety. In addition, he mentioned that VP recently has seen significant interest to register investment funds on segregated CSD accounts to reduce Transfer Agent cost and mobilise investment funds as eligible collateral.

Sveinung: ”The Nordics have a possibility to be world leading. The competition is healthy, and it makes us able to stay competitive. I think we are pretty well positioned in our region.”

Göran: “Could you work together?”

Søren: “Obviously that could prove valuable to our customers, because we would be able to lower transaction cost with bigger volumes. I think it would be interesting to customers to have T2S in a Nordic model and having one gateway to both the Nordic and the European market.”

Sveinung: “Having one and the same platform in all Nordic countries is a pre-requisite, and it should support both issuers and investors.”

Göran: “When will it happen?”

Jyrki: “It is a 25 years old discussion, and I agree that the technology is key to building one Nordic CSD. Right now, we see an increase in cost, as we have to develop our systems to be compliant with new legislation and the European harmonisation. On the other hand it could be done, and I hope it will.”

Nordic model lacks support

At this point in the panel debate, Göran Fors turned to the audience for the first of several app-based polls. The audience consisting of some 170 professionals from the financial sector was asked if a Nordic model for CSDs is important going forward. Promptly more than half of the participants voted, and 56 per cent said “no”, 36 per cent voted “yes” and 8 per cent were indifferent. To no surprise all three panellists – as spokes persons for Nordic CSDs – found, that a Nordic model is valuable and worth preserving.

Søren: “Absolutely. I think Nordic CSDs add value and reliability, while still being able to compete on low cost. VP has been approached by a leading investment bank that wish to offer segregated account holding as a value-added service to their custody customers as a way to differentiate itself from competitors. A service their main CSD cannot offer. I simply cannot see the downside to the Nordic model.”

Jyrki: “I agree. Other regions may be able to copy our model, but it will not be an easy task.”

Support for one Nordic CSD

The audience was asked if the Nordic CSDs should be merged in to one company covering the Nordics. And a solid majority of 67 per cent saw that as a positive option, while 3 per cent said “no”, and 30 per cent voted “no to one Nordic CSD but in favour of the European way”.

Søren: “We are working down that line, and we do see the Nordics as our home market. We are focusing on the passports opportunity that CSDR provides, and we want to give customers one access point to several markets. This is about cutting costs and reduce complexity. Our system is already able to work cross border, and the business case for cross border is favourable.”

Sveinung: “One Nordic CSD should be a long term goal”.

Jyrki: “To me the wish to have one Nordic CSD does not come as a surprise. We have a lot of home work to do to get there.”

“Is it more likely, that we go the European way?” asked Göran Fors.

Jyrki: “Nordic is the most obvious way to consolidate. The European way is even harder to implement in real life.”

Søren: “To me it is about following the customers, and consolidation between CSDs should follow some strategic logic for market participants. And they will have to push to make it happen.”

“The Nordics have a possibility to be world leading. The competition is healthy, and it makes us able to stay competitive. I think we are pretty well positioned in our region,” says Executive Vice President Sveinung Dyrdal from VPS.

“Nordic is the most obvious way to consolidate. The European way is even harder to realize”, says Head of Nordic Commercial Jyrki Partanen from Euroclear.

“The competition is about issuance. We need to sustain and win back issuance business leaving the Nordics. In this regard we will look at prices for issuance, and they will go down,” says Strategy Director Søren Rask Nymark from VP SECURITIES.