Experts from the Securities Services business at BNP Paribas shared their insights about the state of the industry at AFME’s (Association for Financial Markets in Europe) newly launched Operations, Post-Trade & Innovation Conference (OPTIC), which took place in London last month. So what were the main talking points?
Although designed primarily to facilitate greater shareholder participation and stewardship within the EU, the SRD II also imposed a number of requirements on intermediary providers – principally custodians and central securities depositories (CSDs).
In order to strengthen shareholder engagement, intermediaries were told to disclose information about shareholders’ identities to issuers. At the same time, intermediaries were obligated to transmit information from issuers to end investors, so the latter could efficiently exercise their shareholder rights. This has forced intermediaries to pivot away from their legacy systems and embrace straight-through-processing (STP), enabling information to be relayed seamlessly in machine-readable formats between issuers and investors, and vice versa.
Mariangela Fumagalli, Head of Global Asset Servicing Product and Custody Regulatory Solutions for the Securities Services business at BNP Paribas, says intermediary providers have largely reached consensus on using ISO 20022 messaging when disseminating shareholder identification requests and general meeting information. Although she adds that full STP will not be achievable until there is a harmonised, EU-wide definition of what a shareholder is.
While some experts advocate the use of distributed ledger technology (DLT) to help issuers and investors when sharing information with each other, Fumagalli says existing technology will work just as well.
We do not necessarily need DLT. What we need is a commitment from issuers to provide information in a standardised, easy to transmit way, so that it can be passed down to the investorsMariangela Fumagalli
Overall, panellists largely agree that the SRD II has been successful in its stated objective of promoting better shareholder engagement. Nevertheless, this is only the first step in the right direction and to ensure the SRD II objective is reached we would need a review, as stated in the Capital Markets Union (CMU) plan, addressing harmonisation on the definition of ‘shareholder’ across all member states.
Opportunities and threats to securities services
Alan Cameron, Head of Advisory FIC Client Line for the Securities Services business at BNP Paribas, moderated a panel, exploring some of the dynamics shaping the industry today.
Despite all of the wider macro challenges, Cameron says it is vital that custodians stay resolutely committed to delivering a premium client service.
It is essential that providers are not distracted by the various economic headwinds, and that they keep focussed on their clients’ needs and a high service qualityAlan Cameron
With clients demanding greater automation and digital services from their providers, custodians are increasingly collaborating with both each other and fin-techs to develop innovative technology solutions. Cameron cites Proximity, an electronic proxy voting platform, as being an excellent example of this.
Nonetheless, according to Cameron, the industry is dealing with some profound challenges including adapting to new regulations. Although they have improved many aspects of the post-trade world, implementing new regulations can be expensive – for example, increasing capital requirements. It is key for the industry to engage with regulators to ensure new requirements are beneficial Furthermore, it was the view of his panel that the post-trade industry is facing an acute skills shortage, as recruiting and retaining young talent becomes increasingly difficult.
The future of clearing
Central counterparty clearing houses (CCPs) have demonstrated extraordinary resilience over the last 2+ years. Following on from COVID-19, Russia’s invasion of Ukraine is the latest crisis event to put pressure on CCPs. Haroun Boucheta, Head of Public Affairs for the Securities Services business at BNP Paribas, says the war has unleashed all sorts of volatility in commodity markets, prompting CCPs to increase their margin calls.
The panel also looked at the impact of settlement compression on the CCP business model. With the US on course to adopting a T+1 settlement cycle, there is debate about whether Europe will follow suit.
Across the region, there are multiple FMIs (financial market infrastructures) and currencies, and different cross-border rules covering tax and insolvency. I am not saying adopting T+1 is a bad idea, but it will be much more complicated to implement in the EU-27 than it will be in the US and, probably, in the UKHaroun Boucheta
If T+1 is adopted successfully, T+0 or “atomic settlement” could follow in the long term. Boucheta notes counterparty risk would be limited or even non-existent under an atomic settlement model, calling into question the future of CCPs. However, CCPs do provide netting benefits for market participants, something which would not necessarily be available in an atomic settlement environment.
Boucheta also suggested that regulation around clearing should also be reviewed with the European Commission aiming to promote policy objectives like strategic autonomy. He said that maintaining a fair competitive landscape is key and any policy that would only involve EU-based clearing members would not meet the CMU’s objectives.