Securities safekeeping: finding the balance between asset servicing and settlement

To strike a good balance between efficient asset servicing and clean settlements becomes more difficult as we increase the number of geographies; let us address the blocking points and solutions.

Globalisation has long been a fact, and with it came the increase of cross-border flows. Institutional investors on the lookout for returns and diversification are ready to pursue growth through geographic distribution, but it comes with challenges.

One such challenge is securities safekeeping. To strike a good balance between efficient asset servicing and clean settlements becomes more difficult as we increase the number of geographies; let us address the blocking points and solutions.

An increasingly complex chain of intermediaries

As institutional investors expand their geographic footprint, they also expand their chain of intermediaries. Often, domestic assets are no longer safekept directly on their local market, instead resorting to indirect safekeeping. When this occurs, additional intermediaries naturally join the value chain (e.g. subcustodians, technical operators, ICSDs), increasing complexity. This leads to two main issues:

  1. A less efficient securities transaction service:
    when indirect safekeeping domestic securities, the institutional investor’s custodian does not have access to the local market, it cannot interact directly with the issuing company, issuer CSD, local tax authorities and regulators. As such, it must now rely on the quality of services provided by different intermediaries further along the value chain. This may result in less complete market and securities information, delays in receiving market announcements or important event details that affect the securities, non-competitive corporate action cut-offs and missing options normally available on the local market.
  2. Increased risk and higher costs: having more third-party providers in the safekeeping chain, with their associated fees, will increase overall servicing costs. In addition, the institutional investor’s custodian no longer has a direct relationship with all of the local actors, which in turn, means a loss of influence on the quality of the services delivered.

By contrast, safekeeping an asset directly on its local market improves the service quality in a variety of ways. With a smaller intermediary chain, the risk of loss of information for corporate actions decreases since local teams have direct contact with the domestic CSD. Additionally, it allows for direct access to the local market, which results in better market cut-offs.

Not leaving settlements out of the equation

In some cases, relying on local safekeeping may not be ideal in terms of settlement. Sometimes, counterparties will want to settle at the ICSD level, which implicates a transfer of securities from the local market. This translates into a more challenging settlement process, in a time where avoiding settlement fails is critical.

Indeed, recent market trends such as the Central Securities Depository Regulation (CSDR) indicate further scrutiny towards settlement fails. CSDR for instance, a European example, introduced the Settlement Discipline Regime on 01 February 2022, which created pressure on settlement fails with late matching penalties and settlement fail penalties. Additionally, there are further concerns related to the potential introduction of a buy-in mechanism, which would strengthen the criticality of avoiding settlement fails even further.

Another concern could be the introduction of T+1 and T0 settlements. Indeed as the markets move to shorter settlement windows, this would result in fewer opportunities to operate the necessary securities movements in time. Imagine your securities are held domestically in Brazil and your counterparty requires a settlement on an ICSD; instead of having two days to attain the necessary setup for the transaction, you would have one or none.

With this in mind, how do you remain close to local markets for asset servicing while achieving settlement efficiency?

Automatic asset safekeeping optimisation and settlement realignment

The increasing interpenetration of world markets only heightens the importance of reconciling the benefits of optimised direct asset safekeeping with the opportunities to conduct transactions on different settlement systems.

Thanks to BNP Paribas’ direct access to the main local markets around the globe, we can offer the best of both worlds to our customers through our powerful multi-local offering:

  • Asset safekeeping on local markets
  • Automatic realignment of securities so they can be sold cross-border in the locations where they are needed

Our Securities Inventory Management service optimises asset servicing and settlement by automatically transferring assets to and from their local markets whenever they have been received on, or need to be delivered to, a different market. The solution has two main components:

  • Transfer optimisation: we assess our clients’ portfolios at the end of each accounting day. Any assets that are not currently held domestically are then automatically transferred to their local markets via an electronic process (free of payment) – provided the security is not part of a parallel sale on the foreign market. Parameters are established with clients to determine which assets to move under which circumstances.
  • Automatic realignments: assets repatriated for safekeeping to their local market may subsequently be sold by clients on other markets around the world. In such cases, where the assets are not already held in the customer’s desired settlement place, available securities are screened and an electronic transfer (free of payment) is completed in real time to the place of settlement to cover the delivery. This ensures the correct securities are available for settlement and the sale can take place smoothly – reducing the risk, cost and effort involved in cross-border transactions.

Securities Inventory Management is available for Global Custody clients and covers 17 domestic markets (Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, United States) and the ICSDs.

Due to significant demand, we are currently working on extending the scope of asset classes covered (e.g. equities multi-listed, trackers…) and the possibility to offer it to our multi-local clients who face difficulties with their cross-border flows.