Sibos 2013: Day 2 Report – Market Infrastructure Change and Corporate Forum

By Neil Ainger | 17 September 2013

The Market Infrastructure (MI) Forum at Sibos 2013 got underway today looking at the recovery and resolution plans now in the place for the industry post-crash and the technological changes necessary to make them happen, with the huge imminent changes under the TARGET2Securities (T2S) single euro securities settlement engine in Europe, which is due to start in 2015, addressed in the afternoon. Meanwhile the Corporate Forum discussed if these new MIs might be used to aid treasury centralisation, writes Neil Ainger. The technology and procedural changes needed to achieve a centralised treasury were debated in the standalone forum dedicated to treasurers.

There are more than 18,000 rules under the Basel III capital adequacy regime to be implemented by financial institutions. “I once had someone say to me ‘how do you expect my people to have time to read 18,000 rules, never mind implement them?” said Shu Pui Li, Head of Financial Infrastructure Development at the Hong Kong Monetary Authority during the first session of the Market Infrastructure (MI) Forum, which opened today at Sibos 2013 [see the day 1 report here].

The regulator sympathised, he said, and accepted that there is a balance to be struck between introducing rules and leaving time to run a business, “but it is necessary to have regulations and resolution regimes”.

However, regulations can lead to worse control if they are done badly, warned Michael Steinbach, chief executive officer (CEO) and chairman of the payments processor, Equens, who urged banks, regulators and market infrastructure providers, such as his own firm, to all “get rid of entrenched positions and talk.” He identified that co-operation is the correct way to respond to the numerous challenges that face MIs - from payments regulations concerning the single euro payments area (SEPA) and card interchange fee changes, to the moves towards a centralised repository and clearing for over-the-counter (OTC) derivatives trading following the collapse of Lehman Bothers’, among much else MI change.

On the latter point, fellow panellist Eileen Dignen, Senior Vice President, CHIPS Product Management and Strategy, The Clearing House, questioned if the intent of the raft of regulatory changes that are impacting the financial markets - with Dodd Frank particularly prevalent from a US perspective of course - is really to push out traditional providers? “I don’t think it is,” she said at Sibos 2013 during the session entitled ‘Recovery and Resolution for MIs’, “but there is that danger.”

There is also the danger of newcomers to financial services (FS) coming to market and disintermediating established banks and MI providers as they face less of a regulatory burden and often already have a technology head-start because they are unencumbered by legacy issues. “We are starting to see large volumes go over alternative payment systems and that is a challenge to the regulators,” said Steinbach who, in common with his fellow panellists, called for a level playing field.

According to Kevin Brown, Managing Director, Global Head Transaction Services, RBS International Banking, “you could indeed start to see some of these alternative payment providers and structures at Sibos itself in three to four years’ time (as they grow)”.

Bitcoin and other digital money virtual currencies are yet another disintermediation threat, but as was also mentioned during the morning session, you might see the US Treasury level the playing field for FIs via the supranational Foreign Account Tax Compliance Act (FATCA) and other such regulatory moves.

Corporate Forum Opens: Using Technology to Centralise
The Corporate Forum at Sibos 2013 opened with a welcome from Andre Casterman, Global Head of Corporate and Supply Chain Markets at SWIFT, and Diane Reyes, Global Head of Payments and Cash Management at HSBC, with the latter outlining four key trends in the corporate and treasury arena:

  • Rising Importance of Treasury and Emerging Markets: As more consumers join a growing middle class in emerging markets from LatAm to Asia and more investors and producers emerge the importance of treasury in cross-border, global operations is rising, said Reyes, and the changing landscape is impacting cash management, accounts payable (A/P), liquidity positions, trade finance and everything else. Technology is a key part of this change too.
  • Open standards: crucial for corporates as they move away from bank proprietary systems towards SWIFT, XML ISO20022 and other open standards, whether to aid treasury centralisation or just avoid being ‘locked-in’ with a bank.
  • Technology: Treasurers want value from rich data, not just cash position data, and technology can help here, advised Reyes. “There has been a technology revolution in retail banking over the past decade and I think the same thing is beginning to happen in commercial banking,” she explained.
  • Operational efficiency: the fourth and final trend that HSBC’s Reyes identified in her opening Sibos address was the move towards treasury centralisation via shared service centres (SSCs), payment factories and so forth, while highlighting how this is supported by the previous three trends.

The status of the Bank Payment Obligation (BPO) was also much discussed, and advanced, among the Corporate Forum attendees at the Sibos 2013 gathering.

Are Corporates and Banks Aligned in Search for Treasury Centralisation?
The need for banks to support corporate treasurers in the search for operational efficiency was discussed in the next session of the Corporate Forum at Sibos 2013 entitled Best practices in the centralisation of treasury functions: Are corporates and banks aligned?

Anita Prasad, General Manager for Treasury at Microsoft Corp detailed her corporation’s centralised treasury operation based in Redmon, US, and how they concentrate cash and hand it over to the centralised treasury investment team to invest, while explaining how they have worked to improve their operation in recent years so that they can answer the simple question: where is my cash?

“We’ve always had a centralised treasury but when the chief finance officer (CFO) asked a few years ago ‘how much cash do we have?’ he got different answers from the treasurer looking at cash in the bank, to the investment team looking at assets, and so forth,” explained Prasad. “That’s what caused us to improve our treasury operation still further. Centralisation isn’t necessarily for everyone - or at least only certain functions might need it at certain corporates - but it has been good for us.”

The other treasurers on the panel Seturaman Mahalingam, CFO at Tata Consultancy Services, and Alawi Al-Shurafa, Treasurer at Saudi Chevron, shared their own treasury centralisation experiences with the latter stressing his desire to remain bank agnostic and avoid being trapped into a proprietary host-to-host connectivity arrangement with a bank. “That is why we use SWIFT and why I am here at Sibos,” he said. “I am also interested to learn more about SWIFT’s Know Your Customer (KYC) shared services platform because these rules are increasingly impacting treasury payments. I hope SWIFT can help here.”

TARGET2Securities (T2S) single euro securities settlement engine and CSD change
One of the biggest market infrastructure (MI) changes and technology projects on the horizon is the TARGET2Securities (T2S) single euro securities settlement engine in Europe, which is engendering much debate at Sibos 2013 following yesterday’s declaration from the European Central Bank (ECB) board member, Yves Mersch, that T2S will definitely go ahead in 2015 as planned. It is already impacting the marketplace as last week’s Clearstream Xact announcement shows.

“BNP Paribas has been tracking T2S for a while as you can imagine,” said Alan Cameron, Head Of Global Strategic UK Broker-dealers and Bank Relationship Management, at the bank’s Securities Services unit during the afternoon’s ‘T2S Movers and Shakers’ debate at the MI Forum. “It does mean we have to update our systems to connect, however, and give our clients the extra functionality and opportunities it offers.” Indeed, BNP Paribas has already decided to use SWIFT’s Value Added Network (VAN) solution for its connectivity to T2S.

T2S is not just a technical challenge, however, as its advent will further encourage custody banks to enter the Central Securities Depository (CSD) space, under the impact of the changing collateral requirements impacting the sector post-crash, and to seek out new niches. Meanwhile CSDs might think about offering more custody services, as the CSDR regulation progresses in Europe and other regulatory moves to reshape the financial markets post-crash gather pace. Nadine Chakar, Executive Vice President Global Collateral Services at BNY Mellon addressed this issue by referencing BNY Mellon’s establishment of a CSD at the turn of the year, commenting that “you’ll definitely see more CSDs popping up”.

According to Mark Gem, a member of Clearstream International’s executive board, 40% of settlement turnover in euros at the moment goes via Clearstream, and “our decision to participate in T2S a year ago provided a ‘go’ for the entire project”. Euroclear is the other big settlement provider in Europe of course and both organisations were understandably resistant at first about T2S as it will eat into their space and margins. In the same way that the EU’s Markets in Financial Instruments Directive (MiFID I) forced apart the exchange and trading landscape six years ago, T2S threatens to cause a similar disruption further down the line. An initial fragmentation is likely as new players such as BNY Mellon and others enter the space and a latter consolidation is then likely to kick in as the market once more settles down after the initial shake-up.

For Jean-Michel Godeffroy, Director General and Chairman of the T2S Board at the ECB, the crucial benefit of T2S globally is that “it will make accessing European capital markets simpler” and it makes sense to have a single euro securities settlement engine in Europe to match the single currency. It will, however, also mean a clear-out of national CSDs in a changing marketplace.

“The core functions of T2S have already been developed and we’re now testing them,” explained Godeffroy. “We’ve still to develop the billing systems and test them but the project is progressing according to our hopes.”

The marketplace itself is getting ready for this huge change too, with pricing issues just one of the many factors still to be resolved. Clearstream’s Gem confirmed that his organisation “will not charge ad additional fee over and above what the ECB is charging us”, but no doubt domestic safekeeping fees and the scale discounts on offer for volume customers will disappear.

It is to be hoped that the T2S technology and connectivity changes at least go smoothly as the 2015 start date nears, and that no technical glitches such as that which prevented the MI Forum audience voting system from working arise. The views of the audience were not assessed due to the in-session technical problem during this Sibos session but that may be just as well because predicting the impact of T2S, the CSD Regulation, and other MI market changes underway in this sector is a difficult game to play at the moment.

• Bobsguide will be producing a daily show report from the Dubai World Trade Centre (WTC) venue on 16-19 September all this week at Sibos 2013. See our Sibos 2013 blogs HERE and news announcements via the homepage.

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