DEEP LOOK | Platforms have been gaining traction in the custody space for some time. PostTrade360 looks at how these venues are evolving through the addition of new functionality via organic growth or acquisitions and the impact of digital assets.
The direction of travel in securities services is toward tighter integration between securities finance, custody, collateral and post-trade infrastructure.
Custodians are increasingly trying to become the platform on which securities lending, repo/collateral, asset servicing, FX and increasingly digital assets can be orchestrated, while securities finance specialists are plugging into those platforms rather than treating custody as a separate back office function.
Securities finance firms are pursuing direct integration with custody infrastructure to streamline operations, reduce settlement latency and enhance collateral mobility, motivated by the need for real-time visibility into asset positions, improved margin efficiency and the ability to support intraday repo, securities lending and collateral rehypothecation without bottlenecks, explains Andrew Geggus, global head of agency lending, triparty services and head of market & financing services UK at BNP Paribas’ Securities Services business.
Collateral: where securities finance meets custody
“Collateral optimisation is emerging as the critical nexus between securities finance and custody, while also acting as a strategic bridge that aligns the two disciplines,” he says. “As firms seek to unlock trapped collateral, optimise funding costs and meet regulatory requirements, they are leveraging custody networks to mobilise assets across repositories, triparty agents and bilateral arrangements.”
Clients are also increasingly looking for a more integrated set-up and do not necessarily want custody, lending, collateral and liquidity management to operate as completely separate services, observes Remy Ferraretto, head of securities finance and repo sales at Crédit Agricole CACEIS.
“Custodians offering securities finance solutions have additional advantages such as automated detection of short positions, middle office integration, asset pledges, aggregated cash positions and compliance controls, all of which makes securities finance services for clients much more efficient and low-touch,” he says.
Advanced collateral management platforms now integrate custody data, such as eligibility and concentration limits, with securities finance analytics to automate substitution, reallocation and netting. This convergence ensures that custody is an active enabler of liquidity and risk mitigation, while securities finance operations benefit from the granularity and control of direct custody access.
Digital assets drive convergence from both directions
Digital assets are accelerating this convergence by requiring financial institutions to connect functions that have historically operated through separate systems, including custody, wallets, cash management, trading, settlement, transfer agency, record-keeping and compliance controls.
This convergence is happening in both directions, says Matthieu Brunhammer, head of digital solutions at Societe Generale Securities Services.
“Digital-native firms are progressively adopting banking licences, regulatory frameworks and institutional standards,” he adds. “At the same time, traditional financial institutions are integrating tokenisation and digital custody to modernise their existing infrastructure.”
The target model is a hybrid environment in which clients can manage traditional and digital assets seamlessly, without having to choose between conventional and on-chain infrastructure. Over time, the underlying technology should become largely invisible to the client, who will focus on the product or service rather than the rails supporting it.
“This requires closer integration between wallets and securities accounts, custody and trading and fiat and tokenised money,” explains Brunhammer. “Where possible, institutions are also moving towards a unified record or ‘single book of record’ to reduce process breaks and reconciliation requirements.”
Digital money is an essential part of this transformation – tokenising a security creates limited value if the cash leg remains entirely dependent on traditional payment systems. Regulated stablecoins or tokenised deposits can help bridge that gap and facilitate settlement, subscriptions and redemptions. However, Brunhammer acknowledges that the market remains largely hybrid. “Interoperability, liquidity, regulatory fragmentation and the continued coexistence of on-chain and off-chain processes remain significant constraints,” he says. “The convergence is therefore structural but its industrialisation must be driven by use cases that deliver genuine economic value, rather than by the technical possibility of tokenising or accelerating transactions alone.”
Traditional assets settle on a set timetable, so custody, settlement and collateral management could afford to operate as separate steps with gaps between them. Digital assets move and settle around the clock and once the steps start running continuously they stop being separate at all, which is why the infrastructure underneath them has to carry both security and connectivity through the whole life of a transaction.
“For most institutions, holding digital assets is now the starting point and the real test is whether they can use them inside the workflows they already run,” says Richard Clark, CEO of Zodia Custody. “For institutions, secure custody is the starting point and the foundation that lets them earn, trade and build with confidence.”
Tokenisation is not an objective in itself and putting an asset on a new rail does not create liquidity on its own, agrees Jørgen Ouaknine, global head of digital markets infrastructure & wealth distribution at Apex Group.
“The value is in what the rail allows you to do: settle faster, automate processes, move collateral compliantly when it is needed and make assets that have historically been difficult to transfer or finance more accessible across the appropriate channels,” he says. “Collateral and securities finance are likely to feel this acutely because that is where the balance sheet benefits can be tangible.”
From bolt-on to built-in
According to Ouaknine, the question now is how digital assets become embedded in the operating models of existing markets.
“I don’t think we will end up with a traditional financial system on one side and a digital one on the other – both will coexist for a long time,” he says. “The task is to make the difference between them increasingly irrelevant to the client. The ambition should not be to bolt digital custody on as another product. It is about connecting traditional and digital markets so that clients get one experience, whichever rails they choose.”
Modular by design, unified in practice
Stephen Roche, president & co-founder of Saphyre, says it can be useful to describe custody platforms as modular technology platforms because some custodians treat the departments inside securities services as different business lines, each with its own technology budget and plans.
“It all starts with a new account in custody onboarding,” he says. “Other business lines may be able to reuse a lot of that information. When a client transitions business to the custody side, there is an opportunity to upsell fund accounting, tax services, transfer agency and even securities lending.” Reusing that relevant information can make the engagement more strategic and reduce duplicate requests, while allowing for additional information or checks where needed.
Roche observes that a custodian that normalises its data in advance may be better placed to integrate an acquired business and likely win new business organically.
“Data integrity is the core infrastructure,” he adds. “Clients who have a good experience – whether they use one custodian or several – have the opportunity to re-engage, creating opportunities for custodians to grow assets under custody.”
Brunhammer cautions that modularity only creates value when the platform is deeply integrated into the existing information system, adding that it must connect with securities accounts, cash systems, client data, risk and compliance tools, settlement engines and reporting frameworks.
“The most accurate description is therefore a modular and integrated technology platform,” he says. “Modular in its architecture but unified in its operating model and client experience. Its differentiating value lies in orchestrating the entire chain securely, efficiently and in line with the needs of modern finance.”
Build, buy or partner?
Organic development makes sense for the core infrastructure because it allows firms to build around their own processes, client base and operating model. At the same time, acquisitions or partnerships can help accelerate development in specialist areas where technology is evolving quickly, for example digital assets, collateral optimisation or data.
“In practice, we think the important point is less whether a solution has been built internally or acquired and more whether the different components work properly together,” says Ferraretto. “Ultimately, clients are looking for an integrated service, not a collection of separate technologies.”
Brunhammer agrees that platform differentiation will depend less on whether technology is built or bought than on the institution’s ability to select the right components, integrate them into its existing systems and orchestrate them around concrete client use cases.
Breaking down legacy silos in real time
While the securities finance arm of a custodian has historically had connectivity to the custody environment to understand security availability, integration is accelerating to improve latency and security availability.
That is the view of Judson Baker, securities finance and collateral product manager at Northern Trust Asset Servicing. He adds that since securities finance decision making is increasingly based on near real-time information on asset availability, trades and holdings, that connectivity is essential to optimising inventory, preventing settlement failures and managing exceptions more effectively.
“Securities finance agents and custodians have been working hard to break down legacy silos in their infrastructure to achieve inventory optimisation,” he says. “Collateral optimisation is a critical link between custody and securities finance because it enables clients to deploy assets more effectively across derivatives, securities lending, repo and liquidity needs. This leads to clear benefits in liquidity management, trading capacity, alpha generation and reduced operational risk.”