VIDEO | Today’s custodian banks operate under an increasingly complex environment, in the cross hairs of technological and regulatory changes. Caught in the whirl of it all are network managers. Their role has evolved to include risk and relationship management with sub-custodians – and it’s likely to keep evolving. What might the coming year look like for them? At the PostTrade 360° Nordic 2024 conference, four experts attempted to answer this question in the session titled “On the network manager’s agenda for 2025”.
From geopolitical issues to harmonisation pressures, there’s a lot keeping network managers up at night. The panel named many and focused on a few.
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On tax harmonisation
Across the board, the panellists expressed a shared wish for tax harmonisation. Carrying the weight of their expectations is The Faster and Safer Tax Relief of Excess Withholding Taxes (FASTER) directive. Ekaterina Rous, network manager of BNP Paribas securities services, pointed out that there are “four completely different tax regimes” in the Nordics alone. The same lack of standardisation can be seen across Europe.
Additionally, Rous is hopeful that the Tax Relief and Compliance Enhancement (TRACE) initiative “will bring more efficiencies”, even if it “puts more responsiblitiy on us (custodians) as an authorised intermediary”.
Ola Sveen, head of network and tax at DNB Markets, was a little less optimistic. “The liability changing from tax administrators to financial intermediaries is not good for us. If there’s one thing I don’t need, it’s more tax reporting.”
He was also doubtful about the potential of FASTER, taking issue with the directive for being too “open for interpretation” – “If we get 29 different interpretations of FASTER, we will end up in exactly the same situation as we are in today.”
On distributed ledger technology (DLT)
The panellists were uanimous not only in their agreement that DLT is still in its infancy, but also whether it would ever live up to its potential. Anna Lundberg, network and counterparty relationship manager at SEB admitted that it is hard to see the benefits of DLT settlement as long as “we are still settling with cash through the legacy system.”
“Is it faster, better, easier, cheaper, more environmental friendly? What benefits are there and what will it replace, or will it not replace anything? Will we have dual structures?” she asked. “My view right now is that it’s beneficial for unstructured products… Not the core of what we are doing.”
Rous observed that “there are as many different digital projects as islands in the Stockholm archipelago today”, even though the industry still isn’t fully digitalised.
Ulf Noren, sales and relationship manager of sub-custody at SEB illustrated Rous’ point: “The tax process in Finland can be digitised up to a point, but then you have to wait for paper-based documentation in order to get it done.”
For Sveen, DLT settlement simply doesn’t currently make sense, cost-wise. “If we want to invest in digital settlement, it would cost millions, maybe billions. Do we have a billion-euro issue with settlement in Europe? I’m not sure.”
He revealed that DNB has also not encountered clients requesting to “tokenise, collaterise, or utilise their balance sheet in a different way”, proving that DLT settlement might be “a bit ahead of us”.
On competition
CSDs, in recent years, have moved into the value chain that “traditionally belonged to the intermediaries and sub-custodians,” Sveen pointed out. Despite assuring the audience that competition is “very good”, he implied a preference for CSDs staying in their lane. “The main responsibility of CSDs is to operate the settlement system, notary services, account maintenance, and asset servicing. Looking at the Nordic settlement systems – I’m not sure how much investment is being poured into these areas.”
“The fear is that the investments and the income that CSDs are earning is flowing into product management, that they are spending more time and effort competing with CSD participants than they are enhancing their settlement system, investing in initiatives that will enhance the experience for the participants, and reducing the costs, making a more competitive environment in the sub-custody space, which is currently very difficult to compete in.”
Noren is of the opinion that this development might have been one that was difficult to avoid, as CSDs are “natural monopolies”.
Lundberg expressed empathy for firms that choose to work directly with CSDs – “there’s a reduction in the custody chain and reduction of risk, consequently” – but emphasies the value of having a sub-custodian creating a buffer so that network managers don’t have to deal with the obligations that come from being a direct participant.
Sveen concluded, “If we actually want a competitive environment, we need to lower the entry barrier and make it easier to provide sub-custody services without being a global custodian with a large AUC.”
Panelists:
Anna Lundberg, Network and Counterparty Relationship Manager, SEB
Ola Sveen, Head of Network & Tax, DNB Markets
Ekaterina Rous, Network Manager, Securities Services, BNP Paribas
Moderator:
Ulf Noren, Sales & Relationship Manager Sub-Custody, SEB
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