CSD interoperability: convergence by design, or by default?

DEEP LOOK | Europe’s regulator is pushing central securities depository interoperability through its Market Integration and Supervision Package. But the industry isn’t waiting: Euronext’s new alternative CSD framework has reignited the debate, with advocates pointing to greater competition and critics warning of added complexity and cost.

Euronext’s new settlement model for Amsterdam, Brussels and Paris has accelerated conversations around the steps required to produce a more competitive and more consolidated post-trade infrastructure in Europe. The European Commission’s Market Integration and Supervision Package (MISP), meanwhile, proposes a hub-and-spoke model, connecting investors and issuers to CSD hubs on T2S directly or via local spoke CSDs. One track is market-led, the other regulator-led, but both raise the same question: will interoperability come by design, or by market pressure?

While the Euronext model builds on existing concepts in the market – notably the investor CSD approach developed by other infrastructures – it represents the first time that such a framework has been deployed at scale within these specific domestic markets.

It also introduces a more tangible element of choice for market participants, which suggests that competitive dynamics are starting to evolve. According to Pierre Davoust, head of Euronext Securities, the new settlement model (which gives clients an alternative to connecting directly to multiple CSDs or appointing an intermediary to manage these connections) will have a significant impact on post-trade competition by allowing CSDs to compete across markets, especially on equities.

“If you want to compete as a CSD on a given market, you need to be able to manage the on-exchange settlement flows,” he says. “Under our model, in markets such as France, Belgium or the Netherlands you will have multiple CSDs capable of directly settling on-exchange flows.”

Sebastien Danloy, chief business officer at Euroclear says his organisation’s designation as an alternative CSD by Euronext Clearing for Italian government bonds traded on MTS Italy and international ETFs on Euronext Milan illustrates how choice is expanding across the ecosystem.

The single operating model for the management of domestic and foreign securities should be of particular interest to retail banks who have a strong value proposition in their home market but are less competitive beyond their national boundary.

As the model expands to further European markets, it is expected to create a more consolidated European post-trade ecosystem says Polish CSD KDPW’s CEO, Maciej Trybuchowski. “By introducing direct competition backed by large custodian banks, it will drive consolidation through free market mechanisms rather than regulatory requirements,” he says.

What the users say

The real measure of the alternative CSD framework’s success will be if flow will be re-directed, which will probably be more of a gradual evolution. That is the view of Nadine Readie, regional product head Europe, UK & Ireland and global custody & clearing lead Deutsche Bank, who acknowledges that this type of consolidation reduces complexity for clients holding foreign securities in multiple different CSDs. “However, you are consolidating the complexity rather than eliminating it so concentration risk would need to be considered,” she says.

Alexandre Espinar, head of sell-side custody solutions, securities services at BNP Paribas cautions that settlement processes are deeply embedded and that moving from one CSD to another involves significant operational, technical and sometimes strategic adjustments across the value chain from trading flows to custody models and client readiness.

“Beyond settlement, the implications on asset servicing cannot be underestimated,” he says. “The coexistence of multiple CSDs for the same securities can introduce additional layers of complexity, including potential duplication of corporate action flows, differences in deadlines and the need to manage positions across several depositories.”

Espinar reckons the main impact in the near term is likely to be on market dynamics, with increased dialogue, more expectations on transparency and a gradual rebalancing of competitive forces, while more tangible changes in settlement patterns emerge over time.

Davoust suggests the new model has already had a positive impact on costs, referring to a ‘significant improvement’ in settlement pricing across the market since the launch of the project. 

But this does not mean that fee consolidation is inevitable. “If you really want competition across market infrastructure, these infrastructures need to have some flexibility to define their commercial model and fees,” he adds. “I don’t think standardisation alone will foster competition among CSDs. What matters is that clients can actually get competitive offerings from different CSDs.”

Integration, not consolidation

The priority should be greater market integration rather than consolidation for its own sake, suggests Danloy. “Europe’s key challenge is fragmentation,” he says. “Removing barriers to cross-border investment – especially in the equity market – harmonising market practices and strengthening interoperability can deliver lower costs, greater efficiency and deeper capital markets.”

Dirk Loscher, head of custody and investor solutions at Clearstream notes that the European post-trade landscape is already highly integrated with the three major CSD groups accounting for more than 90% of total transaction value settled. “Rather than pursuing top-down, forced corporate consolidation, the industry is rapidly advancing toward an interoperable CSD hub model, which achieves the same scale and efficiency while respecting local market needs,” he says. “However, long-term fee standardisation and market integration will not be achieved simply by consolidating infrastructures. It requires us to address the root causes of complexity: the remaining national legal, tax, and regulatory barriers that continue to fragment liquidity.”

Pricing: early signals, no broad reset yet

Espinar accepts that recent developments  appear to have triggered certain pricing reactions – especially in specific markets and asset classes – but says these adjustments have not yet translated into a broad-based reconfiguration of fee structures, which he describes as complex and difficult to compare across providers.

“In many cases, pricing is still driven by a combination of volume, client segmentation and infrastructure-specific parameters, rather than a fully transparent and standardised model,” he adds.

“It is also worth noting that reductions on certain headline fee components may be accompanied by increases or adjustments on other elements of the overall pricing structure. Therefore, the net impact for clients can be more nuanced than it initially appears when looking at individual tariff lines.”

The speed at which some price movements have occurred also raises questions around the underlying assumptions on pricing flexibility within the market. Whether this reflects sustainable structural change or more tactical responses to emerging competition remains to be seen.

There is renewed momentum at European level, through initiatives such as the Savings and Investment Union and discussions around the Market Integration and Supervision Package or MISP to address fragmentation and improve the efficiency of post-trade infrastructures. This includes a stronger focus on interoperability, transparency and the comparability of fees.

“That said, consolidation alone will not necessarily deliver the expected benefits,” says Espinar, explaining that some models rely on vertically integrated, end-to-end value chains combining trading, clearing and settlement within the same ecosystem, while others aim to preserve open architecture and competition at each layer. 

Risks: will smaller markets get squeezed?

He reckons an alternative path could lie in greater horizontal convergence around shared platforms, standards and processes, allowing multiple infrastructures to operate on a more aligned basis without necessarily being fully integrated into a single stack.

While any further capital consolidation would be unlikely to change the market structure, the draft MISP could amplify cost synergies within existing capital groups, says Trybuchowski. “MISP raises serious questions about the future of smaller financial markets in Europe,” he says. “There is a risk that increased competition among financial institutions will lead to local players being squeezed out by large international financial groups. The challenge for the European Commission is to develop solutions that enhance the capital market’s capacity to finance the economy on a European scale whilst protecting regional markets.” 

The hub-and-spoke model may set the regulatory frame, but as Euronext’s own alternative CSD framework shows, market practice is already moving on its own terms. Whether MISP ultimately catches up to that momentum, or reins it in, may do more to shape Europe’s post-trade landscape than the model itself.