A special focus in the Nordic region by Fundamentals with Ulf Norén, global head of sub-custody, SEB

1. Nordic essentials: Mats Råstedt
essentials
A special focus on the Nordic region
he Nordic region is going through a period of related to the direct holding structure, however as there
profound changes in the market infrastructure. On the are market differences we are likely to end up with slight
trading side we can see the same pattern in our region variations in the models. The starting point is that currently
as has happened on many other markets already, i.e. the in the Nordic markets we have in total around 10 million
fragmentation of trading is continuously increasing, end-investor accounts that are held with the local CSDs. In
and especially for many of the blue-chip shares the Finland as well as in Norway the legislation prohibits the
multilateral trading facilities (MTFs) regularly have nominee registration of local investors’ holdings.
more than 30% of the total trading volumes. The One model that all Nordic countries are investigating at
InvestorServices
implementation of equity central counterparty (CCP) the moment is a ‘layered model’, where a large number
clearing during 2009 and 2010, which in itself is common of the accounts at the CSD level would be pooled in
practise in Europe and thus naturally a key component T2S, thereby limiting the number of accounts in T2S. As
of all major markets' infrastructure, has been the biggest a consequence the Nordic markets would from a T2S
infrastructural change in the region for decades. perspective be more similar to the so-called omnibus
CCP clearing has certainly reduced the counterparty risk markets. It would naturally still be possible for individual
as such, and also reduced the total cost of trading on the end investors to have direct accounts in T2S if they so wish.
Nordic exchanges. As a consequence of this we have seen One of the most important targets with T2S is that by
an increased number of new trading members on the local effectively consolidating all national settlement systems
exchanges, and hence we should see further improved in Europe into one, it should be as easy to settle trades
liquidity on the market which in the end will directly from any market in T2S as it is to settle domestic trades.
benefit the end investors as this should among others lead For Nordic investors this will bring clear benefits as it will
to narrowed spreads. make it easier and more cost-efficient to invest in other
In the Nordics we usually like to portray ourselves as a European markets. Equally, there is a clear expectation that
coherent region rather than individual markets when it T2S will make the Nordic capital markets more attractive
concerns securities markets. We must however remember for the non-Nordic investors.
that the Nordic markets are still quite different; we have One must however remember that the settlement
a fragmented post-trade market infrastructure, local processes in Europe are already today well harmonised
legislation and market practices, different currencies etc. and efficient, and hence the further benefits that can be
As an example, several initiatives have been started extracted from the settlement process are limited. Today
over the years to consolidate the CSD infrastructure in the risk and complexity, and hence the costs, are to a large
the region, however due to various reasons - sometimes extent in the so-called asset servicing area, which includes
political, sometimes technical - nothing concrete has among others corporate actions processing.
happened on this front. These processes are still very much dependent upon
The latest initiative that has been closed is the Euroclear variations in local legislation and practices, and will remain
platform consolidation in the Finnish and Swedish so even when T2S is implemented. As a consequence the
markets, first as the overall single platform programme total benefits from T2S to investors may be quite small, at
was discontinued, and second as the potential back-up least in the beginning. Even though custodians are able
plan, to consolidate the Finnish and Swedish CSDs by re- to run the settlement processes more efficiently in T2S, in
using legacy platforms, was recently considered to be too practice removing the need to use sub-custodians in the
complex. Now the focus in all four markets is more and settlement flow, they naturally still need to handle the asset
more on Target 2 Securities (T2S), and on analysing what servicing part with the same quality and care as today.
is the most efficient model for each market. A lot of the In order to do so the most efficient way forward is likely
work is concentrating on how to adapt the direct holding to include using local sub-custodians as is the practice
structure to T2S in a way that on one hand secures a cost today. These institutions are today and for the foreseeable
efficient process, while still meeting the eligibility criteria future best placed to handle processes such as complex
set forth by the European Central Bank (ECB), and on corporate actions, handling the reporting obligations to
securing a legally sound process, including among others local authorities, consultation on local market development
settlement finality. etc., i.e. tasks that require strong local expertise and a
Close co-operation central meaningful local presence.
The Nordic markets co-operate closely to solve the matters Mats Råstedt, head of business infrastructure, Nordea
42 | Fundamentals | 2011

2. Nordic essentials: Ulf Noren
clearer. In the Nordics, we see that many small and mid-
he situation in the Nordics does not differ that much sized member firms are experiencing cost and complexity
from the situation in Europe as a whole. We do notice increases instead of the wanted cost efficiencies and
that we experience a map where there are too many CSDs simplicity gains. It is time for Europe to make a choice of
and CSD platforms and too many agent banks. There is a what CCP model is wanted – the silo model or the user-
fierce competition for volume and lower transaction fees. owned user-governed option. As a personal opinion, I
This will drive consolidation so in a Machiavellian way would prefer one CCP – the efficiency gains would widely
it is good. We applaud all efforts in Europe to dismantle beat the competition aspects.
national barriers – it is not that the effort is being made but It is not possible to discuss Europe today without
how that can cause some doubts. The development in the spending time on T2S. For the Nordics and the Baltics, all
post trade arena is driven by political and regulatory forces markets have signed the MoU (but the exciting time will
in Europe, so also in the Nordics. be when full commitment is expected). We have mainly
non-Euro currencies as only Finland (and as of Jan 2011
We think that a lot will happen in the next few years also Estonia) currently use the euro. All markets are direct
and some of the major features can be found here: holding markets so finding a layered account structure is
CSDs: Will lose revenues and they will be subject to crucial to T2S commitment. The CSDs in the markets are
increased competition following T2S. The domestic concerned that they can continue to provide and further
monopolies are threatened and especially so if the develop investor accounts and related services. Another
obligation to issue securities in the national CSD is possible stumbling block is the governance structure. Being
removed. This will force CSDs to consolidate and among a buyer in a T2S world is very interesting and we find
these we will see attempts to move to other places in the seven different scenarios for how institutional sub-custody
value chain, especially so by starting to compete in the asset buyers might behave. These range from: doing everything
servicing space and develop further in issuer services areas. themselves, via use of one European provider, a limited
We expect some CSDs to try to become banks and for those number of regional providers, to mixed strategies and
that already are, to enhance their bank offering. We also finally to continue as is.
fear that some will apply the utility view and just raise fees The settlement cost will become very transparent in the
in order to compensate revenue losses. In the Nordics, we T2S environment and we believe that the commercial
had hoped for more of the Single Platform project but as value of a settlement transaction in the future will be fairly
things stand right now, the only single platform within that limited. On the other hand, risks previously assumed by
project is CCI. The rest is fragmented. Sweden and Finland sub-custodians will now be highlighted and transparent
will remain as two platforms with some assimilation in and we firmly believe that we are going towards an
the jurisdictional model, in the merging of fixed income unbundled fee structure in the not too distant future. Will
and equity platforms locally and with some adoption to T2S happen? We think so but there are some question
European standards. No more than that. The Link Up marks. The business case is to a large extent building on UK
markets project has been very silent lately so also here were participation. Without the UK, the business case looks weak
one of the markets that signed up (Norway) seemingly has but still not weak enough to be a stopper. The direct holding
abandoned the whole thing. market will be very important and as said, we believe there
Agent Banks: Operational models must be re-engineered. is a sentiment among those to sign, eventually. The project
Winners can be found among those that manage to drive needs further harmonisation and the governance structure
operational costs down and still keep innovation and safety must be appropriate for all participating countries.
levels high. Agent banks need to demonstrate safety in this By the way, SEB believes that changes triggered by
unsecure environment and in addition to sound and strong the T2S discussion will become reality even if T2S fails!
financials, risk and collateral models will be essential. Agent
banks must grow regionally in order to replace revenue lost Going into regulations and their effects would require
to netting effects and as a result of fee pressure. This will more space so let’s just agree that there are a lot of them
make it very challenging to be a single market provider. at various stages of implementation and shaping. This
We see that the search for quality in agent banks has been is a politically driven process that gives very little room
re-introduced (it is not only reciprocity and price any more) for the industry to influence. More of the spending in
and so is the agent banks’ ability to visualise the future state investments becomes mandatory and many players feel
of the industry and to take us there. Banks will have more and will feel increased strain in finding investments
than a handful to deal with the regulatory flood and effects innovation. Management time is to a great extent consumed
of the T2S discussion. by regulatory work and compliance areas are burning the
CCPs: It is not much of a business case in being a CCP midnight oil.
today. It is in very bad need of consolidation and we It is very important that the custody industry does not let itself
believe it will start to happen - soon. The European CCPs be trapped by regulators and regulators only. Some common
work with very difficult and complicated risk models and ground must be found and some actions must be concerted.
eventual interoperability initiatives are not making it any Ulf Noren, global head of sub-custody, SEB
2011 | Fundamentals | 43