Opinion & Analysis

For most investors, a planned and executed trade is the end of the affair. Once a counterparty has been found and the terms of the deal agreed, we assume we’ve addressed the risks we were looking to offset in changing the composition of the portfolio.

But what if risks lurk in the post-trade processing of our transaction? How do we know that securities and cash have moved correctly, that the change of ownership is recorded accurately and, once the movement has taken place, that our ownership rights are secure?

Over the last two decades the portfolio of the average institutional investor has increased greatly in geographical reach and complexity. At the same time, the outsourcing by asset managers of many middle and back office functions to specialist service providers has resulted in a new challenge: maintaining a holistic view of markets and exposures.

Can custodian banks, the repositories of most large investors’ holdings and accounting information, help redress the balance via new data and analytics services?

Choosing how to connect to T2S was a straightforward decision for HSBC. The fact that the bank has otherwise left its existing arrangements untouched for the time being reflects the nature of a project that is at its beginning rather than its end.

Northern Trust surprised its competitors by announcing how it would manage the transition to T2S a good nine months before the first markets joined the new settlement platform on 22 June 2015. Its solution was a practical one, which recognizes the fact T2S is essentially a settlement platform. It combines direct access to T2S settlement services, with a single asset-servicing agent. To access central bank money at the ECB, Northern Trust is using its full bank branch in Luxembourg to enter the euro-system via the Banque Centrale du Luxembourg.

The Dutch specialist in European securities services adopted a pragmatic approach to the coming of T2S, with the aim of maximising the obtainable savings on post-trade processing, while minimising its costs, especially in terms of investment in systems. KAS Bank strategists also think the full benefits of T2S will take many years to disclose themselves, further militating against a costly and over-ambitious approach that might turn out to be mistaken.

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