Settling on a New Kind of Industry Efficiency

Transcription

1 Settling on a New Kind of Industry Efficiency Panel Moderator: Ken Porcaro, Head of Client Management, North America, Direct Custody and Clearing, Citi Russell Callaway, Executive Director, Network Management, Americas & International Markets, Clearstream Banking S.A., Walter Salvatori, Vice President, Global Market Infrastructures, JP Morgan

2 The Evolution of Custody and Clearing Service Models The Traditional Model for Custody and Clearing Services for Intermediary Financial Institutions Focused on: Access to the CSD, Central Bank, Settlement Systems - Indirectly Safety and Segregation of Prop and Client Assets on the books and records of the Custodian Availability of Liquidity to provide timely settlement from the Custodian Standardized reporting SWIFT, Proprietary Systems Timely and accurate Corporate Actions reporting and processing Standing Instructions for FX Inquiry responsiveness Market Advocacy and timely reporting of Market developments and events

3 Trends in the Market started in the Mid 90 s and accelerating to the present day required new approaches to the Age Old Approach Rapid Expansion of Globalization The Evolution of Custody and Clearing Service Models Development of Multilateral Trading Facilities MiFiD Expansion of Central Counterparties Borderless region of the EU - Common Passport Liberalization of many markets with regard to direct access to exchanges and CSD s More complex and speed to market driven trading and investment strategies Development of Global Index Funds and ETF s Expansion of allowable investments for Pension Funds and other once conservative investment pools Target 2 for Securities Increased cost pressure driven by: Massive Global Competitors and intense competition for market share Regulatory Imperatives and increased oversight and the need for enhanced client protection Increased sophistication of Mega Investors Increased Sophistication and Localization / regionalization of the Intermediaries

4 Direct Custodians must become innovators to support the changing environment Access to Local Exchanges Direct On Exchange Settlements MTF On Exchange Settlements Domestic GCM Services MTF GCM Services Direct Access to Central banks and CSD s Account Operator Investor CSD / Account Operator Central Bank Account Operator Segregated Custodian Account at the CSD under Direct Custodian umbrella

5 2 Exchange Traded Services: Third Party Clearing Citi offers clearing services at nineteen CCPs supporting 60+ trading venues Fully comprehensive CCP clearing service All major trading venues and CCP s supported Equites and fixed income supported Citi becomes principal to CCP transactions and have a back-to-back riskless principal transaction with clients Clearing can be offered in conjunction with settlement or on a standalone basis Agent, principal and disclosed principal structures supported Citi maintains all technical & day-to-day connections with the CCP Citi manages the CCP margin process and pass on margin calls to clients Citi is responsible for maintenance and development of CCP interface Competitive clearing Citi has developed a strategy to maximise the benefits of competitive clearing and consolidate clearing flow in order to reduce cost and improve operational efficiency Regular client consultation Flexible model can accommodate client preference if required Citi is at the forefront of market advocacy efforts to expand competitive clearing

6 1 Exchange Traded Services: Settlement ETS supported in all major markets Citi can support clients domestic and remote trading memberships with a full clearing and settlement service All major trading venues and CCP supported Equites and fixed income supported Citi can support CCP cleared and non-ccp cleared settlement Flexible reporting options including a standard format gross transaction report across markets / trade venues Flexible netting options available including gross, net, aggregate settlement Citi can support CSD and Settlement agent POA structures Clients can choose to send own instructions for Citi to perform a reconciliation between client and exchange / CCP generated settlement instructions Agent, principal and disclosed principal structures supported

7 4 Account Operator Citi offers Account Operator services at 26 CSDs, with an additional 6 planned for 2017 Fully comprehensive CSD Account Operator service Client opens a securities account at the CSD maintaining legal ownership of the account and is subject to the CSD rulebook The Securities CSD account is for the receipt, safekeeping and maintenance of securities Client allows Citi to operate its Securities CSD account by appointing Citi as the account operator via a POA Client enters into account operator agreement with Citi Citi creates a mirror securities account on its books and records Client can open a cash account with Citi to settle the transactions. Securities CSD account is linked to this cash account. Alternatively the client can use its own cash account (in some markets). The client sends all instructions to Citi Citi will send instructions to the CSD Settlement in the CSD to be reflected on client s mirror securities and cash accounts on Citi s books. Settlement and asset servicing message flows and formats to remain unchanged from a custody model CSD Account Documentation and POA Account Operator Agreement Client Citi Account Operator Client CSD Account Settlement Instructions Settlement Instructions Settlement status/confirmation Settlement status/confirmation

8 Latest Trends in Potential New Operating Models Wave of regulations governing Contingency, Concentration Risk, Resolution Planning and Client Asset Protection call for a new approach in Asset Segregation and Reconciliation Segregated Depository account in the name of the Global Custodian or Broker Dealer Maintained under the Custodians CSD Membership Accessible to the Global Custodian Allows direct reconciliation of Books and Records Segregated independent reporting from the CSD Access to the CSD for Due Diligence reviews by the Global Custodian Potential reduction of Concentration risk to the Direct Custody Continued benefits for Settlements and Asset Servicing from the continued Traditional model

9 2 Account Operator ( AO ) for Investor CSD: Model Overview Key principles and Proposed High Level Set-up All assets will be held in Client s accounts (per entity) on books of the Investor CSD All Investor CSD accounts will be linked to the Client s own DCA at the relevant central bank for both settlement and asset servicing Client s accounts in the Investor CSD will be operated by Citi based on PoA for both settlement and asset servicing; Citi will provide an enhanced Account Operator service to the Client, including clearing, settlement and asset servicing Citi also provides a local asset servicing solution to the Investor CSD for the domestic Issuer CSDs outside the home market, leveraging functionality already developed for Citi/CSD in certain markets; To this end, Citi will be appointed by the Investor CSD as Asset Servicing Partner for the assets of the Client in the local Issuer CSDs (aside of the Investor CSD s incumbent asset servicer) All message flows from and to the Client (or other sources such as CCPs) will be via Citi and remain largely unchanged from today The Client benefits from all collateral management services from Euroclear/Clearstream including a single asset pool across ICSD and CSD This model helps to minimize the need for changes/adaptions whilst retaining all material existing products and services

10 4 Account Operator Model High Level Communication Flows of the Account Operator Model for Investor CSD AO Customer Client CCPs POA Asset Servicing [AO Customer Sub-accounts] Settlement Citi is the account operator of AO Customer participant accounts (with Investor CSD) for Settlement and Asset Servicing All communication with AO customer is via Citi CCP Settlement PoA LMP AO Provider to the Client ASO Provider to Investor CSD Asset Servicing [Investor CSD Omni A/C] T2S Settlement/DCP Asset Servicing [AO Customer A/C] Asset Servicing [Investor CSD Omni A/C] Investor CSD T2S Settlement Issuer CSDs Investor CSD re Client Local Market Partner ( LMP ) Citi is the account operator of Investor CSD / AO accounts opened with the Issuer CSDs ONLY for Asset Servicing AO customer assets and activities are segregated on a Investor CSD / AO dedicated account, separate from Investor CSD s omnibus A/C The AO s DCA is linked to the Investor CSD / AO account opened with the Issuer CSDs to receive gross cash payments

11 3 Account Operator for Investor CSD: Key Benefits Client As little change as possible evolutionary and not revolutionary Retain bespoke on-exchange settlement solution and access to Clearing services Facilitates highest asset protection and compliance with new regulations Use of its own DCA to achieve funding efficiencies and balance sheet optimisation Access to efficient collateral management solutions with integrated pool across T2S Investor CSD and ICSD assets Retain one of the best-in-class Asset Servicing solutions provided by local market experts Citi Remains key partner to the Client in T2S and continues delivering robust custody and settlement services Investor CSD Gains local CSD assets at Investor CSD to combine with ICSD assets and provide an efficient collateral management suite of services across the Client s entire book

12 5 Account Operator for Investor CSD: Services Overview The combination of Citi and Investor CSD in support of the Client allows that all critical elements across the value chain are covered in a robust way, striving to provide the best solutions covering all underlying business lines. Product or Service Coverage Provided by Asset Segregation/Protection Investor CSD Clearing Services Citi On-exchange Settlement Services Citi Primary Dealer Support 1 Citi Bespoke Transactions (e.g. IPO) Citi Market Information Citi Pre-settlement Services Citi Settlement Services Citi Fails Coverage Investor CSD Comprehensive Asset Servicing Citi Funding (CeBM) Client Collateral Management Investor CSD Portfolio Optimisation Investor CSD. Selection / Instruction / Substitution Investor CSD

13 Securities 7 Citi T2S Solutions: Securities Citi provides clients a range of solutions designed to support unique business models and take advantage of what T2S has to offer Single Point of Access ( SPA ) Account Operator ( AO ) Model 3. Asset Servicing Only ( ASO ) MEDIUM Client Investment, Resources & Expertise Required SPA AO ASO SPA to T2S platform and markets with full custody services and liquidity provision Own account at CSD operated under PoA by Citi Supports clients who insource settlements in one or many markets Common operational hubs for settlement and asset servicing Centralised processing platform Facilitates consolidation of accounts/assets All benefits of full service custodian Full asset protection from custodian insolvency Market visibility Extends benefits of T2S connectivity with an industry leading asset servicing solution Leverages Citi s SME s and local-market proximity to regulators, tax authorities and other participants

14 5 Asset Servicing Only Supports clients direct CSD connections Overview Clients with direct technical connectivity to CSDs to process settlement flows directly with the infrastructure Asset servicing solution required as underlying CSD connectivity still required Citi has existing CSD connectivity Citi builds real time shadow client positions to perform asset servicing only Citi can offer this service in all T2S markets with two clients already live in The Netherlands & France for Asset Servicing only Asset Servicing Instruction Reporting Client Settlement Updates Settlement Instructions/ Reporting CSD Benefits Supports Asset Servicing only - the most value add /high risk element in the securities transaction life cycle Benefits from Extensive local market asset-servicing operational expertise Proximity to regulators and tax authorities Citi Operates Client Account Under PoA

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