Vivekanand Ramgopal – Be realistic about the present and ambitious about the future of CSD links

Central securities depositories (CSDs) have long recognised the opportunities which lies in linking their services across borders, but it has proved hard to realise them. Vivekanand Ramgopal (“Vivek”), vice president and co-head of TCS Financial Solutions at Tata Consultancy Services, advises CSDs to temper their ambition with a realistic assessment of what can be done quickly, and to focus on areas that deliver concrete benefit, such as DvP on T+2. He nevertheless contends that blockchain technologies have the potential to transform not only the efficiency of cross-border links between CSDs, but their productivity as well.

There are 135 central securities depositories (CSDs) around the world. They each belong to one of five regional associations of CSDs spanning Africa and the Middle East, the Americas, Asia-Pacific, Eurasia and Europe, through which they meet and exchange information regularly. Every two years, the members of the five regional associations gather at the World Forum of CSDs (WFC).

So links between CSDs do exist. But they hardly ever extend to direct digital connections which would enable the users of one CSD to interact across national borders with the users of another CSD, though this is a frequent topic of discussion at meetings of regional associations of CSDs. Vivekanand Ramgopal (“Vivek”), vice president and co-head of TCS Financial Solutions at Tata Consultancy Services (TCS), thinks he knows why such talk hardly ever leads to action.

Cross-border links between CSDs have had a limited impact so far

“CSD-to-CSD links have not had much of an impact because the global custodian-local custodian model has persisted, partly because the banks do not want the competition for cross-border settlement and custody, or disruption of their role as gatekeepers to the CSDs,” he says. “Nor have CSDs been able to prove why CSD-to-CSD links would be more efficient. Besides, lower fees and charges alone are not reason enough for such links to succeed, because there are always differential rates you can obtain in the global-local custody model.”

The exception is Europe, where links between national CSDs, and between the twin international central securities depositories (ICSDs), certainly work. They carry message traffic about transactions and assets and produce revenue. But even the European projects are incomplete, with both global and local custodians surviving as intermediaries after TARGET2-Securities (T2S) completed the transition of settlement in euros on to a single European platform in September 2017. The T2S project also took more than a decade to complete, despite being led by the European Central Bank (ECB).

T2S was forced recently increased its prices to cover its costs. Most users were already reporting that the new platform had failed to cut their settlement costs. This is not just because T2S has added a layer of intermediation on top of CSDs, but because asset-servicing still depends on banks, which have to be paid to reconcile settlement and custody data.

Likewise, the electronic bridge between Clearstream and Euroclear cannot be said to have run smoothly since its inception in 1980. In the 1990s, the discrepancy between the settlement timetables of the two ICSDs, which worked to the advantage of Euroclear, became a major source of friction between the ICSDs and an irritant to customers.

The problem was that the solution Clearstream adopted – compensating clients for losing control of their cash and securities a day early – become extremely expensive as transaction volumes increased. Most other links would regard that as a problem of success they have never had: they have simply failed to attract the volume of business to be viable at all. Attempts to create a collateral link between Euroclear and the Depository Trust and Clearing Corporation (DTCC) are an instance of this.

A mutual focus on DvP on T+2 is key to the success of cross-border-links

Vivek thinks the key to the success of CSD-to-CSD links lies in further compression of settlement timetables. If all markets moved towards settlement on trade date plus two days (T+2), for example, it would prevent the development of problems similar to those which bedevilled the Clearstream-Euroclear bridge. “Across continents, without the alignment of settlement timetables, CSD-to-CSD links are very difficult to achieve,” says Vivek. “If links were associated with a drive to settlement on a common timetable of T+2, they would generate much more interest.”

Even then, time-zones create a further difficulty, if settlement does not continue round-the-clock. “Settlement windows tend to close by 4.00 p.m. local time, and that is a further problem,” explains Vivek. “A lot of CSDs also have legacy systems, which need to be upgraded. Connecting through SWIFT cannot compensate for inefficient systems at the local level. Interfaces are not a technical problem for CSD-to-CSD links, but the systems you interface with can be an obstacle.”

He adds that inflexible and poorly documented legacy systems are often combined with legacy practices and processes. But by pointing out that legacy systems make it hard to forge links between CSDs, Vivek does not mean that the core processes of a CSD must be standardised, or that the settlement practices of multiple countries must be harmonised. In fact, he thinks it is impossible to achieve this with so much jurisdictional and institutional variation. Vivek says that, across the 30 markets where TCS works with a CSD, the variation in local settlement practices is extensive.  As he points out, even the 20 markets which settle on the T2S platform follow highly variegated settlement practices.

“The need for alignment is over-emphasised and over-rated,” he says. “If we try to harmonise settlement practices around the world, the idea will die before we get going. But there does need to be discipline around operational windows, and a drive towards a shorter time-frame for settlement. If the final objective is delivery against payment (DvP), and to do it at the same time, the key processes all take place before you get to that point. The underlying processes can all continue to be different, provided the final step of settlement by DvP on an agreed time frame is harmonised.”

He adds that users of settlement services have some responsibility for demanding more and better settlement services across borders, as well as cheaper ones, though their indifference is understandable. “Investors push for changes when they make significant foreign portfolio investments, but CSD-to-CSD links are not at the top of their list,” says Vivek. “They are more concerned about managing and mitigating the risks, clearing regulatory obstacles to access and minimising taxation of the gains they make.”

Blockchain technologies might provide a better way to link CSDs across borders

But even investors indifferent to post-trade inefficiencies would welcome the emergence of more efficient clearing and settlement networks for foreign portfolio investment. Standardisation of settlement timetables would help, by facilitating the movement of transaction volumes on to CSD-to-CSD links. But Vivek speculates that a network could emerge even faster if the bi-lateral links between CSDs were replaced by a blockchain-based network on which each CSD was a “node.”

“Blockchain technology could be quite disruptive, and yet deliver a significant benefit to CSDs,” he says. “Blockchain can be the linking technology across multiple CSDs on one private, permissioned network. If blockchain is used, CSDs could lose the current levels of complexity in transaction processing. They would not just simplify the processes but reduce message flows close to zero. By eliminating duplication of accounts of the same transaction, it would also reduce the amount of reconciliation that takes place today.”

Vivek also points to the potential savings in connectivity. “When you use blockchain, you do not need another network to connect to your counterparties,” he says. “It is a connective ledger as well as a distributed one. It can be a significant driver of connecting settlement systems in a completely different manner in the future.” Vivek warns that blockchain also implies a much-reduced level of transactional activity for CSDs to service, but he argues that the opportunities almost certainly outweigh the risks.


He cites the fact that blockchain networks host – and update – large blocks of information. It follows that much of the data flow in the securities markets, from corporate actions to standing settlement instructions (SSIs) can be stored and updated efficiently on a blockchain network. “The information- sharing that takes place in cross-border transactions is very heavy,” says Vivek. “And it can be almost eliminated by using blockchain as the medium for the storage and updating of information.”


Blockchain has the potential to enable more than CSD-to-CSD links


He argues that CSDs should view blockchain as a technology which has the potential to revolutionise the way they connect to each other. “Today, a lot of the conversation about blockchain is how to disintermediate CSDs,” says Vivek. “But blockchain is better seen as an enabling technology for CSDs. Because we tend to view blockchain as a disruptive technology, we expect it to completely change the business model. But if you view blockchain as an enabling technology for CSD-to-CSD links, yes, the processes will change, but it has the potential to accelerate CSD-to-CSD links and take them to a very different place – potentially even T+0 settlement of cross-border transactions.”


He also sees blockchain technology as a rich seam of new product ideas which can reinforce the case for CSD-to-CSD links. The maintenance of records of real estate transactions and title deeds by CSDs, for example, might sound like a purely domestic service. In fact, it would be extremely useful to cross-border investors in real estate as an asset class, and to residential buyers based abroad. “In most countries, real estate is a space where trust is lacking, but the value being transacted is very high, especially when the buyers are based abroad,” says Vivek. “And the service can be provided conveniently to foreign buyers via a distributed ledger.”


Another area where blockchain could provide a stream of cross-border transactions over CSD-to-CSD links is the extension of services developed for securities to other financial assets traded globally, such as warehouse receipts, letters of credit, discount bills and trade finance guarantees. A further cross-border opportunity lies in information services, such Know Your Client (KYC) databases. CSDs could run these as a golden source of information about individuals and organisations, enabling their users to meet their regulatory requirement to verify the identity of a customer without interfering with their commercial judgments about the same person or entity.


More importantly, the KYC data would be invaluable to cross-border transactions. “The CSD is a logical provider of a KYC database service and, by keeping the data on a blockchain, they avoid the need for duplication or reconciliation of data submitted about the same customers,” explains Vivek. “This would be useful domestically. But there are a lot of cross-border transactions that are subject to KYC checks, so on top of the national need for accurate KYC information in each country, there is a global need for KYC information about foreign investors and foreign transactions. Banks and others could make use of the domestic information at the global level if CSDs were linked with one another on a blockchain network. At the moment, each country is doing their own thing, duplicating the work, which is a complete waste of resources.”


Be realistic on timing but ambitious to do things differently in the future


He muses that grand but failed attempts in the past to build inter-CSD linkages might have succeeded, had blockchain technology been available. The Link-Up Markets initiative, in which eight European CSDs tried to deliver a consistent settlement service in all eight markets via a single interface, and the Global Straight Through Processing Association (GSTPA) – both of which drew on TCS technology – ultimately failed because they focused on the means (messaging) rather than the end (more efficient settlement). As Vivek points out, blockchain naturally focuses on the end because it eliminates the need for the means.


If CSDs do adopt blockchain technology, Vivek expects the transition to be slow, and to proceed instrument-by-instrument. He also predicts that it will start with new instruments which are themselves based on blockchain technology (such as the crypto-assets that have emerged in 2017 and 2018) rather than the traditional equities and bonds. He adds that the shift to blockchain for cross-border settlement is best initiated on a regional rather than a global basis.


This realism is based on long experience. Vivek observes that CSDs could probably have harmonised settlement timetables on T+2 20 years ago if industry leaders had not insisted on the more ambitious move to T+1. “There is always room to be more efficient,” he says. “The Indian market moved straight from T+5 to T+2 because it was the most practical of the various timelines he considered. Plenty of markets are still on T+3. If they move to T+2, they will attract a lot more portfolio investment. That is the big plus of settlement efficiency.”


Of course, three of the 24 Principles for financial market infrastructures published in 2012 by the Committee on Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (IOSCO) deal with settlement (Principles 8, 9 and 10), and one with settlement by CSDs in particular (Principle 12). But Vivek does not think the principles are making much impact outside North America and western Europe. “The rate of adoption of the CPMI-IOSCO principles has to improve,” he says. “Too many regions are not really concerned about them.”


Which is one reason why Vivek thinks CSDs need to change the conversation they are having with themselves about CSD-to-CSD links before it stagnates. For CSDs to combine their existing businesses better, he believes they must not dwell on the successes and failures of the past, or strive to meet industry standards and regulatory requirements alone, but plan to do things differently in the future. “What new technologies can make it smoother for CSDs to connect with each other?” asks Vivek. “What new and different products can be transacted over such links? Together, new technologies and new products can lead the way towards wholly new and different solutions to future problems as well as current ones.”


Wednesday 10 April 2019


Breakaway Session 1: Dealing with the challenges of running current CSD business


Moderator: R. Vivekanand, TCS

Speaker: Boris Cherkassky, adviser to the managing director of INFINITUM Asset Services (Observer of AECSD), on the topic of “ASDI – Asian settlement and depository initiative: the creation of ASD – Asian settlement depository”


Each table will have a moderator and chair to work on a summary of the matters discussed at each table in preparation for feedback to the plenary session the next day.


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