The Drivers of the CSD Evolution
Over the past several years, the Central Securities Depositories (CSDs) landscape has evolved significantly as multiple external drivers have influenced the industry. Examples of such drivers are emerging technologies, accelerating market requirements and new regulations. At this year’s Technology of the Future (ToF) conference, Andreas Lundell, product manager for Nasdaq’s CSD Solutions, outlined how these factors are driving globalization, standardization and innovation for the CSD industry.
For a CSD, a pivotal entity in the financial industry, the most important mission is to “provide the market with secure infrastructure in relation to the core services, such as securities settlements, account structure, safekeeping and instrument management,” said Lundell. This primary task has remained critical in parallel with the significant evolution of the CSD market during the past five to 10 years, Lundell noted.
New industry requirements driving CSD transformation and business model evolution
One external driver mentioned by Lundell is the increased requirement for trading, settlement and safe-keeping of non-domestic securities. There are examples where governments are issuing bonds with major CSDs to reach new investor segments while still enabling safekeeping with the local CSD. In addition, we see a number of regional initiatives where markets are cooperating to facilitate trading settlements and safekeeping between the markets. “While this used to be managed through complicated setups with global custodians, local custodians and other types of intermediaries, the markets are [increasingly] relying on the local CSDs to enable access to those instruments,” Lundell said.
With this increased reliance on CSDs, participants are honing in on cost pressures, looking for ways to streamline processing, especially on the market infrastructure side. As a result, there have been a “number of initiatives in which market participants joined forces toward standardization and harmonization of the post-trade processes, not only locally, but on a regional or even global aspect,” Lundell said.
Emerging technologies influencing CSD innovation
The stakeholders in the CSD industry and in the capital markets, have witnessed an unprecedented rise of new technologies in the past three to five years.
“Technology solutions should certainly be a key part of the equation for the future CSD business model,” Lundell stated. “The most notable example of emerging technologies adopted by CSDs is blockchain or DLT. From its inception, blockchain quickly became one of the central features of a CSD – where the register of a holder of a specific asset is kept on the immutable ledger.”
While DLT might have initially been viewed as a potential threat to CSDs, it’s now considered a supporting technology that has the potential to improve existing processes and help CSDs identify and launch new services. In addition to DLT, Lundell believes that other emerging technologies such as cloud computing, artificial intelligence and machine learning can be leveraged in the post-trade area.
New regulations fostering globalization
Given the rapid evolution within the CSD industry with emerging technologies and evolving industry requirements, new regulations have come into play, particularly after the 2008 financial crisis. The most notable regulation that followed the 2008 crisis was the Central Securities Depositories Regulation (CSDR), which aims to harmonize timing and standards of conduct in the European securities settlement industry. According to Lundell, that specific regulation is one of the factors driving the globalization of CSDs.
“The ambition of CSDR is to increase competition between CSDs by, for example enabling passporting the CSD license which has increased the interest to serve other markets,” Lundell noted.
To support the key drivers and industry trends observed, Nasdaq has focused its CSD development initiatives in the following areas:
International custody. In order to meet the increasing need of efficient links, Nasdaq has invested in a number of features that together create a foundation for CSDs to have an efficient set-up with other CSDs or custodian banks, in order to provide a service for non-domestic securities. We have recently enabled automated settlement processes for several CSDs based on globally used ISO messages and an external settlement mode. In addition, corporate action related ISO messages received from the linked CSD can now be used to automatically generate corporate events in the Nasdaq CSD solution.
Registrar Platform as a Service enables CSDs to expand their business models and deliver a registrar platform as-a-service to external registrars in the market; all based on the current CSD platform already in use. Storing accounts and shareholders on the same platform generates a number of synergies from a processing point of view, for example in terms of deposits and withdrawal and corporate action processing.
Nasdaq data platform, allows CSDs to commercialize the vast amount of data that a they typically have. As a cloud deployed data service with ready to go integrations with trading, clearing and CSD, the platform normalizes data for easy access and use REST APIs for open connectivity.
If you are a Market Technology customer, please click here to request access to Lundell’s full presentation. To learn more about the Nasdaq CSD Solution visit our website.
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