Target-2 Securities (T2S) may put pressure on custodian banks that don’t want to perform the functions traditionally undertaken by central securities depositories (CSDs). Gustaf Unger, head of asset servicing at SEB, predicts that the discussion of how far this will go will be a big issue at Sibos.

Compared to other banking functions, the sub-custody business had been fairly stable. But over the last three years there has been massive change, and there is more to come. Clear borderlines between CSDs and sub-custodian banks are becoming blurred, with custodians encroaching on CSD territory and vice versa. This is already starting to happen in Demark, according to Unger.

“If our clients, typically global custodians, work directly with one or several CSDs trough T2S, the CSDs might perform several services that we do. If this does happen then the scope for us as a custodian bank will be reduced,” said Unger. “Other large custodians are actively promoting their way into the CSD space. We have decided not to do that, as we want to focus on what we do well.”

Despite this, Unger doesn’t foresee SEB making a major strategic move against the encroaching CSDs. He believes the Nordics are too small and CSDs are too occupied with changing their infrastructure for T2S over the next five or six years.

“I don’t necessarily think it will happen here because it will be more expensive to have two providers that will have to exchange a lot of new data, but it may happen.”

Unger also pointed to increased liability held by depositaries and sub-custodians as a result of the Alternative Investment Fund Manager (AIFM) directive as a source of debate: “There was a discussion in the market a about which entity should take this risk, whether it be the sub-custodians or the depositary, but no market practice has been developed on how that is done. It remains very uncertain.”

“Risk for sub-custodians will increase as Ucits V will add to this liability issue. The volumes we manage for clients under the AIFM directive are still limited but under Ucits V we’ll be talking about really big volumes. I hope the market practices are established before that comes into place.”