Future Proof Your CSD
For several years, complying with regulatory mandates was a top priority for CSDs around the world. On a global level, they had to align with the Principles for Financial Market Infrastructures, a set of standards the international community considers essential to strengthening and preserving financial stability. On top of that, CSDs had to prepare for and implement various regional initiatives. In the EU, for example, they had to be licensed under the new Central Securities Depositories Regulation (CSDR) while, almost in parallel, migrating to the pan-European settlement system, T2S. The Shareholder Rights Directive II is the most recent regulatory initiative to be implemented during 2020.
Suffice it to say that most CSDs’ investments were directed toward acquiring the human and technology resources necessary to meet these tight deadlines. But most of that work is behind them now, and they’ve turned their attention back to the business and getting a return on investment.
Growth opportunities going forward
CSDs are well-established financial market infrastructure providers, but they have recently started to face potential disruption from new and more niched entrants that can achieve a faster time to market and compete on pricing. So how are CSDs going to grow and improve operational efficiency in the future? Which areas can they expand into to increase revenues? Moreover, what challenges stand in the way of achieving their goals?
One potential growth opportunity is to launch innovative new products and services for issuers and investors, two client segments where CSDs typically can move up the value chain. A logical focus could be around investor relations services (e.g. shareholder ID) and general meeting services. For example, we have identified a number of CSDs starting to provide mobile services to beneficial owners for holding statements and simpler instructions, an area that used to be strictly protected by the intermediaries.
Generally, leveraging and monetizing the vast amount of data CSDs possess on financial instruments, corporate actions, ownership in listed companies and settlement behavior is an interesting area. This has great potential considering recent developments in data analytics and machine learning.
Another growth opportunity is to in-source commoditized and standardized processes currently supported by individual participants to offer services to investors. Not only could that be a source of additional revenue for the CSDs, but it could also allow intermediaries to focus on areas that are a source of competitive advantage. Typically, a significant percentage of CSDs’ operational cost is fixed, so revenue streams from these new offerings could be highly profitable, if they can manage scaling opportunities.
Emerging technologies are changing the CSD landscape
Product and service innovation is enabled by technology, and yet many CSDs operate on decades-old core systems. The time has come for a refresh, and for many, procuring a third-party vendor solution based on international standards is the preferred option.
CSDs are actively looking at how distributed ledger technology (DLT) can potentially help to improve business processes and develop new services in specific asset classes – crypto-assets among them. Only a couple CSDs are currently moving toward a total core system replacement with DLT. That said, many proof of concept projects are underway, and some will move into production in 2020, including Nasdaq’s DLT-based e-voting solution in South Africa.
Like other financial infrastructure providers, cybersecurity is a huge challenge for CSDs. Therefore, cybersecurity is frequently discussed, often in conjunction with cloud opportunities, within the CSD community. CSDs would like to take full advantage of the benefits offered by a cloud deployment, but they often face a regulatory hurdle. In many cases, the legal record of the holders of an instrument must be kept on domestic soil, which means that data cannot be transferred to and stored by a cloud provider that operates internationally. On the other hand, the cloud providers are spending a tremendous amount of money on cybersecurity – far more than the CSDs can ever afford individually – so it could be a great benefit to the community. This will continue to be a hot topic of conversation in 2020.
Looking ahead, the CSD landscape will likely be transformed in the next five to 10 years by both consolidation and competition driven by regulation and technology-enabled innovation. Each region will adapt in its own way. At Nasdaq, we look forward partnering with you on the journey as it unfolds, and we wish all our CSD customers and prospects a prosperous and successful start of a new decade.
Other Topics
Market Regulation Blockchain FinTech Innovation Market Infrastructure
Andreas Lundell
Nasdaq
Andreas Lundell serves as the Head of Product for CSD Technology within Nasdaq's Marketplace Technology business. He is responsible for the development of Nasdaq's CSD solutions, including the offering's functional and technical roadmaps, business development and client engagements, as well as strategic initiatives to futureproof and innovate Nasdaq's offering for the CSD community.
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MarketInsite
Nasdaq
Nasdaq’s Marketinsite offers actionable insights on a variety of market-moving topics. Learn from our thought leaders who are driving the capital markets of tomorrow.
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