International Custody Creates New Business Opportunities for CSDs

The CSD industry is in constant evolution and has evolved significantly over the past years as multiple external drivers accelerate change and enable new opportunities for CSDs worldwide. We sat down with Andreas Lundell, Product Manager for Nasdaq’s CSD Solutions, to discuss how CSD links and international custody are changing the CSD space. With more than 20 years of experience in the post-trade area in the financial markets, Lundell has unique knowledge in CSD-related products and topics.

Andreas, can you please explain what a CSD link is and why there is an increased interest in these types of links?

The underlying purpose of a (bilateral) CSD-link is to give one or both of the CSDs access to instruments that are registered with the other CSD. It could be a generic solution covering all instruments within certain asset classes (investor-driven links) to only cover one specific instrument, for example, to support dual listing as a result of a cross-border merger.

Typically, you call the CSD where the instrument is registered as the “Issuer CSD” and the CSD who would like to provide the foreign instrument to the local market as the “Investor CSD.” In practice, the Investor CSD opens one or multiple accounts with the Issuer CSD in order to hold the securities that will be represented in the local (investor) CSD.

As capital markets are becoming increasingly globalized, the interest to invest in non-domestic securities is expanding beyond the traditional institutional investor base as a growing number of retail investors are entering the space. In this development, local CSDs play a pivotal role in providing accessible infrastructure and services for both domestic securities as well as for foreign securities.

How does international custody connect to the above-mentioned CSD links?

International custody can be seen as a broader description of the service around foreign securities provided by the local CSD and supported by the existence of one or multiple links to other CSDs or ICSDs such as Euroclear and Clearstream.

At Nasdaq, you develop technology for CSDs. How does the technology meet the needs of CSD links and international custody?

In the process of introducing our second generation of CSD solution, we noticed early on that the market was in need of a more automated and efficient solution for managing international custody operations, which we believed would expand the business opportunities for CSD clients.

Therefore Nasdaq developed a number of features that would enable efficient set-ups with other CSDs or custodian banks, allowing the users of our CSD technology solutions to provide settlement and custody services for non-domestic securities.

We 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.

What is the main benefit for a CSD to invest in a technology that enables international custody?

Well, the short answer is that it can create additional business opportunities for you. To elaborate further, it will look a bit different depending on the CSD’s current business model and services. Technology that enables international custody might give the CSD an opportunity to introduce completely new services to the market by providing access to foreign securities to local retail investors. Since this is a standard feature in Nasdaq’s CSD solution, the additional investment required by a CSD to adopt this service is limited and, as such, reduces the financial risk of introducing a new service.

However, the solution can still be beneficial if the CSD is already offering international custody. With globalization and an increasing number of retail investors investing in foreign securities, the CSD may face growing volumes. So introducing more automated processes and system support can help reduce the cost and risk of current processes such as cross-border settlement and corporate action processing.

Lastly, Andreas, I know that you have experience from the CSD side yourself, is there any advice you can give to those looking to update their CSD tech stack?

Functionality plays a key role in selecting the best CSD solution for your organization; however, choosing the right vendor is just as important. You must be confident that the solution and the vendor you select will support your organizational goals not only during the implementation process but well into the future.

In addition, you should take the opportunity to review current business processes in order to identify potential improvement areas, either from a pure efficiency perspective but also from an international standard perspective, in order to facilitate for international participants to interact directly.

At the same time, we see an unprecedented development on the technology side, e.g., cloud computing, open API environments, etc. These technology developments come with exciting opportunities for the CSD industry in terms of efficiency and risk management. So I would say that the analysis of business processes and the long-term IT-strategy are equally important and go hand in hand. Together they will work as a perfect foundation for a successful system replacement project.

Nasdaq has developed a CSD buyers guide where we have identified a 12-step framework to help CSDs select the best solution for their markets. If you are interested in learning more, please fill out the form below.

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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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