Valerio Roncone, Head of Markets & Clients at SIX Securities Services
When the Lehman Brothers filed for bankruptcy in 2008, they had a staggering $639 billion in assets.Similarly, the Madoff investment scandal, where former NASDAQ Chairman Bernard Madoff admitted that the wealth management arm of his business was an elaborate $50 billion Ponzi scheme, raised questions about asset safety.
Clients and regulators alike are now seeking the answers to these questions – how quickly can investors’ assets be returned in the event of CSD failure? Or, how can we ensure that these assets are adequately protected in the case of counterparty default? – and banks want to know who the underlying asset holder is, what sort of infrastructure it is, what sort of agent bank it is and, importantly, what types of risks that institution carries forward.
Segregation and the collateral shortfall
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Earlier this year we conducted research amongst leading financial infrastructure service providers and financial institutions in Europe, and found that 50% are now facing a higher number of client requests for asset segregation. Two thirds (64%) of banks also said that they found having both custody and investment lines combined as problematic, which has driven half to request that their assets be segregated.
Whilst regulations such as Dodd Frank and EMIR focus on promoting the transparency of collateral to facilitate greater volumes of OTC derivatives cleared through CCPs, these are arguably incompatible with the Central Securities Depository Regulation (CSDR) that promotes asset segregation.
Ensuring due diligence
There is a tremendous opportunity for technology to provide a solution with DLT, where market infrastructures could potentially act as the ultimate record keepers of the holdings and transactions of underlying clients. Agent banks purchase this functionality from the market infrastructures, maintaining the client relationship, providing their expertise and value across a complete range of securities services products. This would be a fundamental and disruptive change.
For a financial ecosystem to thrive, the concerns and demands of asset owners, clients and regulators must all be balanced. The industry is clearly taking asset safety seriously, however concerns still remain around the practice of being reliant on service providers. It is our role to address these issues, and provide the safe, secure, innovative and robust solutions our clients need.