THE EVOLVING SECURITIES SERVICE LANDSCAPE.
Julien Kasparian (left), Head of UK Sales and Relationship Management, Banks and Brokers and Eric Roussel (right), Head of Clearing and Custody Solutions, BNP Paribas Securities Services assess the potential impact of MiFID II on their client base.
What has been the impact of MiFID I and what do you think will be the impact of MiFID II?
Julien Kasparian: With every piece of regulation there are challenges and opportunities and MiFID II will be the continuity of MiFID I in terms of best execution, greater transparency, reporting, pre and post trade obligations. What was unexpected though with MiFID I was the emergence of several alternative trading platforms and clearinghouses. Although the cost of execution fell, the level of investment in terms of technology and new order management systems rose. One question is whether the lower costs of execution offset the investment needed to connect to them.
Eric Roussel: Under MiFID II, I think on the equity side, the introduction of caps on dark pool trading will have an impact. I also believe there will be significant change on fixed income and OTC products because the regulation extends across all asset classes. There will be a move towards electronic platforms and more anonymous trading. Central counterparties will also play a much greater role in fixed income than before.
Has the delay had any impact for your clients?
Julien Kasparian: We have a wide client base and I think a big part of the marketplace was relieved. Some were happy because they saw MiFID II as a major challenge from an IT standpoint while others viewed it as a business model issue. For example, how do they position themselves in a world of unbundling research from execution? There was though another part of the market that wanted to show everyone that they would have been ready on the original deadline.
How will the clearing landscape change and what will the impact be on market participants?
Julien Kasparian: I think there will be less clearing members because of the capital requirements driven by Basel III, while overall demand for clearing will increase. Broker dealers and banks will not only have to handle greater volumes and face many more CCPs but also handle margin calls and manage collateral against exposures. This requires firms to be innovative and take a holistic view of their assets as well as have the ability to optimise the collateral, offer segregated accounts and be well connected to the different CCPs.
How has BNP Paribas responded to the changing environment? Has the firm had to develop new services or is this an evolution of the existing service and products?
Julien Kasparian: We have a long history in securities services with BNP Securities creating the business line in 1992 and then acquiring JPMorgan European direct custody & clearing in 1995. We spent the1990s as a local clearing and custody firm in each European market but in 2000 we acquired Paribas and two years later bought Cogent where we entered the UK. The growth has been significant and we have not stopped developing products since MiFID I.
One of the biggest changes is the increase in outsourcing. In the past, it was mainly buyside firms that wanted to outsource custody and then moved to back and middle office functions. Last year, we found that sellside firms were taking a much closer look at their operations to determine the return on investment and to outsource functions which were not considered part of their core competencies.
Are the sellside then following the buyside in the way they outsource?
Julien Kasparian: We have the assets under custody and increasingly clients are asking what else we can help them with since we manage those assets. Small and mid-sized brokers were the first to follow the buyside but now we are having discussions with major players who are looking to outsource more in their back and middle offices. This is because their legacy systems are obsolete and can’t cope with all the requirements and complexities of the new regulation.
Eric Roussel: However, there is no one size fits all solution because buy and sellside do not want to outsource everything to everyone. It will depend on the firm in terms of how far they will go. What we are doing is leveraging our platform and technology and building solutions that are customised to the client.
On the buyside, we think one of the biggest growth areas will be in collateral management because under the new regulations, they will have to post initial and variation margin more frequently. The big sellside firms want to keep this function in-house, since collateral management is mostly dealing with cash and they want to closely monitor how they keep, allocate and optimise their assets.
What type of solutions are the buyside looking for in terms of collateral management?
Eric Roussel: There are many different moving parts including valuation, optimisation, and transformation. We launched a suite of solutions called ‘Collateral Access’, as well as developed strategic partnerships with Clearstream and Euroclear in the tri-party collateral space. These services are alongside the middle office and focus on the automation and velocity of the collateral as well as the legal agreements and segregation. Tri-party will remain important but I am not sure the extent to which it will increase. At the moment, a large part of collateral being used is cash and tri-party arrangements mainly deal with securities.
Despite the Target2 Securities (T2S) gaining a significant amount of attention, it is unlikely to cause a major revolution – do you agree and what do you think its impact will be?
Eric Roussel: I think it is good news that T2S is live and at the end of 2017 all central securities depositories (CSDs) should be signed up. Monte Titoli, the Italian CSD, was three months late but it is important to look at T2S as a five to ten year project and if that is the case, three months is not a big deal. Everyone realised it would not be easy but it is already a success and in the end it will help manage cross border transactions and source intraday liquidity. We are seeing two different categories of clients – those that manage their liquidity directly with their own account at the central banks and others who prefer to outsource and rely on commercial bank money as the process of managing central bank money is complex.
Given all the changes how has the relationship between asset servicing firms and clients changed?
Julien Kasparian: Firms are looking for best in class when they outsource and although this period offers major transformational opportunities, we can’t afford to make a mistake. It is no longer about offering a plug in and out of a back office but we have moved more towards a partnership in that we are working together in providing the solutions.
Eric Roussel: During the past two years, we have never had so many conversations with clients. The main concern is how they can best cope with the regulations whether it be on collateral management or accessing liquidity. We are now designing solutions in coordination with our clients.
Julien Kasparian joined BNP Paribas Securities Services in August 1997, and is currently Head of UK Sales and Relationship Management, Banks and Brokers. He has held various management positions within clearing services, operations, product, and market infrastructure as well as sales and relationship management. Prior to joining BNP Paribas, Kasparian worked for the Central Bank of France as an account manager. He is a graduate of London Guildhall University and DUT GEA where he studied Business Economics & Strategic Management.
Eric Roussel is Head of Clearing and Custody Solutions at BNP Paribas Securities Services. He joined BNP Paribas CIB in 1997 at the IT department, to develop counterparty risk management solutions and after algorithmic trading. Previously, he held a trading COO position where he was responsible for business development for proprietary trading desks.