T2S: Opportunities for Insurers Arising From Europe's New Post-Trade Landscape

T2S: Opportunities for Insurers Arising From Europe's New Post-Trade Landscape

Introducing BNY Mellon’s Insurance Industry Roundtable Series

November 2015
Stefano Manzonetto - Moderator   |   Managing Director, Client Executive
Brian Blanchard - Participant   |   Sales Executive Nordics - Managing Director, Asset Servicing
Tom Casteleyn - Participant   |   Head of Product Management for Custody, Cash & Foreign Exchange
Brian Leddy - Participant   |   Managing Director, Markets Group

A panel of our insurance industry experts offer their insights on the evolving European insurance industry. This page provides an overview of the transcript derived from one in a series of Insurance Industry Roundtable discussions in which our executive team and industry and product experts explore key trends and issues facing our insurance industry clients.

Our Insurance Industry Roundtable series considers the challenges facing Insurers in EMEA and how by accessing BNY Mellon’s comprehensive Investment Management and Investment Services solutions we can help them achieve their business objectives. Other topics include:

  • Cash Investments in a Turbulent World
  • Investing in Illiquids: Challenges for Insurance Firms
  • Managing Your Securities Financing & Derivatives Collateral for Optimum Results
  • Transparency: the Data Management Challenge Facing Insurers
  • T2S: Opportunities for Insurers arising from Europe’s New Post-Trade Landscape
  • Using Trusts and Securitisation within Insurance Company Finance
  • Using Your Global Markets Counterparties to Help Optimise Your Risk Profile

STEFANO MANZONETTO: TARGET2- Securities (T2S) represents an opportunity for insurers to simplify their custody requirements by using a single provider at the pan-European level, rather than a range of suppliers in different countries. The opportunity will vary, with multinational players most likely to reap benefits from using a single provider. How would you describe the opportunity for firms in the European insurance market? And how is BNY Mellon’s value proposition to the insurance sector evolving in response to T2S?

TOM CASTELEYN: We’re upgrading our core custody product in response to the launch of T2S by the European Central Bank. We will be able to offer better deadlines, greater asset safety, and eventually deliver pricing efficiencies to clients. But there are also strategic and revenue-earning factors stemming from T2S for many firms. The introduction of T2S – which went live with the first of four waves of migration in June 2015 – does give rise to opportunities for a number of operational efficiencies and cost savings for asset owners. These result largely from the fact that Europe’s domestic central securities depositories (CSDs) will effectively outsource the settlement of securities transactions to a single, central standardised platform, thus enabling delivery versus payment settlement in central bank money. But T2S needs also to be viewed in terms of the wider context of post-crisis regulatory change impacting the financial markets.

Measures brought in by regulators to reduce systemic risk – such as the collateralisation of OTC derivatives transactions under the European Market Infrastructure Regulation and the US Dodd-Frank Act, and the increased liquidity and capital requirements for banks introduced by the Basel III framework – have heightened demand for high-quality liquid assets (HQLAs). The combined effect is to push asset owners such as insurance firms and sovereign wealth funds toward a more proactive role in the collateral market, either collateralising their exposures or monetising their holdings of HQLAs in the securities lending or repo markets.

A more dynamic approach to collateral management can entail additional operational complexity, but T2S offers insurance firms opportunities to pursue offsetting efficiencies. BNY Mellon can help clients in the insurance sector to adapt effectively and profitably to the new environment through a range of collateral management tools and capabilities which are seamlessly integrated with a settlement and custody infrastructure that is being upgraded to take advantage of the workflow streamlining and process efficiencies afforded by T2S.

BRIAN LEDDY: At its simplest, T2S makes it much easier to move assets around Europe. We’ve been talking about disintermediation in the custody value chain for at least 25 years, but this is the first real step toward shortening that chain. But the interesting thing for insurers and other asset owners is how that convenience can drive revenue or improve risk mitigation. Insurance firms have an opportunity to realise revenue from the increased market demand for the kind of assets that they naturally have on their balance sheets. From BNY Mellon’s perspective, T2S helps us to provide those clients with better access to market and more efficient use of market mechanisms to maximise revenue from their holdings, while ensuring their safety.

STEFANO: How will greater asset protection under T2S support collateral flows?

BRIAN LEDDY: The reduced number of links in the custody chain when using a direct participant in T2S will lend collateral providers a greater level of comfort that their assets will remain protected and accessible in the event of a market shock. And the more comfort you have, the more willing you will be to lend those HQLAs, because you know you’re going to be paid at an appropriate rate for the risk. It’s still a risk-return equation, but the increased efficiencies and reduced costs enabled by T2S make it much easier for firms to make those calculations.

STEFANO: From a client perspective, BNY Mellon’s T2S strategy completes our value proposition across a range of services from custody to collateral management to securities lending, which has become more important for insurance firms as local regulations have been relaxed. In recent years, more European jurisdictions have begun to support a more proactive use of HQLAs within buy-side portfolios for collateral purposes, but there remains a preference for use of third-party collateral managers, which requires a service provider to operate at the pan- European as well as the local level. How would you sum up BNY Mellon’s approach to T2S and how does it differ from other custodians?

TOM: Because of the potential benefits it can bring to clients, BNY Mellon is using T2S as part of its efforts to build out its custody and collateral management value proposition in Europe. For example, we will become direct market participants in France, Italy, Belgium and Spain, meaning that – when combined with our existing direct market access in Germany and the Netherlands – we will be able to settle over 90% of all European activity that we process directly on T2S. We will also extend our local asset servicing offering in these markets, and become a euro payment bank, which allows us to settle T2S transactions in direct markets via our central bank money account on T2S. This will take place over a multi-year period in line with the four waves of migration by CSDs from 2015 to 2017.

For asset owners, the key potential benefits of a simpler cash and securities settlement infrastructure under T2S will include: reduced sub-custodian exposure and increased asset protection; improved deadlines for cash and securities settlement, and for corporate action instructions; better integration of our settlement, custody and tri-party collateral optimisation services; and improved efficiency and reduced risk in the core settlement process, due to the new functionality that we will make available to clients. For example, new T2S functionalities such as linkage, hold and release and auto collateralisation will optimise settlement efficiency and liquidity usage, reduce fails and lead to reduced credit costs.

BRIAN BLANCHARD: Not all global custodians have taken the same approach to T2S, but we believe that being a direct participant in key markets allows us to advance and evolve the traditional proposition of the global custodian. Moreover, the prospect of benefiting from the increased collateral and settlement efficiencies referred to earlier tends to reinforce clients’ comfort in working with BNY Mellon.

Other global custodians may not be convinced of the value of the T2S investment or may not have the same client demands to minimise subcustodian risk. Our approach is driven by the fact that we have a large buy- and sell-side client base, both of which are impacted by the changing HQLA supply/ demand dynamics in the emerging postcrisis environment. In future, there is likely to be a greater need for collateral transformation services to help the buy-side deliver appropriate collateral, notably in support of centrally cleared OTC derivatives positions at central counterparties. That activity will happen much more efficiently in a post-T2S environment.

BRIAN LEDDY: We’re already part of the market infrastructure through our position in the US market. As well as demonstrating commitment to servicing European custody clients, direct participation in T2S also helps to ensure competition in a market that could otherwise drift toward an oligopoly dominated by two international CSDs.

STEFANO: Are the T2S opportunities different for different types of insurance firms?

BRIAN LEDDY: In terms of the drivers of revenue opportunities for insurance firms, the country in which they’re invested is at least as important as where they’re regulated. Notwithstanding the need to hold HQLAs against their regulatory capital, there are opportunities for insurers to optimise their asset mix to meet their regulatory capital requirements, return needs and collateral obligations.”

TOM: The bulk of the portfolios of European insurance firms generally contain euro-denominated fixed income assets, which means the benefits for them will be much greater than, say, US insurance firms. There are generally two types of assets held within the insurance company: those in the general account and those contained in unit-linked products or fund structures, which are typically marketed and operated domestically. To support these latter in-country structures – and offer the T2S-related benefits described above – custodians must supply domestic depository banking, fund accounting, transfer agency, and related services too.

As such, T2S is something of a catalyst for BNY Mellon, with our planned direct participation in a number of key markets being the first step in a broadening of our service proposition toward a wider range of the in-country custody and asset servicing capabilities that pan-European insurance firms will require for the fund ranges that they manage.

BRIAN BLANCHARD: BNY Mellon’s current European presence – in Ireland, Luxembourg, UK, Germany and the Netherlands – reflects the importance of being close to the clients’ assets. Our ambition is to support clients in a wider range of European markets. If we can support the majority of a client’s assets – primarily for risk pricing purposes, plus also for collateral management and securities financing – we can provide an enhanced value proposition.

Almost all large insurers have in-house asset management groups that use some kind of unit fund structure or collective investment vehicle. From a regulatory perspective, the new level of integration represented by T2S prompts the question of whether and when will it be possible to offer currently in-country services such as depository banking on a cross-border basis. That may take some time but it is our intention to provide services across the value chain. Ultimately the vision of T2S is about moving securities freely across European borders. Our intention is to be at the forefront of supporting that movement.

STEFANO: From a service localisation perspective, why should local insurance players with a strong geographic concentration of assets consider using a global custody provider?

TOM: By executing our strategy as outlined, we are becoming more local in some key markets. As such, there will be minimal difference between a local custodian in Italy and BNY Mellon in Italy as far as any client with international operations or ambitions is concerned. Furthermore, a number of service providers have encountered difficulties when connecting their local custody businesses to their global custody platform. In contrast, BNY Mellon has always operated as a global custodian with one global platform. Now we are connecting our global custody platform directly into the key local markets in Europe to deliver local custody into those markets. Clients of local custodians have often found it quite complex to move from a pure in-country service to a more international relationship because of the account structures and contracts that must be set up. With BNY Mellon, the process is much more seamless.

On the one hand I would say that it’s easy to broaden your relationship with BNY Mellon as your investment appetite changes and takes a more global direction, but on the other hand it will increasingly be the case that we can compete with local custodians in terms of the services we can offer in the local market. Our relationship management and client service presence on the ground enables us to deliver a global model at a local level.

About the Panel

Stefano Manzonetto

Stefano Manzonetto - Moderator
Managing Director, Client Executive

Stefano Manzonetto joined BNY Mellon in 2013. He is Managing Director, Client Executive responsible for the management and development of relationships with many of Italy’s largest financial institutions. Prior to joining BNY Mellon, Stefano was with McKinsey & Company (2005 - 20012), serving several international banking clients in Italy, UK, Greece, Romania, Russia, Turkey and South Africa.

Between 2000 and 2005 he was with SIA, supplying application management services to Monte Titoli and developing business in the Middle East.

 

Brian Blanchard

Brian Blanchard
Sales Executive Nordics - Managing Director, Asset Servicing

Brian is responsible for helping institutional clients develop robust Investment Services solutions throughout the front, middle and back office. His 20 years of experience in Investment Services include sales specialist roles in Securities Lending and Asset Servicing, segment focus on Central Banks & SWFs and regional coverage in MEA, APAC and, presently, the Nordic markets.

Prior to joining BNY Mellon, Brian spent five and a half years at Clearstream Banking, where he was responsible for Agency Lending and Triparty Repo Sales, following posts in securities lending product management and customer service special projects.

Brian holds a MBA degree from the Rotterdam School of Management of Erasmus University and a Bachelor’s degree in International Trade and Finance from Louisiana State University.

 

Tom Casteleyn

Tom Casteleyn
Head of Product Management for Custody, Cash & Foreign Exchange

Tom is Head of Product Management for Custody, Cash and Foreign Exchange and has oversight of BNY Mellon’s response to Target2 Securities.

He has over 20 years' experience in the banking and securities services industry, and joined The Bank of New York in 2004 as a Client Executive in London. Prior to his current role, Tom was the Regional Executive for Benelux & France, responsible for a team of Country and Client Executives managing and developing client relationships within the region, across all businesses and products of the company.

Tom holds a Master's degree in International History from the London School of Economics and a Master's degree in Applied Economics from UFSIA, the University of Antwerp.

 

Brian Leddy

Brian Leddy
Managing Director, Markets Group

Brian has worked in the financial services industry for over 30 years, and currently has relationship management and business development responsibilities within BNY Mellon’s Markets Group. He joined BNY Mellon in 1999 and, during his time with the company, has managed operations, sales, and strategy departments across the Investment Services and Markets divisions.
 
Brian studied Computing Science at Glasgow University and has an MBA from the Katz Business School of the University of Pittsburgh.

 

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9/2015