CMI in Focus - Value added services by CSDs

CSDs (Central Securities Depositories) started as entities designed to reduce risk in the market by centralising the holding of securities. Originally, a CSD’s core service was to provide safekeeping and custody of stocks, as securities were held in physical or certificated form which required it to maintain large vaults with sufficient controls in place to minimise the risk of loss or theft. As markets grew and developed, however, CSDs expanded the range of services to support the back-office activities derived from trading, such as the clearing and settlement of transactions.

Other post-trade services were subsequently incorporated as technology developed and the increasing sophistication of markets and instruments required more robust processes such as electronic (pre) matching, simultaneous DVP (delivery versus payment), securities lending, collateral management and so forth. In addition, some CSDs became single registrars which allowed them to transfer ownership upon settlement, and in some cases distribute income and process corporate events. All these services have been and still are, considered as part of the core activities at CSDs.

However, the uniformity of original CSDs in terms of the type of services provided and the markets supported, has disappeared. The focus of the business varies significantly from CSD to CSD, depending on the strategy adopted by the management and board at each depository. We have categorised their approaches into four groups:

  • Utilities: CSDs that provide core services such as safekeeping, clearing, settlement and registration services. They may expand the type of instruments or markets covered but remain very much focused on supporting the post-trade infrastructure in the securities market. For instance, DECEVAL in Colombia recently launched the dematerialisation of promissory notes and has maintained its focus on dematerialising other types of instrument. Usually, these CSDs are natural monopolies in their markets and there is very little competition (there are a few cases of markets where CSDs compete for the same securities such as Brazil and India). Another example is CSDs in Africa (e.g Botswana, Ghana and Nigeria), which given that they are relatively new compared to other regions, have decided to maintain their core activities and enhance them as their markets develop.
  • Commercial: CSDs that provide more commercial activities in competition with their own participants or other commercial entities. An example of this category is the Korea Settlement Depository, which provides a commercial service to facilitate cross-border transactions by domestic investors. The service includes cross-border deposit and settlement services through foreign custodians (the Cross-Border Clearing Network covers a total of 42 countries). The portfolio of services also includes account opening, order placing, notice of trade execution and instruction for settlement. In Norway, VPS provides a variety of services to issuers, including information on beneficial owners registered in nominee accounts. In partnership with Richard Davies Investor Relations, VPS also offers IR InTouch, an online investor relations service that combines rigorous shareholder analysis, insider services, investor targeting and tailored investor relations contact management, as well as mutual funds services provided commercially to the Norwegian market. The most dramatic case might be Egypt’s MCDR which owns a local football club.
  • SuperUtilities: This group includes those CSDs that have moved up the value chain to provide infrastructure super utilities to the wider financial market. This is the case of DTCC in the U.S, which through a number of subsidiaries provides support to the derivatives market (DerivServ and DTCC’s Global Trade Repository) and the syndicated loan market (LoanServ). In addition, it provides investment product services, consisting of DTCC’s Insurance & Retirement Services and Wealth Management Services businesses.
  • Nation-wide infrastructure utilities:  These are CSDs that have leveraged off their expertise in the securities market, such as in the maintenance of large databases to provide support as wider infrastructure entities. For instance, India’s NSDL has become a depository not just for securities; it now provides Unique Identification Numbers to Indian Citizens (benefiting from the account structure at NSDL at the beneficial owner level). It is also the central record keeping agency for pensions and manages a skills database for employees in the IT sector amongst others. Furthermore, the Estonian CSD manages the pension system on behalf of the state authorities. The Canadian CDS manages a number of issuers’ information databases (namely SEDAR, SEDI and NRD) on behalf of the regulators (however, these functions are to be transferred to a newly appointed commercial provider in the near future).


But is it acceptable for CSDs to provide additional services? For most companies, diversifying their revenue income is a key component of their financial success and CSDs are no exception. They were, however, originally implemented to minimise risk in the market. By taking on commercial activities, they are increasing their risk profile. A solution that some CSDs have adopted to protect their core business is by separating their commercial activities (i.e. creating legally separate subsidiaries/companies). It is imperative that those services considered as ‘risky’ are completely segregated from the utility functions of the CSD. Providing commercial activities also requires the CSD to change its mind-set and become more commercially oriented. Those CSDs with a clear focus on their post-trade infrastructure and in a monopolistic position may find it difficult to compete with commercial entities in an aggressive way.

Remaining as utilities in the securities market limits a CSD’s capacity to diversify revenue but supports its role as a risk minimising entity. Its fee structure and financial model needs to be designed in a way that makes the CSD financially viable and that allows it to have sufficient liquid reserves to continue operations for a prolonged period of time (minimum six months under the latest CPSS-IOSCO Principles for Financial Markets Infrastructures).

Expanding utility functions to the wider financial sector also helps reduce risk in the market and may position the CSD as a strategically important organisation. It may also diversify revenue streams but the CSD may not always have the capacity and skill required to enter into an additional sector. In many instances, it will be required to develop a different type of expertise, which the CSD must be willing to undertake.

Providing additional utilities services in the wider sense may not necessarily impose additional risk but may distract the CSD from its core activities. Most, however, can easily extrapolate from their experience and technology to expand their range of services to support the government, regulators and other agencies in the best interests of the country as a whole.

Clearly, there is no right model and each CSD will continue to develop in a different way. Regulators are also required to review and analyse whether the new lines of businesses proposed by the CSD are in accordance with their market strategy and do not pose any additional risk to market participants, investors and the country as a whole. A careful examination of the business case is required before any significant expansions are permitted.

For further information contact:

Ana Giraldo
Associate Director, Americas & Eurasia
Thomas Murray Data Services
+44 (0) 20 8600 2300

Jim Micklethwaite
Director, Capital Markets
Thomas Murray Data Services
+44 (0) 20 8600 2309