Executive Summary
The European Commission wants to create an integrated capital market in which funds can be distributed seamlessly across Europe and where a single point of entry would be sufficient to conduct post-trade activity on a pan-European basis. Yet, as long as the European Commission is unable to tackle the discrepancies in national regulations, most notably around fiscal and corporate laws, its objective of creating such a market will remain a fantasy.
Although Alternative Investment Fund Manager Directive[1] and UCITS V[2] certainly improve investor protection and transparency, they also significantly increase the complexity of operating a European fund business. By imposing new constraints on depositary banks, these regulations will push participants to reconsider their current infrastructure and drive significant reorganization.
In addition, several barriers will impede the creation of a standardized framework for distributing Alternative Investment Funds across Europe through a pan-European passport under AIFMD. First is the intricate web of distribution options available to AIFs depending on their domicile (EU vs. Non-EU), marketing activity (direct vs. reverse inquiry), targeted customers (institutional vs. retail), addressable market (pan-European vs. select countries). This complex distribution coupled with discrepancies amongst national regulators’ interpretation of the directive and National Private Placement Regimes (NPPR) creates an insurmountable barrier to the standardization of AIF distribution in Europe.
The Target 2 Securities[3] platform will bring benefits and efficiencies to post-trade securities processing on a pan-European basis, but numerous local specificities in market practices and national regulations, such as corporate laws, will limit its reach. Even post 2017, once all the Central Securities Depositories (CSDs) who committed to the project will have joined the platform, market participants will not be able to centralize their operations across all European markets through a single provider and will still need to operate a spaghetti-like network of connectivity with local agents to conduct the asset servicing processing. Therefore, while we can expect some efficiency gains in European post-trade thanks to T2S, the benefits are unlikely to be shared evenly across all EU countries and numerous discrepancies will remain.
The emergence of a European equivalent to DTCC is unlikely to happen anytime soon. The combined impact of T2S and CSD Regulation[4] is insufficient to foster a consolidation of CSDs across Europe. Its likely outcome is to reduce the scope of activity of the smallest local CSDs, for the benefit of the iCSDs, Clearstream and Euroclear. As for the increased competition among CSDs due to Art.47 of CSDR, we expect an analogous development to the one fostered by MiFID I implementation: a fierce competition for the most profitable issues and a status quo for the market majority. Local CSDs will not disappear, but if they don’t act, they will eventually be marginalized in the future European post-trade industry. However, moving up the value chain and competing with sub-custodians is a strategy that will be difficult to implement for most participants, in fact we believe that they should identify niche markets in which they can leverage their existing experience to develop new and innovative offerings.