Custodians are clearly at the centre of the securities industry with massive influence on the efficiency or not of the global markets. Through their sub custodial networks the Global Custodian is without doubt the single major factor that can determine how well a retail domestic market can interact with international markets. As such the Global Custodian must be the main port of call for politicians and regulators if they wish to bring about change and improve the markets. A few years ago the Custodians seemed split in the market with the group that came to be known as the ‘Fair and Clear Group’ projecting (or should I say protecting) their business against a centralised clearing model. It’s not worth going over old arguments since the world in Europe has now changed. The Custodians have always looked after custody relationships as highlighted in a recently published white paper Custody Relationships; a Carthaginian Approach and have protected their position when they have had to, but we might now be in a situation where we must expect more of them to be part of industry change.

 

The introduction of MiFID has really upset the apple cart, with so many new trading venues becoming established and even more, likely to see the light of day, this year. All this appears to be at the expense of the Registered Stock Exchanges who now appear to be moving to a vertical model. NYSE Euronext and now the LSE are moving to a vertical silo, forming a similar architecture as the Deutsche Bourse. It was not that long ago when Europe was well on course for a horizontal model against the German set up. If the trading market structure models are in a state of change so are the Clearing Houses. A few years ago, the horizontal market model was creating conditions where consolidation in the clearing houses was underway. This too has come to a complete full stop and more than that an about turn with increased fragmentation of the Clearing houses. However, it’s unlikely that market fragmentation will continue and it’s certain that deals will be forged to bring together obvious business partners. After all clearing is a high volume, low margin business, doubtful to survive against too much competition and the same can be said for the MTFs and Dark and Lit Pools.

 

So, are the Global Custodians missing the point?

 

Clearly they are the one major market component that ties together the domestic and international markets. Could the Custodians agree that they will put their business into a single chosen clearing house and force consolidation? Could the Global Custodians offer their clearing and settlement capabilities to limited number of selected trading venues? Would this then deter the Stock Exchanges from going down the vertical route? Could Global Custodians offer netting services for their customers? How would business change with Global Custodians taking a more leading role giving a direction that fits with political objectives? Lots of questions with no answers but I suspect the Custodians are not really missing the point, they are just biding their time, waiting to take advantage.