At a roundtable discussion in London, key figures in the subcustody industry addressed challenges like the eurozone crisis, regulatory changes, and the need for enhanced risk management and capital adequacy. Participants emphasized the importance of client dialogue and proactive due diligence in response to market uncertainties, including the implications of new regulations and market fragmentation. Overall, the discussion highlighted the necessity for custodians to adapt to evolving legal and operational landscapes while ensuring the protection of client assets.

1. SUBCUSTODY
SPONSORED ROUNDTABLE | Moderated By Joseph D. Giarraputo
Competition, Regulation
And Technology
At a roundtable in London, Global Finance brought together key figures
in the subcustody industry to discuss how they are responding to the
many challenges posed by the eurozone crisis, the failure of MF Global,
regulation and the need to expand into new markets and products.
J
oseph D. Giarraputo, publisher, Global Finance: What due-diligence. Risk management is not just about crises; it is
scenarios for the outcome of the European debt crisis more about issues such as capital adequacy of providers and
must a subcustodian consider? making sure that local custodians meet the right benchmarks.
Tomasz Grajewski, global head of UniCredit Global Securities Ulf Norén, global head of subcustody at SEB: Europe is facing
Services: There are unknown factors definitely in the equa- a multidimensional crisis where we have a debt crisis but also a
tion. This is the conclusion derived from the number of major confidence crisis.We have to think the unthinkable.We need to
exercises, which have taken place in London and elsewhere. look at what the support system for the banking system is going
From that perspective, little detailed planning seems to be pos- to look like.We also need to look at the severity, length and the
sible at this stage. In the event of a major disruption, we need construction of the currency restrictions that will follow. What
to ensure that the authorities give clear and prompt guidance we need to do is an analysis at an infrastructural level, a product
to the markets. Even in the worst-case scenario, equities (which level and a capital management level. We also need to conduct
constitute the bulk of our client assets) would be less impacted a legal-impact analysis. What is needed is an in-depth dialogue
than bonds and, especially, cash. At an institutional level, from with clients, regulators and competitors.
the client’s perspective, it is important that they focus on risk I’m more concerned at a micro level. What will happen to
April 2012 | Global Finance | 55

2. SPONSORED ROUNDTABLE | SUBCUSTODY
the contractual obligations? What will happen with my cash pivotal role. We also look at the protection that we can offer
position? How will we deal with that FX contract? How do clients in the event of something happening and a number of
we deal with the obligations we have towards one another on these measures that could be improved, and, again, modeling to
corporate actions and income distribution, both in fixed income see what we can do should some of these things actually happen.
and on the equities side? But really it’s about making sure that the assets are fully protected
Alistair Jones, head of sales and relationship management and that at any moment in time we know where we stand with
Europe, subcustody and clearing, HSBC Securities Services: regards to customer assets, and who the beneficial owner is.
The cash liquidity side is consistently becoming a challenge. A Norén: Previously, we went through the motions of due dili-
lot of the liquidity that used to be there in the past is no longer gence. Now it is more about encouraging active due diligence.
readily available. If the debt crisis worsens, then we constantly As Andrew Rand from Brown Brothers Harriman stated in
need to improve our best-practice plans. We’re not the biggest an interview recently, “Due diligence is really something that
player in the eurozone for subcustody, so our impact is perhaps should happen every day.” So that’s the sort of model we need
less than some of my colleagues here, but to get to.We all need to be guided on how
nevertheless we play an important role we handle this to a great extent by both
in the life cycle. We’ve also worked well AIFMD (Alternative Investment Fund
together with our peer group to ensure Manager’s Directive) and UCITS V, which
that our plans are strong and robust from contain quite detailed wording on respon-
the point of market infrastructure down sibilities that are going to be put on global
to our internal controls and processes. custodians for their network. As subcusto-
Alan Cameron, head of client seg- dians, these sort of transfer demands will
ment—broker dealers and investment continue to make our daily lives colorful
banks, BNP Paribas Securities Services: going forward.
We really just have to learn to live in a Grajewski: There are three important
period of heightened awareness. Right things. First of all, as custodians, we need to
now it’s very important that we keep ensure that the legal structure we’ve got in
our clients up-to-date with what we’re place ensures the safety of client assets.The
seeing and hearing on the ground. Then second point is that we need to lobby for
we have to be ready for sudden action changes within the markets to maximize
if required. It could just be a surge in the safety of assets and clear segregation of
volumes following a very quiet period, client assets.The third point is a combina-
or it may be something requiring more tion of probity and operational integrity
robust responses. That’s really about all at the custodian. The custodian’s probity
ULF NORÉN
we can do at this point. It is important must be undoubted; they must have an
is global head of subcustody at
that the industry works together and talks SEB. Having worked in both global unquestionable reputation. Operational
together on this. custody and subcustody for more integrity is ensured by segregating the
than 25 years, Ulf now heads the assets already at our level, and, wherever
Giarraputo: Following the collapse of subcustody business in SEB. SEB’s required and possible, at the level of the
subcustody venture is active in 10
MF-Global, the safety and soundness of central depository.
markets: Denmark, Estonia, Finland,
customer assets is being questioned.What Germany, Latvia, Lithuania, Norway, I can refer to one example of this from
role can subcustodians play in ensuring Sweden, Russia and Ukraine. Ulf Central & Eastern Europe. In Poland we
the safety of these assets? is very involved in shaping SEB’s have, in response to client pressure, been
Jones: We’ve worked very closely with future subcustody offering, thereby fighting for omnibus account structures.
working intensively with the European
clients since the financial crisis and mod- Finally, these were introduced in 2012,
regulatory and infrastructure changes
eled various what-if scenarios similar to as well as with building sustainable but—surprise, surprise—not all clients
the previous question. We then worry operative models. want to take advantage of them. I am
about what happens if one of those were sure there will be movement towards that
to go into liquidation. What’s the con- structure, but the view that segregation
tractual position as a peer group? We’re increases asset protection is slowing down
also much more concerned about market infrastructure as well any changeover, despite the fact that segregation increases cost
than we were previously because now it plays an incredibly and complexity.
56 | Global Finance | April 2012

3. Cameron: Of course, a great basically concerns the subcustodian at the clearing
deal of attention is rightly level. Fragmentation has been bad in that respect as it
focused on the credit stand- has forced us to make investments in the post-trade
ing and regulatory status of field that we wouldn’t necessarily have prioritized from
the institutions holding assets. a strict role perspective. On the other hand, subcus-
However, it is also important todians are there to bridge the gaps and irregularities,
for clients to review what has so fragmentation also generates more activity as well.
been agreed contractually, Jones: The majority of the different trading venues
and for them to ensure that were initially created to help drive down the prices
it is understood by all parties of the incumbent or the monopolies that may have
concerned and put into prac- existed previously. In that regard they were a success
tice. Understanding how the as trading costs have decreased. But in my experi-
multiple market infrastruc- ence, the overall costs of trading, clearing and settle-
tures act is an area of increas- ALISTAIR JONES
ment have increased because of the numbers of central
ing attention. is responsible for the HSBC counterparties, which means we’ve got to post margin,
Securities Services sales and busi- variation-margin and joint-default funds. A number
Giarraputo: There’s been ness development team for the banks of these different trading venues also have different
increased fragmentation of and broker-dealer sector within rulebooks for how certain trades are handled in the
EMEA, based in London. Alistair
trading venues in Europe. has been with HSBC for nearly four
event of a failure. In the back office, that creates a lot
What impact is it having years and is an active member of the more inefficiencies and complexity, which increases
on subcustodians and their British Bankers Association Custody risks and costs.
clients? Advisory Panel and the AFME Post
Cameron: Increasing frag- Trade Settlement Committee. Prior to Giarraputo: There are a wave of new rules and regula-
joining HSBC he worked in a variety
mentation really comes from of senior operational positions at
tions coming at custodians and their clients.Which do
the trinity of competition, ABN Amro, Deutsche Bank, Dresdner you think will be the most troublesome or beneficial?
technology and regulation. Bank and Goldman Sachs in Hong Norén: Most of the regulations will be damaging to
It doesn’t always have a huge Kong, London and New York over his the industry as a whole. It will drive cost and force an
impact on the custodian as 25-year career. artificial streamlining of behavior especially, and it will
they are often settling trans- also punish the volume drivers, for example, the high-
actions that have been netted frequency traders. We have counted up to 24 major
down by the central counterparty clearninghouses. But many regulations and at least 45 that will have some kind of impact.
of the custodians also act as general clearing members (GCMs) Of the 24 major regulatory initiatives, AIFMD will hit us a lot
of the CCPs, and it’s here that they really get involved in this because it places so many requirements onto our client base.
fragmentation issue. Cameron: Maybe I could shoehorn Target2-Securities (T2S) into
In that respect, there are both good and bad aspects of frag- this question. It’s neither a rule nor a regulation, but it’s definitely
mentation for custodians. On the plus side, there is a real need the most important thing on the horizon, and we’re still waiting
for the custodian to act as a GCM. There are so many CCPs in to hear whether the CSDs are going to participate.We still don’t
Europe–23 at the last count– and more coming all the time. So really know the costs. We don’t know how they’re going to be
it is a very reasonable and economic plan for trading members passed on to us.We don’t really know what T2S functionality the
to outsource clearing to a GCM rather than connect to all of the CSDs (central security depositories) are going to use.
CCPs themselves.The problem the GCMs face is that there are Jones: The number of regulations that are being debated,
so many CCPs that it’s hard to actually get costs down. planned and considered is a concern. However, I think it’s
Grajewski: As custodians are part of the investment life cycle in interesting to note that from a subcustody point of view we’re
the latter stages, it’s more about adopting the procedures related actually still very lightly regulated, but we will be impacted by
to the CCP. At least in Central and Eastern Europe, we do not all of these proposed changes. The cost of implementation and
have so many CCPs. Whenever we act as the operator for a compliance is a challenge, as a number of these regulations are
remote member within our region we are driven by their choice happening at a similar time. The status quo is also not attractive
of markets and infrastructures. But by and large, any changes on or desirable, but with the cost of regulatory change and if we
the trading side have much less impact on us have to plan for T2S as well, that’s going to be quite a traffic jam
Norén: It’s certainly true when it comes to trading that it only in our organizations to implement.
April 2012 | Global Finance | 57

4. SPONSORED ROUNDTABLE | SUBCUSTODY
Grajewski: Much of the new regulation is reasonable; it’s all outsourcing services than we would have imagined even one
about stability of the markets and protection of investments. But
or two years ago.
the issue is with the scope of these changes, and the fact that they
Grajewski: We don’t see outsourcing being as big as it is in the
go too far. They impose too high a risk on us as the custodians.
US and Europe. Having said that, what we see is component-
based outsourcing—taking certain
Giarraputo: What is the status of the har- functions and then giving this to the
monization of rules, regulations and prac- agents. Obviously for the clients we
tices within Europe? can be a banker, a counterpart, a cus-
Grajewski: In reality there’s little harmo- todian, and a distributor, but it is still
nization within the CEE. The key about more on a relationship basis rather than
harmonization in the future is that it will traditional outsourcing.
be driven by the trend to move from EU Norén: From a subcustody position, a lot
directives to regulations. With directives of smaller broker-dealers have already
you need to have them enacted within [given] or are considering giving up their
each country. Then there is a possibility trading membership and are instead using
that there will be different interpretations; direct market access (DMA) or DMA-like
regulations allow a common approach. solutions. On the global custody side, we
Jones: The industry has invested a huge see a strong trend among clients towards
amount of time in trying to drive and outsourcing fund administration, but also
improve harmonization. Regrettably, how- other selective outsourcing possibilities
ever, the amount that has been delivered is are considered at an increasing level.
very limited. Jones: It’s more mature in Europe to
A number of these harmonizations look at outsourcing or even co-sourcing,
will require national securities law to be depending on how you want to phrase
repealed in a number of member states, it. With regards to Asia, where we have a
and right now that’s not [at the] top of very large presence in custody, there’s an
everybody’s list. Potentially, you also need increasing willingness of clients to look at
to ensure that harmonization is comple- TOMASZ GRAJEWSKI this since the financial crisis.
was appointed global head of
mentary to initiatives such as T2S but UniCredit GSS in October 2011 and
also creates and maintains a competitive has been a member of the GSS Giarraputo: What’s the current state of
European market. executive committee since 2009. Mr business for subcustodians?
Norén: Regulations don’t take into Grajewski, who is based in Warsaw, Jones: We all look back at last year and
account the global coordination of ini- is also the head of GSS operations in think, “Wow that was a tough year.” But
Bank Pekao, Poland. His responsibili-
tiatives. There’s still the possibility for ties cover custody, broker clearing and
actually for us it was quite interesting.We
national interpretation and implementa- fund services for global custodians, processed record volumes, and we ended
tion. There are also bottleneck problems. global investment banks and domes- the year with record values of assets under
I come from markets where the infra- tic institutions across Austria and the custody. So for us, we’d say that the busi-
structure in each market is small, and CEE. He has 16 years’ experience in ness was good. However, we’re all experi-
securities services and held senior
it’s the same people involved in all of relationship management positions in
encing margin compression.That remains
these changes. Citibank Handlowy Securities Services a concern, and we all need to ensure that
before joining UniCredit Group. as custodians we’re being properly com-
Giarraputo: Custodians have been pro- pensated for the risk that we undertake.
moting outsourcing to their clients for Grajewski: We have seen a drop in
several years. What is the current status the value of assets. Having said that, in
of these efforts? many countries we have been appointed clearing agents for
Cameron: We have a healthy broker-dealer outsourcing business, new remote membership business, and in a sense, we’ve been
and there is increased awareness amongst the broker-dealers compensated by the high volatility and big volumes resulting
of the advantages of moving to variable costs from fixed costs, from this.
as you would expect, given the difficulties in the marketplace We also see opportunities as a result of the split between
generally. We are seeing larger firms look at broker-dealer settlement and asset servicing as part of T2S.There is likely to be
58 | Global Finance | April 2012

5. demand for a kind of new asset-servicing that there will be more banks wanting to
function and for more services related to get out than we’ve seen in the past.
liquidity. In our region, obviously Austria, Norén: For sure there will be fewer par-
Slovakia and Slovenia are part of the euro- ticipants, and the remaining ones will be
zone, so they will be affected from 2015.As subject to fee and competitive pressure.
a group, we will also continue our strategy Regional providers are a better fit for
of looking towards the east—extending to cross-border client needs by way of run-
the CIS region, Belarus and Mongolia as ning a client-driven agenda across multi-
examples, a trend that is driven by client country borders.
demand.
Cameron: Credit is tight, and business Giarraputo: What new products or
conditions are tough. It’s hard to be hav- services can we expect to see from
ing a good time when your clients are not custodians?
having such a good time. So we need to Norén: As a subcustodian we need to
focus on getting some of the core things focus and to understand different needs
right, and top of that list right now is driv- that come from different client seg-
ing down costs. ments. We need to become much more
Norén: We are in a competitive region, in-depth and spend more time on each
and we have an interest-level situation and every relationship to make sure that
ALAN CAMERON
that is not at all helpful when it comes to we are doing the right things. Once you
is head of client development for
revenue generation. Yes, these are chal- broker-dealers and investment banks have positioned yourself to be a stra-
lenging times, but I still think that being at BNP Paribas Securities Services. tegic partner to your clients, you need
a subcustodian or working in the post- He has worked in custody and to look at what it triggers in terms of
trade space, as a whole, is a good place clearing for over 25 years—gaining products. Looking at the European envi-
extensive experience in product and
to be. However, I don’t think there will ronment, there is definitely much more
relationship management. He holds
be too many doing that going forward. a master’s degree in economic his- need when it comes to sophistication
And those that want to do that need to tory from the University of Edinburgh in derivatives clearing, collateral man-
take a good look at business and opera- and is an associate member of the agement and cross-margining products
tional models. Institute of Bankers in Scotland. between marketplaces.
Cameron: With respect to new products,
Giarraputo: How do you expect the roster one would be continued geographical
of participants in the European subcustody market to change? expansion into new markets. Secondly, there are new products in
Jones: If T2S is implemented, then it’s a complete game- and around clearing, collateral and outsourcing services.Thirdly,
changer.The whole European operating model will completely I would put selling old products in new bundles—being willing
transform. There’ll be fewer providers. to service clients with either custody or settlements alone. As
Grajewski: Whenever you ask this question, the answer is, yes, time goes on we will see such services as corporate actions and
the competitive landscape will be streamlined, but all of a sud- proxy voting offered as stand-alone services.
den, if you look at the market, the custodians and market partic- Grajewski: Partnership is important, and knowledge about the
ipants are still around.These days, however, there are two major client’s needs and their plans for the future is key.These days it’s
differences. First of all, the single-market providers definitely not just about launching new products. It’s more about getting
cannot guarantee sustainable growth for their organizations, service delivery right the first time, plus enriching whatever we
and then for the stakeholders. The second is, especially post- do for the clients.
Lehman and the debt crisis in Europe, we hear that in many Jones: We continue to look at possible new market expansion
cases, organizations do not treat securities service as a core part and new products, or where we have a product in one location,
of their business.The result will be that some of the players will we try to harmonize it or roll it out to anywhere that’s appro-
have to exit the business. priate. The best practice, whether our client is dealing with this
Cameron: Over the last few years we’ve seen this industry con- in Latin America, Europe, Middle East or Asia, is, we’ve got to
solidate through a pursuit of scale driven by the need to keep make it look and feel identical. They want more consistency of
investing in technology. Now banks are moving into a period of reporting, and they want us to be country- or market-neutral
balance-sheet and liquidity constraints, so one can only assume in some cases. n
April 2012 | Global Finance | 59