Competition, Regulation and Techonlogy


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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.

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Competition, Regulation and Techonlogy

  1. 1. SUBCUSTODY SPONSORED ROUNDTABLE | Moderated By Joseph D. GiarraputoCompetition, RegulationAnd TechnologyAt a roundtable in London, Global Finance brought together key figuresin the subcustody industry to discuss how they are responding to themany 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 facingServices: There are unknown factors definitely in the equa- a multidimensional crisis where we have a debt crisis but also ation. This is the conclusion derived from the number of major confidence crisis.We have to think the unthinkable.We need toexercises, which have taken place in London and elsewhere. look at what the support system for the banking system is goingFrom that perspective, little detailed planning seems to be pos- to look like.We also need to look at the severity, length and thesible at this stage. In the event of a major disruption, we need construction of the currency restrictions that will follow. Whatto ensure that the authorities give clear and prompt guidance we need to do is an analysis at an infrastructural level, a productto the markets. Even in the worst-case scenario, equities (which level and a capital management level. We also need to conductconstitute the bulk of our client assets) would be less impacted a legal-impact analysis. What is needed is an in-depth dialoguethan 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. 2. SPONSORED ROUNDTABLE | SUBCUSTODYthe contractual obligations? What will happen with my cash pivotal role. We also look at the protection that we can offerposition? How will we deal with that FX contract? How do clients in the event of something happening and a number ofwe deal with the obligations we have towards one another on these measures that could be improved, and, again, modeling tocorporate 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 protectedAlistair Jones, head of sales and relationship management and that at any moment in time we know where we stand withEurope, 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 inneed to improve our best-practice plans. We’re not the biggest an interview recently, “Due diligence is really something thatplayer in the eurozone for subcustody, so our impact is perhaps should happen every day.” So that’s the sort of model we needless than some of my colleagues here, but to get to.We all need to be guided on hownevertheless we play an important role we handle this to a great extent by bothin the life cycle. We’ve also worked well AIFMD (Alternative Investment Fundtogether with our peer group to ensure Manager’s Directive) and UCITS V, whichthat 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 globalto our internal controls and processes. custodians for their network. As subcusto-Alan Cameron, head of client seg- dians, these sort of transfer demands willment—broker dealers and investment continue to make our daily lives colorfulbanks, BNP Paribas Securities Services: going forward.We really just have to learn to live in a Grajewski: There are three importantperiod of heightened awareness. Right things. First of all, as custodians, we need tonow it’s very important that we keep ensure that the legal structure we’ve got inour clients up-to-date with what we’re place ensures the safety of client assets.Theseeing and hearing on the ground. Then second point is that we need to lobby forwe have to be ready for sudden action changes within the markets to maximizeif required. It could just be a surge in the safety of assets and clear segregation ofvolumes 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 integrityrobust responses. That’s really about all at the custodian. The custodian’s probity ULF NORÉNwe can do at this point. It is important must be undoubted; they must have an is global head of subcustody atthat the industry works together and talks SEB. Having worked in both global unquestionable reputation. Operationaltogether 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, whereverGiarraputo: Following the collapse of subcustody business in SEB. SEB’s required and possible, at the level of the subcustody venture is active in 10MF-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 fromrole can subcustodians play in ensuring Sweden, Russia and Ukraine. Ulf Central & Eastern Europe. In Poland wethe safety of these assets? is very involved in shaping SEB’s have, in response to client pressure, beenJones: We’ve worked very closely with future subcustody offering, thereby fighting for omnibus account structures. working intensively with the Europeanclients since the financial crisis and mod- Finally, these were introduced in 2012, regulatory and infrastructure changeseled various what-if scenarios similar to as well as with building sustainable but—surprise, surprise—not all clientsthe previous question. We then worry operative models. want to take advantage of them. I amabout what happens if one of those were sure there will be movement towards thatto go into liquidation. What’s the con- structure, but the view that segregationtractual position as a peer group? We’re increases asset protection is slowing downalso much more concerned about market infrastructure as well any changeover, despite the fact that segregation increases costthan we were previously because now it plays an incredibly and complexity.56 | Global Finance | April 2012
  3. 3. Cameron: Of course, a great basically concerns the subcustodian at the clearingdeal of attention is rightly level. Fragmentation has been bad in that respect as itfocused on the credit stand- has forced us to make investments in the post-tradeing and regulatory status of field that we wouldn’t necessarily have prioritized fromthe 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 venuesand for them to ensure that were initially created to help drive down the pricesit is understood by all parties of the incumbent or the monopolies that may haveconcerned and put into prac- existed previously. In that regard they were a successtice. 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 centraling 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 numberGiarraputo: There’s been ness development team for the banks of these different trading venues also have differentincreased fragmentation of and broker-dealer sector within rulebooks for how certain trades are handled in the EMEA, based in London. Alistairtrading venues in Europe. has been with HSBC for nearly four event of a failure. In the back office, that creates a lotWhat impact is it having years and is an active member of the more inefficiencies and complexity, which increaseson subcustodians and their British Bankers Association Custody risks and costs.clients? Advisory Panel and the AFME PostCameron: Increasing frag- Trade Settlement Committee. Prior to Giarraputo: There are a wave of new rules and regula- joining HSBC he worked in a varietymentation really comes from of senior operational positions at tions coming at custodians and their clients.Which dothe 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 toIt doesn’t always have a huge Kong, London and New York over his the industry as a whole. It will drive cost and force animpact on the custodian as 25-year career. artificial streamlining of behavior especially, and it willthey 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 majordown 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 lotof 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 definitelymentation for custodians. On the plus side, there is a real need the most important thing on the horizon, and we’re still waitingfor 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’tEurope–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 beit is a very reasonable and economic plan for trading members passed on to us.We don’t really know what T2S functionality theto 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’sGrajewski: As custodians are part of the investment life cycle in interesting to note that from a subcustody point of view we’rethe latter stages, it’s more about adopting the procedures related actually still very lightly regulated, but we will be impacted byto the CCP. At least in Central and Eastern Europe, we do not all of these proposed changes. The cost of implementation andhave so many CCPs. Whenever we act as the operator for a compliance is a challenge, as a number of these regulations areremote member within our region we are driven by their choice happening at a similar time. The status quo is also not attractiveof markets and infrastructures. But by and large, any changes on or desirable, but with the cost of regulatory change and if wethe trading side have much less impact on us have to plan for T2S as well, that’s going to be quite a traffic jamNorén: It’s certainly true when it comes to trading that it only in our organizations to implement. April 2012 | Global Finance | 57
  4. 4. SPONSORED ROUNDTABLE | SUBCUSTODYGrajewski: Much of the new regulation is reasonable; it’s all outsourcing services than we would have imagined even oneabout 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 thego 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 certainGiarraputo: What is the status of the har- functions and then giving this to themonization of rules, regulations and prac- agents. Obviously for the clients wetices within Europe? can be a banker, a counterpart, a cus-Grajewski: In reality there’s little harmo- todian, and a distributor, but it is stillnization within the CEE. The key about more on a relationship basis rather thanharmonization in the future is that it will traditional driven by the trend to move from EU Norén: From a subcustody position, a lotdirectives to regulations. With directives of smaller broker-dealers have alreadyyou need to have them enacted within [given] or are considering giving up theireach country. Then there is a possibility trading membership and are instead usingthat there will be different interpretations; direct market access (DMA) or DMA-likeregulations allow a common approach. solutions. On the global custody side, weJones: The industry has invested a huge see a strong trend among clients towardsamount of time in trying to drive and outsourcing fund administration, but alsoimprove harmonization. Regrettably, how- other selective outsourcing possibilitiesever, 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 phraserepealed in a number of member states, it. With regards to Asia, where we have aand right now that’s not [at the] top of very large presence in custody, there’s aneverybody’s list. Potentially, you also need increasing willingness of clients to look atto ensure that harmonization is comple- TOMASZ GRAJEWSKI this since the financial crisis. was appointed global head ofmentary to initiatives such as T2S but UniCredit GSS in October 2011 andalso creates and maintains a competitive has been a member of the GSS Giarraputo: What’s the current state ofEuropean 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 andaccount 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.Wenational interpretation and implementa- fund services for global custodians, processed record volumes, and we endedtion. There are also bottleneck problems. global investment banks and domes- the year with record values of assets underI 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 seniorit’s the same people involved in all of relationship management positions in encing margin compression.That remainsthese 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 inseveral years. What is the current status the value of assets. Having said that, inof these efforts? many countries we have been appointed clearing agents forCameron: We have a healthy broker-dealer outsourcing business, new remote membership business, and in a sense, we’ve beenand there is increased awareness amongst the broker-dealers compensated by the high volatility and big volumes resultingof the advantages of moving to variable costs from fixed costs, from you would expect, given the difficulties in the marketplace We also see opportunities as a result of the split betweengenerally. We are seeing larger firms look at broker-dealer settlement and asset servicing as part of T2S.There is likely to be58 | Global Finance | April 2012
  5. 5. demand for a kind of new asset-servicing that there will be more banks wanting tofunction 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 bezone, 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 forof 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 orconditions are tough. It’s hard to be hav- services can we expect to see froming a good time when your clients are not custodians?having such a good time. So we need to Norén: As a subcustodian we need tofocus on getting some of the core things focus and to understand different needsright, and top of that list right now is driv- that come from different client seg-ing down costs. ments. We need to become much moreNorén: We are in a competitive region, in-depth and spend more time on eachand we have an interest-level situation and every relationship to make sure that ALAN CAMERONthat is not at all helpful when it comes to we are doing the right things. Once you is head of client development forrevenue 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 needa subcustodian or working in the post- He has worked in custody and to look at what it triggers in terms oftrade space, as a whole, is a good place clearing for over 25 years—gaining products. Looking at the European envi- extensive experience in product andto be. However, I don’t think there will ronment, there is definitely much more relationship management. He holdsbe too many doing that going forward. a master’s degree in economic his- need when it comes to sophisticationAnd 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 productstional 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 geographicalof participants in the European subcustody market to change? expansion into new markets. Secondly, there are new products inJones: 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 willingtransform. There’ll be fewer providers. to service clients with either custody or settlements alone. AsGrajewski: Whenever you ask this question, the answer is, yes, time goes on we will see such services as corporate actions andthe 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 theipants are still around.These days, however, there are two major client’s needs and their plans for the future is key.These days it’sdifferences. First of all, the single-market providers definitely not just about launching new products. It’s more about gettingcannot guarantee sustainable growth for their organizations, service delivery right the first time, plus enriching whatever weand 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 expansioncases, 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 thisCameron: Over the last few years we’ve seen this industry con- in Latin America, Europe, Middle East or Asia, is, we’ve got tosolidate through a pursuit of scale driven by the need to keep make it look and feel identical. They want more consistency ofinvesting in technology. Now banks are moving into a period of reporting, and they want us to be country- or market-neutralbalance-sheet and liquidity constraints, so one can only assume in some cases. n April 2012 | Global Finance | 59