Global Finance - Features roundtable Sub Custody


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Global Finance - Features roundtable Sub Custody

  1. 1. Sponsored RoundtableSub-Custody | Moderated by Dan KeelerIn Safe HandsKey figures from the world’s leading sub-custodians discuss how they arehelping their clients deal with the effects of the flood of new regulation.Global Finance: Recent years have seen a flood of regulations Fontan: The SLD is an attempt—although it is very diffi-introduced or proposed. Which are the most important from cult—to harmonize how securities are treated, regardless ofa sub-custody perspective? the model you have behind them. It’s about defining whatFlorence Fontan, head of public affairs, BNP Paribas: In a security is and who has ownership of it. You have differentEurope, new fund regulations including the AIFM (alterna- models worldwide. In Europe, if an investor buys shares, hetive investment fund managers) directive and the proposed owns a portion of the company. All the intermediaries arerevision to the UCITS (Undertakings for Collective Invest- completely transparent—they just are facilitators for hold-ment in Transferable Securities) framework will have a direct ing the shares, so if an intermediary goes bankrupt, it doesn’timpact on sub-custodians. Both propose that the depository affect the rights of the investors. The other model, which isof any funds—the entity who has custody of the assets of mainly the US model, is called securities entitlement. Youthe funds—has an institutional responsibility for those assets. don’t have the property right over the issuer, but over who-Effectively, the custodian may have to indemnify the funds. So ever you choose to hold your assets. So the SLD will impactcustodians will have more responsibility than they currently investor protection as well as the relationship between issuershave and, if they are using sub-custodians, they will try to pass and investors.that responsibility to the service provider, which is the sub- Mark Kerns, global head of investor services, Standardcustodian. As a result, sub-custodians’ contractual arrange- Bank: For decades, our industry has consistently had manyments and costs will rise and their relationship with the global key initiatives competing for limited industry bandwidth andcustodians will change.There is another market-specific set of often leading to delays in execution. Understandably, on theregulations, including Dodd-Frank in the US and the Euro- back of the financial crisis, that’s proliferated, so now the bigpean Market Infrastructures Regulation (EMIR), that will issue is harmonizing the various global, regional, local andaffect us. These will have an impact on trading and clear- overall industry initiatives—and practically implementinging and will require custodians to adapt to this new environ- them. From a sub-custody point of view, this results in a highment, potentially raising our costs. Finally, again in Europe, degree of challenge but one that critically needs to be metthere is the Target2 Securities (T2S) initiative, which aims where it’s relevant to the markets in which you operate. Forto provide a common platform to use on a CSD (central example, the markets in which we specialize are at a differentsecurities depository), which will be helpful because we will stage of regulation compared to the developed European mar-then be able to connect to a single platform and not have to kets. While there are clearly market authorities, central banks,adapt to each CSD’s platform. As well as regulations there are CSDs and stock exchanges, the regulation that supports themarket initiatives—regional, local and global—such as stock securities industry is still in a developmental mode—and theexchange mergers, that will have also have a strong impact on products that are used in those markets are often much moresub-custodians. limited than people see in the large European markets. ForUlf Norén, global head of sub-custody, SEB: There are so example, in Sub-Saharan Africa there is no security lendingmany initiatives that it’s hard to put them all into the proper outside of South Africa. However, local regulators have gen-context—particularly as there is no or very little harmoniza- erally focused on developing regulation that is in line withtion with other legislation. And many of them that have good the developed markets.intentions, say to break down national barriers in Europe, are Fontan: Following the crisis, there was heavy political pressureactually increasing confusion and maybe even constructing in the US and Europe to toughen the regulations to address thefurther barriers. One particularly important one, though, is problem. In Latin America, Africa and Asia, though, regulatorsthe Securities Law Directive, which will affect both the post- are trying to help the development of their own financial mar-trade environment and the trading environment. Everyone kets while making sure it’s done in a smooth way without tak-dealing with securities will be affected by it. ing all the risks that many developed markets have been facing52 | Global Finance | April 2011
  2. 2. recently. Regulators in Asia are looking risks they’re prepared to take at a localfrom the perspective of their individual market level and what risks they’re pre-market’s situation, which is logical, and pared to take as it relates to the coun-sometimes even enforcing stronger rules terparty they’re dealing with. We’rethan those we experience in Europe or already seeing something of a paradigmin the US. Our experience of dealing shift where organizations that do a lotwith diverse European markets proves of their own sub-custody also providevery valuable, as we bring both global it as part of a global custody solution. Asolutions and domestic capacity to the driver for that is what’s happening fromvarious markets where we operate. a regulatory and liability risk-manage- ment point of view as well as the com-GF: What will be the effects of all this mercial opportunity.regulation on sub-custodians?Norén: Cost is one of them. More and GF: Will the new regulations be effectivemore of the investment we have avail- Ulf Norén in helping sub-custodians manage risk?able to make the world a better place for SEB Fontan: Regulation shouldn’t help sub- Having worked in both global custody andthe investor goes to mandatory spending sub-custody for more than 25 years, Norén custodians manage risk as risk manage-following regulation. The same applies now heads the sub-custody business at SEB. ment is already part of their business-to management—it’s to a great extent SEB’s sub-custody venture is active in 10 as-usual, but the liability attached to the markets: Denmark, Estonia, Finland, Germany,consumed by regulatory shifts. But that Latvia, Lithuania, Norway, Sweden, Russia new business will reinforce the focus oncreates opportunities. Some custodians and Ukraine. Norén is very much involved in risk. Regulation will trigger full reas-will look at what’s happening and maybe shaping SEB’s future sub-custody offering, sessments of what type of risk sub-cus- thereby working intensively with Europeandecide to drop out of the market. You regulatory and infrastructure changes as well todians accept and whether the revenuecan be bullish and say, if those guys drop as with building sustainable operative models. attached to the risk is appropriate.out, let’s go for it, see what we can do. Norén is a member of various national and Norén: Some may actually increase the regional industry groups as well as beingFor the average investor, though, services SEB’s designated liaison representative in the risk we bear. Take CCPs. I’m generallyin general will become more expensive. Association of Global Custodians. glad that we introduced CCPs, but theirFontan: There are the additional costs risk model is not that transparent, so it’sdue to the new regulation, but there is a second element, which hard to fully assess your exposure. And allowing CSDs to takeis that regulations do not only affect us, but also affect our cli- a credit risk or to take any role except for the agent role inents.We can help them, by providing services such as reporting, securities lending adds risk. In some ways, the regulations areor helping them in their own compliance for this new regula- increasing the risk more than mitigating it.tion. For example, more and more transactions will be required Kerns: There’s been consolidation in every aspect of how theto go through CCPs (central counterparty clearing houses,) capital markets are supported. Consolidation of exchanges, ofwhich will require collateral. We can help clients access those CSDs, of custodians, of regional and local market providers.CCPs and also help them put up the required collateral. Finally, You could say that consolidation leads to significant organi-we have a role to play in helping clients manage the complexity zations, high degrees of liquidity and a strong focus on riskthat is the result of the tangle of new regulations. management. Or you could argue that a diversity of provid-Kerns: One of the issues that the regulatory changes have ers mitigates risk through separation. It’s inevitable, though,raised is that global custodians and global clearers will need to that across the capital markets infrastructure there’ll be greatertake on, in some cases, the liability for activities they perform consolidation. And ultimately you could find that you’re con-in markets on behalf of the clients that contract with them solidating risk in an ever-decreasing range of infrastructurein their capacity as a fiduciary, for example, as a depository providers that support a global operating That opens up a whole interesting series of questions, GF: Is fragmentation still an issue in Europe, and if so, how issuch as where can that be passed on from a sub-custody point it affecting sub-custodians?of view? We have to decide what liability we are prepared Norén: Fragmentation is still an issue in Europe and is affect-to take in support of the end-client of our client? That leads ing more than just sub-custodians.There are too many in eachto cost and a whole range of broader banking relationship country, and in Europe as a whole. We also have too manyissues. Our clients need to make a clear assessment of what CSDs and too many CCPs. And we have fragmentation in the April 2011 | Global Finance | 53
  3. 3. Sponsored Roundtable: Sub-Custodytrading arena as well. But we may be at a turning point—to ent markets. At the same time, clients are asking for a globalremain active as a sub-custodian you need to make sure you offering across assets, across geographies or across type ofcan handle the trade flow and the clearing flow, and that you’re services. They want a suite of services, but they want to beequipped to handle the settlement flow. In addition, we have able to see what they’re paying for each one. Since the cri-been investing in the asset servicing area. At the same time, sis, liquidity has become an important component, too. If wea lot of the components of the sub-custodian’s business are provide liquidity in the system, on behalf of our clients, webeing hurt. We don’t have any interest income to speak of, need to factor it into our pricing.The difficulty is quantifyingwith this zero-interest-rate environment, and the regulatory and valuing that liquidity. Everybody recognizes the value ofand trading-side initiatives are all about reducing the numbers liquidity, but how you include that in your pricing model isof transactions. It is a complicated and expensive business to be a different and because of that we may see more consolidation. Kerns: The organizations buying services from us areFontan: There are contradictory events taking place, some very sophisticated, so they like to understand each of thethat would lead to consolidation, while some would promote components of your offering and what you charge for them.fragmentation. On the trading side you could see mergers Unbundling helps them understand the pricing and is likely toof platforms, which will reduce fragmentation. At the same continue, but not necessarily to a level of unbundling withintime, you have a trend to create new CCPs—although there is custody between corporate actions, income collections andalso an initiative to merge some CCPs. so forth. We’re also seeing a shift fromT2S is also a driver for consolidation, the cost-plus mentality to a relationshipbut there is also the prospect for com- pricing arrangement. From a businesspetition between CSDs, which will model point of view, the financial crisisintroduce more complexity. With cli- has triggered more interest in regionalents looking for more pan-European or solutions. Organizations are lookingregional offerings it’s down to the sub- for counterparties that can covercustodians to help them cope with that multiple markets for them in order tofragmentation and all this mess. reduce the number of counterpartiesKerns: There’s been quite a lot of con- they’re dealing with. They’re choosingsolidation of custodians and sub-cus- that regional provider based on credittodians already in Europe. At the same profile, risk profile, service capability,time, though, there’s been a multiplica- market coverage and the range oftion of venues for trading. So there is products they offer, which means you’reroom for more rationalization of pro- dealing with a bigger relationship. Thatviders at all levels of the capital markets Mark Kerns whole relationship is where the business Standard Bankinfrastructure, and it will be driven by Mark Kerns is the managing director and models are changing—the more you doeconomics or a requirement to take global head of Standard Bank’s corporate with an organization, the more you’retoo much risk relative to the economic and investment banking investor services going to look at what the economic division. The division is a leading providerreward. Outside Europe, particularly in of custody and investment-related products relationship should be.Africa, there is a very different dynamic. and services to local and foreign institutional Fontan: We’re moving from a pureTypically, each country has built its own investors across thirteen sub-Saharan markets service provider relationship to more of and Argentina. In addition, Standard Bankcapital markets infrastructure, but now provides pan-African securities execution, a partnership.we’re seeing increasing regional coop- foreign exchange and custody solutions from Norén: I’m still convinced that costseration, with, for example, multiple its international headquarters in London. need to continue to go down. In order Kerns is a former director of the WMmarkets in East Africa and West Africa Company, a leader in the provision of to do that while continuing to handleworking together. investment accounting, valuation and the growing complexity of our role,GF: What new pricing models or performance measurement services. He we need to do two things. One is to launched the Bankers Trust global and masterbusiness models are appearing, and what custody services in Europe and established reengineer our complete operatingchallenges are they addressing? and ran the global master custody business model so it has a center of excellenceFontan: There is a clear trend toward for J.P. Morgan, based initially in London and that can handle the plain-vanilla then New York.more transparency in pricing and for Prior to his appointment at Standard Bank, he services that can benefit from volumeunbundling services. Clients want to has also filled a variety of executive roles at concentration. Second, we need to havebe able to see each component of your BNY Mellon, the last of which was executive a clear discussion with clients about the vice president and head of fund managerservice. However, there is no agreement services, which included trustee, custody, complexity of the services they needwithin the industry on how to unbun- fund administration both on and offshore and from us and the costs of those services.dle, which makes it difficult to compare related services provided to fund managers in I fully agree that you need to unbundle Europe, the Middle East and Africa.between different providers and differ- both services and fees and you need to54 | Global Finance | April 2011
  4. 4. fairly price the risk we absorb and the solutions and to do it constantly andliquidity we provide. The service model publicly. You can’t sit on your ownneeds to be constructed around risk- solutions, you have to present and collateral management. Even though, in a transparent world,Quality has reemerged as a crucial the benefit you get from creatingcharacteristic, too. You have to be error- your own exclusive solution may befree and to provide thought leadership. short-lived, at least you get the creditFontan: Right. Before the crisis it was for having achieved it.all about price. Now, the quality of your Fontan: Investors are being moreoperation and your credit rating have adventurous, but they’re not back torisen to the top of the list. Not just the the full spectrum. They’re back intoquality of day-to-day operations, but new markets, in terms of geography,also in terms of crisis management. This because they want to benefit fromis a long-term partnership—clients are growth in the emerging markets. We Dan Keelerlooking for somebody who will support Global Finance have accompanied our clients andtheir business and accompany them across “Recent events have prompted a rash of expanded our geographical coverage,the changing environments we’re facing, product innovation” offering sub-custody services in Brazilso they need to be confident we’ll still be or India. From a product perspective,in this business in two years’ time. they are not back to writing complex products, but they’reKerns: Yes, there has been an evolution of the relationship open to a broader range of products, many of which should beover the past three years to where organizations want to work core services from the sub-custodians.on a longer-term basis. The conversations with clients aremuch less about price and more about strategy. They want GF: The pressure on single-country providers is growing.Willadvocacy and they want market knowledge, so the buying we see more consolidation?process and the negotiation process have become more Norén: On a social media website that we support, called theconstructive and much more reasonable. There’s much more Benche, we asked how many sub-custodians people believevalue being attributed to the other things that you can do. will remain in Europe by 2016. Based on initial results, more than half of the respondents believe there will be fewerGF: As investors become more adventurous in seeking returns, than nine. That’s down from more than 50 at present, so itare custodians extending their geographical coverage and represents considerable consolidation. That corresponds withexpanding their range of service offerings? our view. Competition and price pressure will continue toKerns: Yes. The regional providers are either deepening their be the main drivers, but another factor is that regional andpenetration of clients in particular markets or looking to add pan-European providers have proved they can service clientsmarket coverage so their offering is more comprehensive, across country borders, and that they are quite good in marketparticularly to the global buyer. The broader the coverage you advocacy as well. So the regional trend will continue—andhave, the more appealing you are to organizations that are a bit further down the line a pan-European trend will dolooking to develop partnerships, mitigate their risk, deal with the same kind of damage to regional custodians that regionalinstitutions that they know well, and indeed, often have a broader custodians have already done to domestic ones.corporate relationship with. We’re also seeing that providers Fontan: The pressure is coming from two areas. First, isare looking to offer more capabilities. A good sub-custodian is economic.With interest rates down you cannot count on thatalso a very strong domestic provider in their own market. For revenue resource. There is strong pressure on prices, so youexample, we’ve got a very big business in South Africa, which is need to reduce your cost base and you need economies ofbeneficial for our South African intuitional investor clients, but scale. In your domestic market, the scope for that may beit’s also beneficial for international investors coming into the limited. Second is your client. We’re moving to more of acountry.You’re part of the fabric of the country, you have broad partnership relationship and, as a global custodian, we covercapability, you’re very well attached to and collaboratively work 100 markets. I cannot build a true, long-term relationshipwith the CSD, the stock exchange, and all the infrastructure with 100 providers, one per market, so I will privilege someproviders.Your presence in the domestic markets in which you relationships, which will hurt single-country providers.Thoseoperate is a vital factor in terms of your own business model, we do work with will have to be niche players that have topbut also in your appeal to an international buyer. quality for a market where there is nobody else I can trust.Norén: I agree. Expansion and product development are Kerns: If an international organization that’s buyingabsolutely crucial. And when you move into new markets it in-country services in, say, five markets can get them fromis absolutely necessary to prove that you can provide some a single provider they already have relationship with, thatenhancements to those markets. You need to come up with opportunity is much more compelling. That leaves the single April 2011 | Global Finance | 55
  5. 5. Sponsored Roundtable: Sub-Custodymarket provider looking less attractive looking for us to optimize our offeringto the international in-bound investor, to help them cope with a difficult andbut it still does leave the domestic changing So the survival of the single- Norén: In the Nordic region, we’ve gonemarket custodians will be dependent on from a bilateral settlement environmenttheir ability to maintain a deep business into a counterparty clearing environment,in their own domestic market, and which is a big, big change. In order torather less about their ability to offer establish our clearing services system, wesub-custody services. jumped out of our product silo in sub- custody and asked the guys in tradingGF: Are clients encouraging the regional and capital markets to help. Out of thatplayers to move into new markets? cooperation came a lot of good things,Fontan: Sometimes our clients ask if including a very good cross-marginingwe’re planning to go into a particular model, where you not only can cross-market because they’re not happy Florence Fontan margin between products, but alsowith the service they’re getting from a BNP Paribas Securities Services between venues. We have also spent a lot Florence Fontan is head of public affairslocal custodian. Another driver for us at BNP Paribas Securities Services, the on the credit and collateral side becauseis the other divisions of the bank. We subsidiary of BNP Paribas that specializes we think some of the more determinedhave an asset management arm and an in all securities services, including custody battles will happen in that field. A third and fund services. It has a presence ininvestment bank arm. If that internal 16 European countries. After a career focus is our self-servicing models wherebusiness has important assets in one in consulting, Fontan joined Banque larger clients have their own accountscountry, is it worthwhile for us to go Paribas/BNP Paribas in 1998. She was at the CSD. You have scalability, so you closely involved in the merger of BNP anddirectly to that country, just to serve the Paribas and in 2000 joined the securities can take on more settlement activity ifBNP Paribas group globally? services business to look after strategy you want to, but you employ someone and development for this subsidiary and to to do the servicing for you. Another area manage external acquisitions.GF: Recent events have prompted a Since 2003 she has been following that we believe in is sharing and socialrash of product innovation. What are all European market and regulatory media. We’ve funded the Benche andsome of the most useful new services, developments for BNP Paribas Securities hope it will develop into something Services in various fields.from a client perspective? On clearing and settlement aspects, she has user-driven. We do make sure thatFontan: A lot of product innovation been closely involved in discussions on the we share our opinion on, for example,has been triggered by regulation and code of conduct for market infrastructures, regulatory issues but it’s open for anyone the Target-2 Securities initiative and variousby changing operating models, trading initiatives to remove the industry Giovannini to comment or to get involved. We aremethods or types of assets traded. barriers. She is also closely following all sharing information now, but as it growsWith the fragmented landscape in initiatives at the clearing space whether and gains traction, hopefully we will be interoperability between CCP for equities orterms of CCPs, for example, clients the new proposal to introduce CCP clearing in able to learn from it, too.are dealing with a bewildering array OTC derivatives markets. Kerns: From an Africa perspective, we’reof organizations. We are working to in quite a different place. Capabilitiesconsolidate that view by creating an environment where it that are well established in the developed markets are still inappears as if the client has only one CCP in front of him. their infancy. There are some areas where Africa is actuallyThat not only helps clients deal with the complexity but also ahead of other markets. Mobile banking, which is still in itsoptimizes the costs. Another example that can help our mid- relatively early stages in Europe, is becoming part of the fabrictier clients keep their costs down is our outsourcing service, of some of the African markets. But what’s exciting is thatwhich enables them to rely on our mutualized cost base, so capabilities we’re very familiar with in developed markets, likewe can provide them with lower cost than their in-house securities financing, securities lending, collateral managementcost. We are also adding new types of services, such as three- and tri-party repo, are very topical areas of innovation withinparty settlement services, where we guarantee settlement for the region. There’s increasing demand, and regulations aretheir clients. Having a guarantee from BNP Paribas can help changing to enable things like securities lending to be functionsa mid-tier broker sell its offerings and remain competitive of how the markets operate.There are still major issues with thefrom a cost perspective—and also from a credit rating broader infrastructure—electricity, telecommunications and soperspective. Finally, we are developing ways to help clients on—in many African countries, so the cost of doing businesswith whatever type of activity, and whatever type of assets and ensuring business continuity is very high. While you canthey need—whether it’s cash, equities, bonds or derivatives. have the latest technology and developed market capabilities,The next challenge is how can you optimize the collateral it’s still built on developing infrastructure. But there’s a lot ofof your clients across those assets? Essentially, the client is forward momentum and progress. n56 | Global Finance | April 2011