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VOLUME 2 No. 10 - Dec 2005
NEW HEIGHTS
CUSTODIANS IN CONTROL
DARE TO DOMICILE - SECURITIES LENDING PLUS:
FRENCH CUSTODY - VIVE LA DIFFERENCE STP & AUTOMATION - A FAIR PRICE?
NEW HORIZONS - AUSTRALIA FOCUS PANEL DEBATE - CENTRAL & EASTERN EUROPE
CAPITAL REIGNS - COLLATERAL MANAGEMENT PENSIONS - TIME TO HEDGE?
REGULATION- MIFED SPECIAL REPORT - RMA SECURITIES LENDING
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VOLUME 2 No. 10 - Dec 2005
JOURNAL
NEW HEIGHTS
CUSTODIANS IN CONTROL
DARE TO DOMICILE - SECURITIES LENDING PLUS:
FRENCH CUSTODY - VIVE LA DIFFERENCE STP & AUTOMATION - A FAIR PRICE?
NEW HORIZONS - AUSTRALIA FOCUS PANEL DEBATE - CENTRAL & EASTERN EUROPE
CAPITAL REIGNS - COLLATERAL MANAGEMENT PENSIONS - TIME TO HEDGE?
REGULATION- MIFED SPECIAL REPORT - RMA SECURITIES LENDING
ANALYSE THIS - THE FUTURE? 22 PATTERNS & PREDIDITIONS FROM THE SELL SIDE
CUSTODY/ASSET SERVICING
PROFILE: MARKETS FOR TOMORROW 14 SOCGEN’S BRUNO PRIGENT
EN FRANCAIS 17 FRANCE
THE NEW OUTBACK 30 AUSTRALIA: SELL SIDE VIEWS ON BUY SIDE MOVES
ROUNDTABLE: CEE 44 CUSTODIANS ON THE NEW EUROPE
FUNDS/ALTERNATIVE INVESTMENT
ALL REIT 52 REAL ESTATE INVESTMRNT TRUSTS FOR PENSION FUNDS
HEDGE FUND PERFORMANCE 42 THE LATEST PERFORMANCE RESULTS OF HFRI
SECURITIES LENDING
ON LOAN - WHAT AND WHERE 36 PERFORMANCE ANALYSIS OF LOAN PRODUCTS
DARE TO DOMICILE 38 OFFSHORE DOMICILES FOR BENEFICIAL OWNERS
COLLATERAL MANAGEMENT
CAPITAL REIGNS 62 ARE BANKS BIG ENOUGH?
PENSIONS
FUND PROFILE: 54 INTERVIEW - GERRY DEGAUTE OF THE ROYAL MAIL PENSION PLAN
INFRASTRUCTURE/REGULATION
A NEW DAWN 60 FINANCIAL INSTITUTIONS PREPARE FOR MIFID
PEOPLE PLACING
PERSONAL PROFILE: 69 JENNIFER OCAMPO-KING SPELLS GROWTH FOR TD SECURITIES
MOVERS AND SHAKERS 72 WHOSE MOVING WHERE?
PEOPLE MARKET 70 MCGREGOR BOYALL SHED’S LIGHT ON FINANCIAL RECRUITMENT
REGULARS
MANDATES 66 SERVICE PROVIDERS RETAINING MANDATES
CONFERENCE DIGEST 74 SECURITIES LENDING PROVIDERS JOIN FORCES IN FLORIDA, USA
DIRECTORY OF SERVICES 76 CUSTODY, FUND ADMINISTRATION, SECURITIES LENDING,
TECHNOLOGY, PRIME BROKERAGE, TRAINING & EDUCATION
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and other regulations that require effec- is why KAS BANK continues focussing on
Letters to the Editor tive information management. For exam- expanding its range with value added
ple, central to being compliant with both services such as order management, per-
Sarbanes Oxley and MiFID is the require- formance and risk analytics, and out-
ment to securely retain, store and man- sourcing solutions. The investor and
age an extensive variety of different docu- intermediary will therefore – also in a
ments. MiFID won’t be the last regulation truly European securities market – be the
that the industry faces and so savvy winner by having the choice to “go
organisations will need to start to put direct” for a commoditised service, or to
together compliance strategies for current select a specialist, added value provider.
and future regulatory requirements. By
taking a more considered and holistic Ryanne Cox, Director
approach to IT, the industry can make Financial Intermediaries, KAS BANK
significant cost savings on the EUR 1bil-
lion bill proposed earlier in the year. MiFID
Write to - ALTERNATIVE INVESTMENTS BEWARE
Janet.DuChenne@ISJforum.com Simon Forster, Director, Diagonal With sterner competition, more diverse
Solutions customer demands, and pervasive rising
MIFID BLOW costs, you are hopefully sustaining prof-
For a market so bombarded by regula- AGENT VIEW itability despite ever-reducing margins.
tions and guidelines, the prospect of the Representing a specialist provider of Then along comes MiFID, the largest
Markets in Financial Services Directive securities and investor services in Europe most comprehensive tract of legislation
(MiFID) is yet another blow, not least I cannot help noticing that “agent banks” designed to protect the customer since
because it is expected to be the most far are by many still considered to thrive on the dawn of the finance industry. The
reaching reform of any financial market market inefficiencies. I would like to costs to the industry will be significant,
ever undertaken. What currently makes address this point from two angles. Firstly and have been estimated at up to £2.2
MiFID so daunting is that nobody knows – providers such as KAS BANK have billion for the UK, mostly affecting the
just how far or extreme this reform will been instrumental in creating some of the front office. But, before back office oper-
be. Until January 2006 MiFID is ‘in the most substantial cost savings for buyers of
land of the unknown,’ commonly referred securities services over the past few years. Post-MiFID survivors
to as a consultation period. Over the past While market infrastructures do not have will be agile, automated,
few months many industry bodies have harmonised procedures and market prac-
voiced their displeasure about the direc- tices yet, KAS BANK offers an integrated international innovative
tive and analysts have predicted that access to multiple European markets, institutions, with STP-
such an overhaul of the EU market will using domestic terms and conditions.
leave investment firms looking at a EUR Take for example the Euronext markets, enabled, simplified,
1 billion bill. Such estimates do not make the UK and Germany: just three markets scalable processes.
for pretty reading. however operating a range of different
exchanges, clearing houses, and no less ations become complacent, remember
What currently makes MiFID than six depositories and cash clearing that this is an all-embracing initiative, and
systems. Connecting to these directly lightening-fast front-office dealing
so daunting is that nobody would be a costly and complex exercise processes will not be compromised by
knows just how far or for the investor or intermediary. traditionally lethargic settlement processes
in the back office.Whilst selective
extreme this reform will be. I cannot help noticing that regulation is coming to the fax and paper-
Although certain guidelines are up for “agent banks” are by many based hedge funds industry, it is the
debate, one thing for certain is that data mandated increased speed and extent of
management in this sector will never be still considered to thrive on trade reporting requirements, with
the same again. Firms will have to be market inefficiencies. consequential tightening margins and
consolidation which will have a dramatic
able to justify their decisions based on
competitor quotes and client correspon- A second factor is that also for effect on the competitive landscape.
dence – all of which will need to be providers of securities services them- Post-MiFID survivors will be agile,
stored and managed in a secure and selves, an integrated securities market is automated, international innovative
auditable repository. If their decisions are a good thing. From the point of view of its institutions, with STP-enabled, simplified,
questioned then firms will need to be 100 own back office organisation, a har- scalable processes. As a key provider of
per cent confident that the correspon- monised securities infrastructure will pro- cost-effective automated applications and
dence they put forward in order to vali- vide savings of costs and efforts, enabling connectivity today in this market space,
date their decision is authentic and has the agent bank to focus on its true chal- we are only too aware that without this
not been tampered with. Nothing can be lenge: insourcing securities services on type of technology, smaller less adept
left to chance, making MiFID a big, but the basis of quality and added value. It is institutions will feel this inevitable scythe of
not insurmountable, mountain to climb. therefore in agent banks’ interests, as legislation cutting through their processes
The key thing is not to panic and start much as in the interest of end-users of and profitability. Firms must conscientious-
investing in IT systems willy nilly. When securities services, that the securities ly take action to arm them for the financial
the final directive is announced in infrastructure be both harmonised and revolution that will change the dynamics of
January, companies will need to establish impartial. operations in the European arena. How
what it means for their organisation. To Providing securities services is only serious are MiFID implications? All
do this they will need to do a complete sustainable if we continue delivering encompassing, and failure to act will
review of their technology platforms and added value to investors and intermedi- jeopardise the very existence of
information solutions. Yet the result of aries. Whereas this added value may, in established players across the industry.
this review does not necessarily have to the short run, be in providing a single
lead to a huge IT investment. market access point for markets not yet Graham Bright, Head International Sales,
What organisations should be doing is harmonised on infrastructure level, this Financial Tradeware
finding commonalities between MiFID role will evidently change over time. That
(Continued on page 68)
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investor. Fimat and the Fimat Group refer to all companies or divisions of companies owned directly or indirectly by Societe Generale that include the "Fimat" name. Fimat USA, LLC,
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News - Americas
107bn to USD 136bn, as at June 2005, Bank, said: “While third-party fund pro-
according to research by Lipper cessing on FundSettle continues to
Fitzrovia. Royal Bank of Scotland grow - by more than 140 per cent in the
International (RBSI) currently leads the past year, in fact - client demand to cen-
way, with USD 18.4bn of assets under tralise all of their fund-processing busi-
custody in Jersey, ahead of Royal Bank ness, including their own in-house
of Canada (RBC) with USD 13.9bn and funds, has reinforced FundSettle’s role
BNP Paribas USD 13.3bn. Significant as the leading market infrastructure for
growth in both property/real estate and fund-transaction processing.”
private equity/venture capital funds
reflects Jersey’s continuing attraction as Market Infrastructure/Regulation
a centre for more specialised fund
products. London - The Financial Services
Authority (FSA) is encouraging senior
London – Global Transactions Services, management at regulated firms to begin
a business unit of Citigroup Corporate preparing for the implementation of the
and Investment Banking, has been European Union's Markets in Financial
appointed as the preferred fund admin- Instruments Directive (MiFID), which is
istration, custody and related services likely to come into force on 1 November
provider for Winterthur Life UK, part of 2007. The Directive will have a signifi-
the Credit Suisse Group. This transition cant impact on financial services regula-
underlines Citigroup’s strength in the tion and how firms operate and interact
Custody & Outsourcing funds administration business and with customers. The FSA has published
Winterthur will transfer its fund ‘Planning for MiFID', a factual docu-
Amsterdam - State Street has opened accounting and administration func- ment which provides a short guide high-
an office in Amsterdam. The new office, tions onto Citigroup’s Edinburgh funds lighting the key areas, such as conduct
located at Thomas R. Malthusstraat 1-3, platform in the third quarter of 2006. of business and systems and controls
will house more than 150 employees requirements, which will be affected by
providing a full range of solutions to the London - OMX Securities Services (UK), the Directive and the likely main practi-
Dutch market. State Street opened its a provider of transaction technology, cal implications for regulated firms. It
first investor services office in processing and outsourcing solutions has also published the International
Amsterdam in 1999 and has increasing- for the financial markets, today Regulatory Outlook (IRO) which analy-
ly built a strong foothold in the announced its continued expansion in ses regulatory change that is being driv-
region.“The Netherlands boasts some the UK through the appointment by en by European and other international
of the most highly developed pension Killik & Co, the UK-based stockbroking initiatives and its likely effects on UK
schemes that have been pioneers in the and financial planning firm, of OMX financial services.
financial marketplace,” said Rod Securities Services UK as their new set-
Ringrow, Senior Vice President and tlement and custody provider. The STP & Technology
Head of State Street’s investor services appointment includes the transfer of
Killik & Co's settlement and custody London - Xcitek, the global provider of
business in the Netherlands. market data, corporate actions software,
teams to OMX Securities Services. The
appointment of OMX will help Killik & and staffing solutions, is working with
Paris - Société Générale Global the London Stock Exchange to take
Securities Services for Investors (SG Co deliver its vision of becoming a
financial planning business that has delivery and process its Corporate
GSSI), have announced that ING Actions data in the SWIFT ISO 15022
Wholesale Banking has outsourced its stockbroking and investment manage-
ment as core competencies. format in its flagship product, XSP™.
London booked international cash equi- XSP further enhances its offering by
ties business to SG GSSI. ING supplying the Exchange’s Corporate
London’s equities trade-processing and Brussels - FundSettle, the market infra-
structure for the processing of cross- Actions and Dividend data in this stan-
settlement of cash equities will now be dard messaging format to promote
handled completely by SG GSSI. border and domestic fund transactions,
has expanded its reach beyond third- greater straight-through processing
Philippe Robeyns, Head of Investment (STP) whilst reducing operational costs
Banking Services at SG GSSI, said: “The party funds to include clients’ in-house
funds. This enhancement is intended to and risks. XSP is SWIFT ISO 15022 com-
transfer has been a great success. Other pliant and features comprehensive data
banks have been watching this imple- help clients centralise all of their fund-
processing business in a single location. scrubbing tools, workflow management
mentation very closely and we expect modules, web and ISO messaging for
much more interest in our service.” A low-cost, sliding-scale tariff has also
been introduced in support of the new client notification and response capture,
offering, representing a reduction of and complete entitlement processing.
Funds & Administration
minimum 60 per cent on the servicing
Jersey – The total net assets of funds tariff for third-party funds. Ivan Nicora,
serviced in Jersey have risen by 27 per Director and head of Investment Fund FREE NEWS DAILY AT
cent, with the total growing from USD Product Management at Euroclear WWW.ISJFORUM.COM
For more information: Amsterdam: Tel: + 31 20 527 2636 or 31 20 527 2838 - Brussels: Tel: + 32 2 565 63 86 or 32 2 565 86 71 - www.merchantbanking.fortis.com
News - Asia Pacific
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DELIVERING A DOMESTIC
MARKET FOR EUROPE
Domiciles News
As one of France’s largest secu- Alain Closier is currently steering the worldwide effort of
France’s second largest securities services provider. When his key
rities services providers, SG concern, Société Générale Global Securities Services for
Investors was officially named two years ago, Closier seized the
GSSI’s worldwide goals are well opportunity to transition from his former post as Head of
Banking Services at Société Générale (where he controlled cash
within reach. management and retail securities services) to lead the new divi-
sion within the Group. Explaining the rationale behind the cre-
ation of SG GSSI, Closier says: “In 2003 we decided to create a
Alain Closier talks to ISJ about new division, combining all securities services expertise in order
to best serve retail investors, corporate entities and banks. We
his company’s key challenges reorganised Investment Banking, Retail Banking and Banking
and opportunities Services departments and created a new business model in the
securities services area.”
The SG GSSI business model, as it is known today, comprises
custody, fund administration, trustee services, brokerage out-
sourcing, lending and borrowing and issuer services. “The
model equips us with everything we need in order to provide
Tomorrow form for serving retail and institutional customers. “We need
the same platform to support the investment banking and cus-
tody business in Europe,” says Closier. “In creating SG GSSI, we
have assembled over 4,000 people within the SG Group.”
Outsourcing
The other main objective for SG GSSI is to expand its out-
sourcing business. “We regard outsourcing as a key development
within our market,” says Closier. “An increasing number of
financial companies are ready to outsource their non-core func-
tions. This is true for brokers, retail and investment banks. The
phenomenon is new and is a very important objective for us.”
SG GSSI’s first key outsourcing client was ING Bank in the
UK. The company provides support services to the equity
investment banking arm of the Dutch bank. “As a growing mar-
ket, outsourcing is very important to us,” says Closier. SG GSSI
is also developing value added services such as securities lending
and borrowing. The provider has three lending desks, in New
York, London and Paris. SG GSSI also considers pan-European
fund administration as another important business line.
Administration services include pricing and performance meas-
urement for complex products such as hedge funds. “Our busi-
ness model does not include the provision of specific services,
but rather a range of services in a one stop shop for our clients,
says Closier. “The idea is to provide clients with one entry point, from provider to provider depends on the provider’s portfolio
where they have access to execution and clearing services for any of clients. If clients include broker dealers there should be no
type of instrument, including cash or derivatives.” Beyond clear- problem with using SWIFT in your relationship with those
ing and execution, other services include settlement, back office clients. If your client portfolio tends more towards asset man-
outsourcing, lending and borrowing. agers or hedge funds, SWIFT may be more difficult to impose.”
“This is our vision and strategy,” says Closier. “Hedge fund
asset managers need a provider, which has evolved to provide a Post Trade
range of services, including back office outsourcing. These play- The European post trade environment is of equal importance
ers want to concentrate on core activities and outsource their to SG GSSI. Closier explains: “Even before post trade is consid-
back office to us.” ered, we face the prospect of consolidation between the London
Stock Exchange, Euronext and the Deutsche Borse.
Location Only after this consolidation can consolidation of the post
Back office outsourcing opportunities are case-specific trade environment, comprising Eurex, LCH.Clearnet, Euroclear
depending on the location of the institution. “The situation in and Clearstream be considered. The evolution of Euronext,
France is not the same as it is in the US, the UK, continental LCH, and Deutsche Borse will be a defining step for the organi-
Europe and Asia,” says Closier. “The US is a very different mar- sation of post trade activities within Europe. There are a lot of
ket, with bigger players and bigger potential clients. The US possibilities, depending on the outcome.”
comprises a specific model, called correspondent clearing. Not
only does the model involve outsourcing of the back office, but
the entire clearing account. The UK market, on the other hand,
“As a provider of securities services
comprises two models, a correspondent clearing model and a
model whereby only the back office is outsourced. The latter is
it is important to build a platform
fairly new and is the type of model we have in place with ING. based on low cost, critical mass
The back office outsourcing model recently emerged in the US
and is still regarded as a new market.” and sufficient automation”
The emerging model, to which Closier refers, involves out-
sourcing of the back office, but not the account or clearing The current settlement scenario, comprising Euroclear in the
functions. “We are very interested in the back office outsourcing Euronext zone and Clearstream in the Deutsche Borse zone,
model in the US,” says Closier. “We are also interested in two contributes to a fragment post trade environment. This frag-
prominent business lines in the UK, namely outsourcing for mentation extends to the regulation of capital markets. Closier
brokers and banks.” While the US and the UK present specific explains: “We are lacking a single European regulator. Each
areas of opportunity, Continental Europe is a different story. country has specific regulation in order to govern the function
“Europe is an interesting market with great potential, but it is of the trustee. As a consequence of country-specific regulation,
completely different to the UK, where the outsourcing market is trustees need different platforms. But in five or 10 years time,
growing,” says Closier. “In Europe outsourcing presents a mar- the situation in Europe will be different. We can expect frag-
ket for tomorrow. The maturity of the market on the Continent mentation to persist for the next two or three years. Beyond this
differs from region to region and, from a business point of view, we can expect further consolidation. It is already difficult to
it is important to have a clear view about development of new develop a securities services business in Europe. You need to
markets. If you don’t develop at the same pace as the market, continually develop IT systems and new platforms. If the future
you present a problem for your clients and your revenues. of the infrastructure in which you operate is unclear, it becomes
Timing is very important.” difficult to develop new projects.”
Automation Competition
Productivity and STP are other important concerns for Closier The prospect of further consolidation is not limited to the set-
and his team. “As a provider of securities services it is important tlement infrastructure and regulation. Service providers in
to build a platform based on low cost, critical mass and suffi- Europe are also affected as US providers continue to enter
cient automation,” he says. “While SWIFT is a very important
step in the quest for automation, it is not the only solution SG GSSI staff by geographical region (March 2005)
through which automation can be achieved. SWIFT cannot Oceania/Asia - 6%
solve all problems relating to automation. It is merely a step The Americas - 20%
towards automation.”
As a securities services provider, SG GSSI’s is eager to use
SWIFT in as many ways possible. Closier explains: “Even more
important is the extent to which SWIFT is used by the client. It
is important that our relationships with banks and institutional
investors involve the use of SWIFT by all parties in the chain.
Links with clients can be more easily established through the United Kingdom - 9%
use of SWIFT. However, if your client happens to be a hedge
fund or an asset manager, it becomes difficult to impose SWIFT
in this scenario. You can impose standards, but these depend on Continental Europe - 65%
the client’s usage of SWIFT. The differences in SWIFT usage Source: Société Générale
Vive La
strong institutional investor franchise. Our main activity is
now linked to the institutional investor client segment.
This may come as a surprise to those who perceive us
firstly as a clearing bank.”
Third Parties
According to Bernard Blaud, Head of Institutional
Investor Sales, The vast majority of BP2S’s business is con-
ducted through third parties, excluding clients of the wider
BNP Paribas group. “We intend to work with more asset
Difference
managers who have traditionally been locked in to their
wider banking group,” says Blaud. The business of securities
The market for outsourcing in France was impacted by the
West when State Street was appointed middle office out- services providers in France has
sourcing provider by AXA’s French operations. “In the
French market, we are seeing increased competition from
wide ranging impacts on the
the likes of State Street, Dexia and the Bank of New York rest of Europe.
(which has a joint venture agreement with Natexis Banque
Populaire)”, says Blaud. “But there is more to come in the
way of middle office outsourcing projects.”
BP2S regards its global custody and depot bank unit as ISJ speaks to providers to find
core securities services. “We have strongly increased the
number of external clients and have maintained a leader-
out why
ship position for the last five years,” says Pasquet. “More
recently, we have developed the outsourcing of middle
offices in France and have integrated the middle offices of
our Group's asset management and insurance businesses.
In addition we see a lot of medium-sized deals coming to
the fore.”
The landscape for middle office outsourcing in France is
very different to other markets. Blaud explains: “Most of
the captive companies here belong to the banks, prompting
the service provider to take a different approach when
marketing their services. Our market is driven by the asset
management mandate. We are following this mandate and
keep an eye on whether the mandate is alpha or beta
driven. This distinction is important to our strategy. Beta
strategies are pricing driven whereas alpha driven strategies
would comprise more complex range of services. We expect
that 50 per cent of the buyers in this market are going to
diversify their asset management mandate. This will help us
acquire a majority of market share of non-client asset fund of funds and single hedge funds, which invest directly
managers in France.” in equities and shares. The fund of funds are generally
easier to serve. Hedge funds, which invest in equities and
Consolidation shares are more difficult to serve and most of the French
The shape of financial services in Europe is reflected by players encounter difficulties when accounting for these
the French market, particularly as far as consolidation is funds. In addition, the new international accounting
concerned. “Consolidation in our industry in France is by standards will make it difficult for French corporates to
no means complete,” says Pasquet. “We have developed a buy hedge funds, particularly those funds investing in cash,
strong and unique European franchise based on multi- due to the consolidation rules.”
domestic roots across Europe to serve our clients, while Going forward, the major market for BP2S lies among
having global capabilities. This strategy allows us to benefit asset managers and institutional investors who are not
from consolidation.” attached to a larger banking group. “The insurance market
Apart from France, BP2S has full service capabilities in all is also attractive due to the move towards unit-linked
major offshore and onshore European markets. This gives contracts,” says Blaud. “We’re looking at each of these mar-
us critical size, not only in the French market level but also ket segments closely.”
in the European market,” says Pasquet. In addition to asset managers, BP2S predicts further
Despite the growth of the hedge funds industry in growth within the financial intermediary segment. “We are
France, the ability to serve these funds is not everybody’s expecting demand for a more complex and more packaged
offer,” says Pasquet. “We have an equity,
“Hedge funds, which invest in equities and fixed income and derivatives clearing offer-
ing and provide execution, and financing.
shares are more difficult to serve and most of the The ability to combine a multi product
French players encounter difficulties when offering instead of being too specialised is
the future of the French market. We are
accounting for these funds” connected to all the major international
financial intermediaries, which are operat-
raison d’etre. “You need to invest in order to provide serv- ing in France, and international investors, including those
ices,” says Blaud. “You should analyse who is going to buy inside and outside of France. The challenge is to offer even
the hedge fund. There are hedge funds, which consist of more customised package to high demanding clients.”
Service providers in France agree that in order to survive
A Mature Market? on the French market, products should be packaged care-
fully. “What makes the difference between service providers
is the ability to deliver ad hoc services to the client,” says
Blaud. “The French market is at an advantage in that it
invested heavily in IT projects during the 1980s, whereas
the UK market only introduced Crest in the mid-1990s.
The French market is fully automated and the IT consult-
ing opportunities are luring small players who would like
to be involved in this market.”
Pasquet adds: “The closer, the better is not only a strap
line but a reality: without the local touch and a thorough
understanding of the way our clients are structured it
becomes difficult for providers to succeed”.
Investment
To become a scale provider in the French market requires
years of investment in technology and systems. Realising
this, Credit Agricole Group has partnered with Groupe
Caisse d'Epargne in order to leverage both providers'
investment in technology by combining their respective
investor services business lines. The unveiling of Credit
Agricole - Caisse d'Epargne Investor Services in July 2005
marked the creation of a force to be reckoned with in the
French market.
Guillaume Fromont, Member of the CACEIS management
board comments on the importance of the French market:
“The French securities services market is one of most
dynamic in Europe. The French fund management indus-
try has undergone strong growth, which is driven by the
success of cross-border distribution.”
Institutional and private investor clients in France cur-
rently offer excellent growth prospects for foreign fund particularly abroad. “At the same time we will continue to
managers looking to expand their business. develop our product and service offer and will concentrate
“This international-focused business development can only on growth and expansion in Europe,” says Fromont.
take place with the aid of powerful global
service providers,” says Fromont.
“Drawing strength from the quality and the
“the entire fund management business,
commitment of its two renowned sharehold- confronted with competitive pressure and new
ers, Crédit Agricole and Caisse d'Epargne,
CACEIS offers a global service to fund man- legislation, is reconsidering its business model”
agers on the French market.”
Fund management companies are confronted with strong Service Driven
competitive pressure to create innovative and sophisticated In answer to recent changes in the French market, global
products, which will enable them to increase their market custody provider Citigroup has added a range of new serv-
share. CACEIS became the depository bank and valuation ices to its stable. “We became a general member of Clearnet
agent of the first hedge fund governed under French law. three years ago,” says Jean Jacques Panvert, Securities
“Fund managers are compelled to concentrate on financial Country Manager France, Citigroup Global Transaction
management and are engaged in progressive outsourcing of Services. “This enabled us to accommodate clients who are
back office functions, which are comprised of two types. trading on Euronext and provide clearing and settlement of
Firstly, the standard processes, such as valuation, middle- their on-exchange transactions. We provide the same
office services and performance calculation, which used to service for electronic fixed income platforms such as Euro
be an integral part of a fund management company in MTS, MTS and BrokerTec.. We have $66bn of assets under
France. The second type of outsourcing is related to the custody in the French market and as a settlement bank, we
development of open architecture distribution. CACEIS is rank third for OTC settlements in Euroclear France. In
a provider of this fund distribution support service.” addition to clearing and settlement, we provide asset
As the French funds industry increases in size and com- servicing tools such as corporate actions, dividend
plexity, a follow-up of the distribution figures and related payments and proxy services.”
commissions is essential. This follow up is at the heart of Providers who are present in multiple markets are affect-
CACEIS' European Transfer Agent offer, which includes ed by the harmonisation of the Euronext markets, which
multi-channel order collection and a multi-lingual call cen- includes France, the Netherlands and Belgium. “This har-
tre, calculation and payment of commissions and monitor- monisation will imply a lot of technology developments
ing tools for all of the distribution networks. for all providers,” says Panvert. “Providers need to develop
The need for scale also impacts a provider's ability to their IT systems in order to face the challenges of this har-
offer competitive pricing. “Only the monisation. Harmonisation also requires investments in
large, profitable players can finance terms of human resources. Several working groups have
the considerable investments required been created to discuss these harmonisation proposals.
to cover all the needs for clients, Citigroup is actively participating in these groups.”
which includes assistance with The upside of Euronext harmonisation is that it has cre-
international development projects,” ated outsourcing opportunities for custody providers who
says Fromont. “Scale also ensures treat technology investment as their core competence. “We
providers can lobby in a heavily are seeing several new requests in this regard,” says
regulated business, so that legislative Panvert. “We are providing these outsourcing services to
decisions taken by French governing some clients already. The trend is definitely there. Our
bodies are made with the interests of clients are mainly non-resident and need an expert in the
our customers' business development French market. Our aim is to unbundle services, to provide
in mind.” Guillaume an 'a la carte' service for foreign trading members in the
The CACEIS partnership is present Fromont French market. In the past, foreign members were chan-
in several European countries, includ- nelling all of their clearing and settlement through their
ing France, Luxembourg, Ireland, Spain, Belgium and custodian bank. Thanks to the harmonisation, the client
Holland. “This combination of business lines is just one could choose certain services from his correspondent bank
stage in the process of European growth which can be based in Paris. For example, we have certain clients who want to
on partnerships or acquisitions,” says Fromont. “We have become individual clearing members and continue to use
the full support of our shareholders, who are the major Citibank Paris as a settlement agent”.
players in European banking.” The requirement for scale will ultimately lead to further
The unavoidable factors of security and cost reduction consolidation in the French market. “You need a certain
drive large fund management companies to outsource, and critical mass in order to reduce your costs and maintain
consequently make a decision to focus on their core busi- your margins,” says Panvert. “In the last few years we have
ness. “Nowadays, the entire fund management business, seen a few mergers and acquisitions in the French market.
confronted with competitive pressure and new legislation, Today we are seeing more partnerships.”
is reconsidering its business model,” says Fromont. Partnerships are largely based on a sharing of IT systems
CACEIS is a supplier of complete services and is focused and platforms. Citigroup STP rate is at 99 per cent. “For
on accompanying clients in their development projects, the last seven years, we have automated our processes as
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Analyse this..Future Perfect?
ISJ invites service providers to comment on the past year and where they
see major opportunities going forward
Dai Bedford, Partner and co-Head of Eurasia, Capco Chris Poikonen, Senior Vice President Relationship
Management, eSecLending
Benjamin Franklin famously said ‘…there are only As we near the end of 2005, securities lending market par-
two things in this life that are certain…death and taxes’. ticipants can confidently state that it has been a good year
If Franklin had been around in the 21st century he may for the industry. Lenders, agents and borrowers alike have
well have added ‘regulation’ to this statement. benefited from hedge fund growth and demand, as well as
In fact, not only has enhanced regulation clearly been a robust proprietary trading activity. The end result will be an
feature of 2005 and will certainly still be for 2006; the overall increase in volumes, a healthy yield enhancement
nature of regulation has also seen an interesting trend trading season and a growing demand for asset classes
shift over the last year or so. such as corporate debt and emerging markets.
Whereas once, it was predominantly control-orientated Beneficial owners, now more than ever, are actively man-
and focused on a company’s ‘reporting’ and ‘compliance’ aging their securities lending programs. They are more
processes, take Sarbannes Oxley and IFRS for instance, closely examining the options and tools available to them
we are now seeing a substantial shift towards regulation and making better informed lending decisions. Many bene-
which goes right to the core of a business and in doing ficial owners are introducing competition and utilizing vari-
so aims to change the way a company operates. ous routes to market, which are allowing them to safely
At Capco, our role is to advise the financial services increase returns, mitigate risk and achieve greater control
industry on how they can be both efficient and effective over their programs.
With the growth of more actively managed multiple
in competitive markets. provider securities lending programs, third party lending
Over the last year, with the arrival of MiFID – the agents, technology providers and market data specialists
Market in Financial Instruments Directive – we have seen have realized continued momentum. Traditional custodial
how rapidly encroaching regulation is impacting how providers are also increasing their third party mandates as
clients go about achieving their goal of operational excel- they continually adapt to an ever changing marketplace. As
lence. a result, the lines that delineate custodial lending agents
We are therefore advising our clients that they should from third party lending agents have become increasingly
use the ‘burden’ of regulation to their advantage rather more blurred as all seek to compete in this evolving space.
than fight against it. 2006 and beyond should offer continued growth and
Likewise, SEPA - the Single European Payments Area opportunities for those well positioned in the marketplace.
and the related pricing directives, normalising Firms that seek to diversify their focus from strict yield
domestic and cross-border charges for payments, is enhancement trading and capitalize on new markets and
already having a substantial – in excess of EURO 5bn asset classes should be poised for future success. Collateral
annually - impact on payment revenues. flexibility will also become increasingly more important in
Compliance with the emerging endgame is the years to come. The short-term cash markets should
complicated and something the industry is likely to continue to provide yield opportunities with increased bal-
spend between EURO 6 bn to EURO 10 bn on between ances fueled by the borrowers’ relatively low cost of funding.
now and 2010. Non-cash pledges and receipts should also remain in favor
With MiFID’s emphasis on best execution and SEPA’s as borrowers seek off-balance sheet transactions.
focus on price control, regulation is now not only looking Regulators, auditors and boards of directors alike are also
to monitor business control but is intervening in core becoming increasingly interested in securities lending.
business activities under the guise of increased con- Trading practices and methodologies, as well as fee arrange-
sumer protection. ments, are being reviewed in greater detail. As such, trans-
This is a clear trend, bringing regulation into the parency is becoming more relevant to all practitioners.
drivers of business strategy and will have the affect of The outlook for the securities lending industry in the coming
further altering the balance between regulators and the years is decidedly positive. This value-added activity
regulated. remains a low risk alpha proposition for beneficial owners
and a solid source of market liquidity. The opportunity for
growth should continue for those attentive to supply and
demand forces, the ever changing regulatory environment
and an increasingly more competitive landscape.
22 INVESTOR SERVICES JOURNAL
Analyse this...Future Perfect?
Joyce St Clair, Executive Vice President, Northern Trust Bob Cumberbatch, European Business Lines Director, Interactive
Data (Europe) Ltd
Asset servicing, in common with any service industry, will
always be driven by customer requirements. In today's tough During the past year the financial industry has dealt with
and crowded market place, providers are not only under pres- more and more regulation, such as the EU Savings Directive
sure to deliver low cost, high quality services but also to pos- and the Market Abuse Directive. This looks set to increase
sess the capabilities to support their clients' growth. This with the Financial Services Action Plan (FSAP), which identi-
involves providing a 'high-touch', integrated service to a fied 42 measures designed to abolish ‘national’ obstacles to
diverse client base, from pension funds to fund manager the integration of European financial markets by 2008.
clients. Despite the recent announcements regarding F&C and These include the Capital Adequacy Directive (Basel II),
Mellon and Schroders and JP Morgan, the current appetite for UCITS III, the Transparency Directive and, of course MiFID.
investment operations outsourcing is at unprecedented levels. For the market data vendor community, such regulations
We expect to see a steady stream of major deals announced introduce changes to existing datasets or require new data
over the coming months and years. We believe there will be an to be collected, processed and distributed. Some require the
increase in component outsourcing alongside a consistent flow complex relationships between issues and issuers to be
of large deals in the foreseeable future. established and maintained. However, regulations – and
The spectacular growth in the alternative fund sector and the standards – can bring new opportunities. The adoption of
continued importance of Jersey and Guernsey as offshore fund the Unique Issue Identification (UII), the ISIN, Ticker and
administration centres will remain important drivers of new Market Identifier Code, suggested by the MiFID sub-group
business for asset servicers, who will need to focus on technol- for Reference Data, will open up the European market to
ogy and client service innovation to stay ahead of the game. financial information vendors. And MiFID will make it even
Those providers with their sights set on continuing to succeed more imperative that institutions have access to several
in the future will have to be prepared to step up to the plate sources of timely and reliable pricing information to achieve
and demonstrate rigorous process, procedures and corporate 'best execution'. Institutional customers will also need good
governance in a risk managed framework. Offshore capability quality reference data to help enable STP – especially for cor-
has also become an important factor in the battle for market porate actions processing.
share. The phenomenal growth in the Irish funds industry over With Basel II and UCITS 111, high quality reference data is
the last decade has been remarkable and competition remains vital to link securities data (issues) to their respective issu-
healthy. The shift in asset ownership from bond and money ing entities and their ultimate parent entities, whilst depend-
market funds to equity holdings and alternative investments able mergers and acquisitions data will be especially impor-
has led the fund industry to focus on ethics and place investors tant post MiFID. Interactive Data has been steadfast in
centre-stage. It is incumbent on regulators and asset servicing addressing these issues. Take, for example, FT Interactive
providers to have the right infrastructure and risk management Data’s service of ISO 15022 formatted corporate action files
processes in place to service all types of funds and protect the – including rights issues, bonus issues, mergers and acqui-
rights of investors. Further pressure will be placed on the finan- sitions, and redemptions – delivered directly via the internet
cial services industry going forward. The growth in demand for or via the SWIFTNet network. And FT Interactive Data has
tax transparent, cross border, pension pooling solutions will again been awarded the B.I.S.S.* gold award for its corpo-
also be an important driver of new business and innovation in rate actions and reference data. MiFID Unique Issue
2006. The continued emphasis on transparency, managing Identification (UII) - ISIN, Ticker & Market Identifier Code:
costs and enhancing administrative efficiencies will fuel this adoption of this opens up Europe to our products and serv-
trend. Northern Trust is widely recognised as being a leader in ices; may impact our UK revenues but could do very well in.
the market in this field. We are the first global custodian to Aside from. regulatory impact, the growing hedge fund
have launched a pooling solution for a multinational client that industry brings opportunities for real-time data vendors like
is able to support multiple country plans, multiple countries of Interactive Data’s ComStock business. And in the fixed
investment and multiple asset classes. At Northern Trust, we income markets, asset and mortgage-backed securities, and
are reaching the end of an exciting year in our continued devel- credit default swaps, have become increasingly popular. In
opment. 2005 saw our acquisition of Baring's Financial Europe FT Interactive Data now evaluates around 1,100 indi-
Services Group ("FSG"), our entrance into the UK outsourcing vidual tranches of this type of structure and plans to extend
market as a major player via our outsourcing arrangement with coverage to include pre-payment sensitive security types.
Insight Investment, the launch of our tax transparent pooling Market timing and time zone arbitrage have been
solution and some landmark mandate wins in the global cus- prominent in the financial news, representing another
tody arena, including the recently announced win of AP4. New opportunity. FT Interactive Data’s Fair Value Information
opportunities are constantly for the taking in a fast moving Service was recently made available to European domiciled
marketplace. Those providers best placed to capitalise will be funds, following the success of its groundbreaking service in
leading product innovators offering a high-touch, high-tech North America.
integrated service.
Richard Warne, head of client management for JPMorgan Paul Stillabower, Global Head of Business Development,
Worldwide Securities Services in EMEA HSBC Securities Services
Outsourcing was the topic everyone was talking 2005 was a very exciting year in the securities services
about in 2005, with fund managers increasingly accept- business and HSBC expect this trend to continue. Key
ing it as the norm. macroeconomic and socio-cultural factors continue to
JPMorgan expects to see the current level of out- provide opportunities and challenges for our clients.
sourcing to continue into next year. These include:
The industry may start to see a move towards more i. pension reform, due to corporate and state level deficits and
component-based offerings, but single-component increasing pensioner-to-worker ratios, leading to higher sav-
deals are likely to be less common due to the intrinsic ings ratios, especially in Europe and Asia;
linkages that exist between many areas of processing. ii. increased regulation and corporate governance, with
While buyers may be reviewing their suppliers and associated compliance costs rising;
suppliers may, in turn, be reviewing their platforms, the iii. discerning clients sensitive to price, quality and risk across
outsourcing trend is here to stay. the whole value chain;
Looking forward to 2006, the two key themes on iv. infrastructure and markets continuing to integrate, but more
which JPMorgan sees continued focus are regulation slowly than hoped; and
and the use of alternative asset classes. v. increased use of alternative instruments across all product
On the regulation side, clients will continue to need structures and client segments, which provide new
help, whether it is with Sarbanes-Oxley, Proxy Voting challenges in internal operational efficiency and the external
Reporting or Chief Compliance Officer requirements. market infrastructure.
Basel II will continue to be an issue and with the As a result, our clients will focus on cost efficiency,
impending deadline for more disclosure, operational compliance, product development, distribution and
risk will increasingly be a big area of focus with invest- improving the investment process. Technology dollars
ment managers looking to their providers for help in will be directed towards front office activities and the
addressing these issues. Basel II has also meant an cumulative effect will be an increasing emphasis on out-
increased desire for secured lending, which will put the sourcing to providers with the necessary focus, industrial
pool of acceptable collateral under strain, prompting strength breadth of capabilities and reach to underpin
instruments such as Asset Backed Securities (ABS) and changes to operating models. This should lead to fewer
Mortgage Backed Securities (MBS) to become more outsourcing relationships per client, as each looks to
acceptable. gain from advantages in pricing and service quality
The tremendous growth in alternative asset classes through bundled arrangements.
also represents new challenges. At HSBC, we will differentiate from our competitors by
These markets are now so large and influential that continuing to:
they can no longer be overlooked by many investors. i. invest in the people who support our relationship-driven
We are increasingly being asked by our clients for philosophy and high-touch, top quality service model
solutions spanning a growing range of product and across all client and geographic segments;
asset classes, such as OTC derivatives, hedge funds, ii. provide access to our broad array of market-leading servic-
leveraged loans and structured products. es, which leverage our global banking capabilities in areas
Pension funds, for example, are frequently turning to such as payments and cash management, execution,
alternative assets as they look for new ways to meet research, advisory, lending, structured products, transition
their liabilities. management, consulting and risk management;
Processing and valuing these instruments is complex, iii. focus on our unique multi-domestic capability to grow in
and we are seeing a growing demand for services that Europe’s largest markets, in Asia, the Middle East, and
help to ease the operational burden of investing in and large emerging economies such as China, Brazil and India;
accessing these disparate markets. take advantage of HSBC’s superior coverage of alternative
Investors may find the accounting and regulatory instruments and emerging markets, where our clients often
rules for these instruments to be a challenge, but they need the most assistance; and,
can expect an upsurge in the services available todeliver iv. provide competitive and transparent, relationship-based
support. pricing, which is driven by our scale efficiencies.
There are a number of core areas that will drive our busi- While there is much debate about transparency, the trends
ness and the industry in general in the future. Here I have toward single global book trading systems, integration of
identified some of the main ones... equity finance and repo, and inter-firm connectivity, is
Markets - the slower growth market environment shows no unmistakable.
sign of significantly accelerating in the coming year. As a
result, service providers with the ability to adapt to a single- One Good Book?
digit-growth environment will be best positioned for the Having explored new markets and new instruments, many
future. securities finance organizations are investing in consolidat-
Customers - The demand for full service, integrated offer- ing securities finance trading and reinvestment into a sin-
ings - beyond just traditional custody - continues to grow. gle global book. A single global book system gives securi-
Capabilities such as fund administration, fund accounting, ties finance traders worldwide the ability to see all long and
transition management, securities lending and transfer short positions by instrument, currency and location, and
agency are now viewed as key value added servicing require- all outstanding contracts and current deals in negotiation.
ments. In the past, the major barriers were scalability and speed
Many of State Street’s recently announced UK pension regardless of location, in the face of increasing numbers of
fund mandates span a broad spectrum of services. positions and open contracts.
Recent examples of such mandate wins include State Street’s Today, technology is up to the task. The most effective
appointment by Lloyds TSB Group Pension Schemes to pro- global book systems are those that are fully integrated into
vide investment services for the Schemes' assets, which are operations and settlement.
currently valued at £11 billion.
Under the terms of the five-year agreement, State Street The Marriage of Equity and Repo
will provide custody, fund accounting, securities lending and Historically, the equity and repo desks have been distinct
bespoke reporting services to the Lloyds TSB Group Pension and often competitive with each other. As securities
Schemes. WM Performance Services, the European perform- finance (lending and repo) becomes more central to prime
ance measurement division of State Street, will also continue brokerage and more driven by hedge fund requirements,
to provide performance measurement services. the need for firms to provide clients with one point of con-
The terms of the initial mandate, signed in 2000, covered tact and an integrated set of offerings is more crucial.
only custody, with the other services having been added grad- As hedge funds implement trading strategies requiring
ually over the course of the relationship. borrowing equities, repo financing, and tri-party or swap
Regulatory - In a post-Myners environment, customers support, they anticipate these activities coming through
focus on the need for transparency, along with comprehen- one set of relationships within each prime broker relation-
sive analytics and timely evaluation services. ship. Hedge funds will increasingly seek an independent
No longer will monthly reports suffice. Asset owners want link that provides consolidated connectivity to multiple
daily, even hourly (!) updates on their investment perform- prime brokers.
ance, coupled with insightful analysis on how to interpret
this data. Growing Faster
Lastly, the investment operations outsourcing arena also In most countries, high volume has been a mainstay in
continues to evolve. domestic stock loan, with international stock loan following
- Mistakes within the outsourcing space can have an the same trend. The general collateral (GC) business (easy
enormous impact on business. More than ever, investment stocks) is the first step in automation for most firms, using
managers are looking for a proven provider with experience. systems and communications technology.
- Many of the providers have secured their initial “launch” client, Most cost savings come from straight-through process-
so now the market will progress to another level, as each service ing between firms. A growing percentage of GC business is
provider seeks to prove their value proposition among the now conducted over inter-firm networks, in which orders
competition. are routed and filled automatically.
- Even with the current state of the markets, fund managers At least one U.S. securities finance network processes
will still look to the benefits of outsourcing to provide a business 100,000 orders and executes 20,000 GC borrows and
advantage. loans per day in a completely automated fashion.
John Mayr, head of marketing and business Neil Vernon, Senior Product Manager,
development at SimCorp SmartStream Technologies
1) Exception Management
Announcements of new outsourcing deals for back A client recently disclosed that between October ’04 to July
office asset management have been relatively thin on the ’05 they were subject to a 40 per cent increase in transac-
ground in Europe over the last twelve months. tion volumes.
There have been at least two major project failures This type of increase is not unusual, many firms are experi-
and several other projects are rumoured to be in trouble. encing similar or greater growth fuelled by improving eco-
This suggests that the industry is in a period of transition. nomic conditions and new trading methodologies.
Among the reasons for this is that outsourcing service The opportunity for exceptions to occur between point of
providers are finding it more difficult than they imagined execution and settlement is all too frequent and the associ-
to move new clients onto common platforms. ated costs all too high – typically firms can lose between 15-
This should not really be a surprise – after all, the range 20% of their profits in any given year.
of alternative systems suppliers available in this market, This risk increases as transaction volumes rise and as such
with which service providers compete, would indicate that one of the challenges we believe institutions will seek to
there are diverse requirements in the client community. address in 2006 is how to keep control over operational
Arguably, many unusual requirements of any given risk and cost with expanding volumes.
client are at the periphery of core processing or originate Proactive Exception Management is one area that offers
in processes upstream from the outsourced functions and firms a tangible ROI – by creating an audit and control
so should not be the concern of the service provider. architecture over the entire transaction lifecycle companies
Frequently though, the asset manager will feel that these are able to identify failing transactions before they fail.
special requirements differentiate them from their com- Real-time management leads to faster resolution
petitors, so the service provider cannot just override or and prevents the error from propagating to down-stream
ignore them. systems.
So if service providers are to crack this puzzle, which Errors are automatically routed for resolution and fixed
they must to achieve sustainable profitability, then it is before they get to the counterparty. Ultimately, client service
likely that only those with the most flexible of platforms, is improved and operational cost and risk reduced.
that will accommodate such diversity, will flourish.
This will be difficult for many service providers that 2) Insourcing and Outsourcing
have outmoded platforms made up of a patchwork of Although Outsourcing has recently been in the headlines
incompatible applications, strung together with hard-to- with several high profile contract terminations there is still
maintain interfaces and human intervention. a great deal of interest in the area.
Either they will have to invest in new platforms that Firms, especially custodians, are still interested in turning
reduce complexity or they will eventually have to bow out their cost centres into profit centres.
of the race. Those who believe they excel at specific processes will
The most flexible platform is one based on seamless look to insource work from others in their value chain.
processing with a single database. This allows new busi- A good example in 2005 was Citigroup Global
ness functions to be turned on or off within the system Transaction Services’ creation of a flexible Middle Office
without having to build or change complex interfaces Trade Operations platform to service their asset manager
between applications. clients.
It makes the system both scaleable and able to support The firms likely to succeed with their Insourcing strate-
strategic changes in the business mix. gies will look to invest in scalable technology, capable of
Unless service providers realistically reassess the way supporting multiple instruments, all major industry stan-
they provide their service, they can expect to see erosion dards
of business through their inability to support the true and providing full connectivity to central and local match-
needs of their individual clients. ing facilities.
By harnessing this technology they will be able to create
outsourcing platforms that allow them to benefit from
economies of scale and yet still deliver customisable servic-
es for their clients.
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JOURNAL JOURNAL
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Analyse this..Future Perfect?
Nadine Chakar, CEO of ABN AMRO Mellon Frank La Salla, Managing Director, Pershing
The stringent regulatory environment the industry has been The world may be getting smaller with each passing year,
experiencing in recent years with the advent of Basel II and but investor demand for access to global markets continues
Sarbanes-Oxley will continue unabated. Clearly their require- to grow. Increasingly, investors are turning to their invest-
ments will have a major impact not only for ourselves as ment professionals for access to a broader array of product
providers, but for our institutional investor clients as well. choices that extend beyond global currency transactions to
We can expect to see an increased demand for sophisticated include managed accounts, mutual funds, and portfolio eval-
reporting tools - especially on the multinational front and, in uation services. The interest in—and investor demand for—
particular, for pension funds and large-scale financial institu- these global financial products and services will continue to
tions. As a provider it's therefore incumbent upon us - and gain traction throughout 2005 and financial services organi-
imperative - to ensure that we establish greater clarity for clients zations will be challenged to keep pace.
with regard to their meeting the obligations set by European Further accelerating this trend is the drive to meet the com-
directives, and to provide them with cost- and resource-efficient plex needs of the rising number of high-net-worth investors
solutions. The directives will also be expensive to incorporate, globally. CapGemini’s World Wealth Report, published this
and this is a burden all industry players need to recognise. Fee year, predicts that global high-net-worth wealth will increase
pressures will continue. I appreciate that I'm far from alone in at a compound annual rate of 6.5% during the next five years,
predicting further consolidation among providers, but I'm cer- and by 2009 could total $42.2 trillion.
tain the trend is inevitable; it's just unclear at this stage whether Adding to the challenges of meeting investor demand for
we'll see this occur in 2006, '07 or beyond. Over the last year more global products and services and delivering solutions
every major player in the industry has come to recognise more tailored to the needs of emerging high-net-worth investors
profoundly the complexities inherent in major outsourcing worldwide, is the drive to keep pace with advances in tech-
deals. Looking ahead, the issue of cost, pricing and even the nology. In today’s environment, investors have come to
economic model itself may witness a degree of evolution expect access to their account information and a wealth of
and/or change. Certainly, in addition to full-blown outsourcing, market data—as well as well as the ability to conduct trans-
you are likely to see an increase in a modular approach to this actions—at the touch of a button. And this means providing
service, whereby providers are delivering on very specific areas investment professionals and their clients with anytime, any-
for their clients' business needs. Increasingly I expect providers where information access.
will break away from competing in the commodity service busi- These developments, combined with the need to meet the
ness and will make efforts to find new ways of providing more unique regulatory requirements across the globe, are among
value to clients by carefully targeting their more niche require- the growing number of factors that are spurring the need
ments. I'm talking about an emphasis on partnership, and on among financial services firms to establish outsourcing rela-
providing the client with a premium value-added service. tionships with leading solution providers that have global
There's likely to be further debate about the changing role of the reach. The move toward establishing outsourcing relationships
global custodians, in which ABN AMRO Mellon for one will be provides financial services firms with the scalability they need
working in partnership - in a consultative manner - with both to efficiently manage their business and meet client demand
the client and their consultant. You'll see consultants remain- for access to a broad array of products and services. And this
ing focused on plan sponsors, ensuring that the sponsors meet is a shift that will continue to gain momentum. In its 2005
their legal, regulatory and financial requirements - kicking the report on outsourcing trends, Cerulli Associates observed a
tires of the providers, as it were - to ensure we have good asset trend in the U.S. that is beginning to cross over into the global
safety, and are provisioning a high-quality diverse product set financial community too. The report showed that the most
that can deliver tailored solutions. important characteristics prospective U.S. customers consider
Nowadays institutions rightly expect that their provider can when aligning with a provider are the need to achieve scalabili-
take off-the-shelf products and be able to customise them to ty and the capabilities an outsourcer can deliver to help them
maintain client relationships.
achieve an exact fit to their own unique needs. Also, and of equal
The Age of the Global Investor has arrived, and in 2006
importance to the client, I believe, is the need for us to provide
financial services firms will continue to face the challenges of
the necessary intellectual capital as a core part of the service
meeting the investing needs of a diverse client base.
solution and its delivery, in order to best handle the increased
Unquestionably, those that will achieve the greatest level of
complexities of our clients' business - for example, in the scope success in growing their businesses will be organizations
of structured products and derivatives processing. In all, I antici- that leverage a deep pool of resources and access not only to
pate an exciting and challenging year ahead, in which we at ABN international markets, but to a comprehensive array of finan-
AMRO Mellon look forward to delivering, and exceeding upon, cial products and services that are more global in nature than
the expectations of our clients and other stakeholders, and to ever before.
vigorous participation in the industry's key debates.
Pascal Scatozza, Fund Administration and Middle Office Glen Good, ADP Investor, Communication Services
Outsourcing Product Manager at BNP Paribas Securities
Services in Luxembourg. Over the last twelve months, there has been increasing
activity in the areas surrounding shareholders’ rights and
Within the funds of hedge funds arena, we predict that the mechanics of proxy voting voting. The increasingly suc-
trade processing, valuation and reporting will become key cessful bedding down of Paul Myners’ recommendations
packages of a hedge fund offering. from his UK proxy voting review of January 2004 has been
During meetings with clients interested in creating funds of reflected through the past year by improvements to the
hedge funds, the question of hedge funds shares execution institutional investors’ voting response rates and the huge
often becomes a key discussion point; this is easily under- rise in volumes, from a FTSE 100 and 250 perspective, of
standable when looking at the peculiarities of the alternative institutional votes returned, alongside increased numbers
funds industry that is today worth 2,200 billion US$. of meeting announcements made, through CREST’s proxy
Even though worldwide hedge funds assets are mainly voting functionality. On the European front, there have been
composed of single manager hedge funds (it is estimated two market consultations, over the last eighteen months,
that 70 per cent of the alternative investment funds are single relating to shareholders’ rights by the EU’s Internal Market
manager hedge funds), it is important to note that the Directorate with the intention of publishing either guide-
European hedge funds market is very FoHF oriented. This is lines or directives sometime between November 05 and
mainly due to the fact that for the time being, the industry January 06. In Germany, the UMAG regulations have
including regulators, asset managers, custodians and prime recently been implemented, most noticeably for overseas
brokers favour the risk diversification offered by this type of investors by bringing about a vote entitlement record date
product. of twenty one days, and in the UK the publication at the
Even if these vehicles are usually easier to manage from an beginning of November of the Company Law Reform Bill,
investment manager perspective, the custodian banks of which contains a number of improved references to share-
such schemes have to cope with the unautomated and illiq- holder communication and proxy voting, including the dis-
uid characteristics of the underlying positions. Once a FoHF closure of voting activity. I believe the biggest impact will
allocation manager has determined the investment horizon evolve from the EU Internal Market Directorate’s considera-
and performed proper due diligence on the target hedge tions which may result in, amongst other things, the recog-
funds, the first role of the custodian bank is to support the nition of beneficial shareowners’ voting rights; promotion
Management Company in the execution of the purchases of of electronic delivery for meeting notifications and associat-
shares. The experience of the staff and the appropriateness of ed documentation to all shareholders; an end to share
the system are of the utmost importance when dealing with blocking and the introduction of record date entitlement;
offshore investment vehicles execution. Actually, since appli- enabling of electronic voting; and publication of meeting
cation forms are usually defined fund by fund, the paperwork results – in effect, and dare I use this phrase, universal
handled by the custodian is problematic for someone that enfranchisement. In addition, the use of electronic media
has never dealt with hedge funds execution. The custodian will improve the efficiency of the current proxy voting
has to make sure that cut-off times, payment instructions, processes and should offset any increased costs which may
sub-administrator details and all the other required informa- result from recognising beneficial owners’ rights. With
tion are properly indicated in the application or redemption regard to the very recent activity in Germany and the UK,
documents. one can assume that greater numbers of overseas investors
The depth of relationship between the custodian bank and may now look to vote at German meetings as the introduc-
local administrators is also key in the tracking of transactions tion of record dates should remove the lingering blocking
and confirmations. Without a robust order management sys- market perception which can be found amongst many non-
tem and skilled staff, the trade monitoring process becomes resident shareholders. The disclosure of voting activity
a nightmare since settlement cycles in this industry may requirements to be found within the UK’s Company Law
sometimes amount to several months. In the interim it is Reform Bill may prove to be a springboard for those who
essential to report pending positions to the investment man- support such a process to be implemented on a global
ager who needs to closely monitor his funds allocation. The scale. Finally, the introduction of ICJ’s service should work
custodian also needs to provide the asset manager with up towards relieving the pressure felt by many overseas
to date valuation reports that include both estimated and investors in turning round their vote instructions within, on
final Net Asset Values. perhaps too many occasions, a very short period of time as
The custodian bank of a FoHF must relieve the asset they attempt to participate in many of the two and a half
manager of the administrative burden and provide online thousand meetings that normally take place over two days
reporting of trade status and portfolio valuations. at the end of June. It is believed that ICJ’s services can
improve the vote solicitation period for foreign shareowners
by up to eight days.
The New Outback administration support to fund managers and other institution-
al investors. Arnott also said, “master custody, however, is not
the panacea to solve all custody or administration issues, but it
can be the solution for some clients. It perhaps works best
Industry Challenges where a client has lack of scale. In order to be profitable, custo-
At the time State Street’s operating model was not consistent dians need to have scale meaning, they need a large client base
with those of its customers. “Then super funds were priced over which to spread the ever-increasing costs of technology.
monthly, requiring a lot of customized reporting,” said Travers. Clients face significant investment costs in technology such as
He acknowledged that, “a key challenge was the absence of ade- when systems have reached their use-by-date.”
quate mechanisms for customizing and at the same time, the Master custodians are held accountable to the duties, respon-
models that were in place simply didn’t meet standards and it sibilities and information provided in the investment managers’
was therefore financially not feasible to continue in that direc- compliance with their contracts, and monitor how efficient the
tion.” investment managers are in undertaking their investments.
There are a lot of changes in superannuation that have created
more opportunities for institutions like State Street to get back Consolidation
into the business of servicing Australian superannuation funds. Nevertheless, despite this growth the trend towards consolida-
Some of those changes are Australia’s new choice of fund tion has gripped the industry over the past few years and shows
regime, changes in regulations such as requiring that trustees be no signs of abating. If the consolidation of the corporate super-
licensed and, adds Travers, “those two things are important annuation arena had been the primary driver for change among
because the superannuation funds are looking at how appropri- the major custodians, then the advent of choice of fund is seen
ate their operating models are for the future of the schemes that as likely to accelerate the pace of that change.
the trustees manage.” Travers also said, “that is critical because With consolidation, one of the key challenges facing custodi-
regulation changes are creating additional cost burdens on the ans is that a smaller “boutique” fund or client, is acquired by a
superannuation funds and the choice of funds. This then sug- master trust or a larger fund. Dealings by the custodian with
gests that those funds have to be staffed to compete with the previous management are no longer current and chances are
investment managers who manage unit trust funds, mutual new management has an arrangement with another custodian
funds or managed product.” or something altogether different. It again comes down to a
Because of the regulatory burden and the competition facing question of scale: risk losing a fund when folding into a master
fund managers, superannuation funds are looking at what their trust, unless the firm is actually the custodian for the master
operating models need to look like in the future. “There is sug- trust as well. Travers added, “changes brought to the industry by
gestion that current operating models may shift to a daily pric- both consolidation and choice of fund have been forcing us to
ing regime resembling investment managers which is what State look seriously at the super industry once again.”
Street does well,” he added. In terms of how the custody market is evolving in Australia, a
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Country Focus - Australia
consensus seems to be difficult to find. Consolidation has been influenced by what the funds focus is. FRM’s senior vice-presi-
occurring within the custody industry to parallel with growth in dent Derek Goodyer says, “there is no doubt, however, that ben-
the superannuation industry. But according to a report by efits of hedge funds need to be balanced against the risks of
Angelo Calvitto, Director Relationships and Sales at ANZ including them in a portfolio because they are complex prod-
Custodial Services, he says he sees no evidence of consolidation ucts and their success is often dependent on the skill of the
at present but to the future sees technology as a key factor. manager.” From a custody standpoint, investment managers
JP Morgan Chase’s Arnott agrees: “Custodians need to treat must understand the complex nature of hedge funds when it
technology as a priority largely to keep up with advances in comes down to global clearance and custody network.
automation,” adding “Australia has one of the highest levels of Australian regulators provide clear policy guidelines regarding
automation when compared to global peers. In the case of the appointment of a custodian, largely necessitated by the com-
equities trades executed by investment managers, greater than plexities of automation required, pivotal to their custodial role
90 per cent of those trades are in STP (straight through in the trade cycle.
processing) electronic form. Contrast that with an investment
in unlisted unit trusts where, due to a lack of market Health of Australia’s Super Fund Industry
standardisation, all such transactions are subsequently subject The rapid net asset growth of Australia’s superannuation
to manual processing.” funds’ industry equates to close to AU $150 billion that will
need to be invested over the next five years, according to
Technology and Automation Executive Chair of Industry Fund Services, Garry Weaven.
Modern front-office systems generally do not require any Weaven recently spoke to Australia’s Committee for Economic
manual intervention in the processing of securities transactions. Development saying, “while there was no shortage of retail or
This is the concept referred to as “straight through processing” wholesale investor support into traditional sector investments
(STP). It ensures that once the deal is booked, subsequent set- (such as banks, or resources)” otherwise known as “sleep-well”
tlements and trade confirmation messages are transferred, and stocks, that he “perceives listed infrastructure investments may
statutory reports are generated without any manual interven- well be the next recipient of approximately AU $15 billion, into
tion. J.P. Morgan found that 85 per cent of transactions could be infrastructure where there is a high degree of concentration in
processed using STP. The remaining 15 per cent required some the Australian market.” Major industry super funds have been
element of manual intervention. Software suppliers have long averaging in excess of 20 percent per annum net asset growth
recognized the benefits of STP in the banking world and conse- over recent years.
quently developed integrated front-to back-office solutions in “Unless super funds want to spend their time buying and sell-
order to facilitate STP. The concept is not restricted to the con- ing BHP shares to each other, they are going to have to access
fines of banks, and extends to depositories and custodians. new investments either in new Australian assets or go much
From a custodian’s viewpoint, another key challenge they face is more heavily off-shore,” he said. Australia has created a world-
when the settlement function is outsourced to a specialist. leading system of savings and wealth creation to finance the
These institutions often use sub-custodians to deal with local retirement needs of future generations, as well as a healthy rate
settlements where, at the end of the trading, the responsible per- of economic growth and a sound public sector balance sheet.
son receives a list of failed and settled transactions, which may State Street’s Traver’s said, “Australia’s custodians and asset
occur when there are insufficient funds or stock in the client’s administrators play an increasingly important role in the safe-
portfolio. Because there are a host of manual intervention keeping of Australians’ investments and superannuation assets,
requirements between trading positions in the systems and as well as providing ever-broader administration support to
actual trades performed, the facilitation of settlements can be fund managers and other institutional investors.”
interrupted by a highly complex communication process that is
meant to ensure all deals are settled on time. Traditional solu- Stephanie Banks is a freelance writer, based in Sydney
tions fall short in supporting wholesale investors, especially
those utilising managed funds. The challenge is to benefit trade
efficiency, settlement and reporting information to and from a
variety of fund managers. Facsimile instructions, manual data Assets under custody and administration as at 30 June 2005 ($A Billion)
entry, lack of transparency, inconsistent processes, and opera- Assets
Domestic
Domestic Total Under
tional risk and investment delays, are common issues. Name Custody
Custody Domestic
Global
Admin
Custody
Domestic (AUD) Custody Transactions
Hedging Risk in Super Funds (Offshore) Assets (Master
Custody)
#
Hedge funds, along with credit default swap funds and deriva-
ANZ 27.20 48.30 75.50 0.00 5.50 330,000
tives, is an asset class fast growing in Australia. According to
ASTERON 5.90 0.00 5.90 0.00 5.90 3,960
Australia’s Financial Risk Management (FRM) group, various
BNY 0.00 0.00 0.00 48.50 0.00 0
hedge fund strategies have a relatively low correlation with tra-
BNP Paribas 125.40 0.00 125.40 0.00 147.70 298,167
ditional asset classes but are gradually evolving the same way Bond Street 27.00 0.00 27.00 0.00 0.00 #NP
private equity evolved years ago. The inclusion of hedge funds Citigroup 66.70 28.00 94.70 45.50 0.00 399,509
into a portfolio has notched up exposure as investors became HSBC 1.30 10.00 11.30 0.00 0.00 #NP
more comfortable with the concept. While information on the INVIA 9.10 0.00 9.10 0.00 0.00 #NP
Australian hedge funds’ market remains fairly limited, it is esti- JPMorgan 141.60 68.00 209.60 66.10 240.10 265,271
mated that, as at June 2004, there was at least $15 bn invested in National 166.80 58.00 224.80 43.70 269.60 482,138
these funds, in increase of AU $6 bn, or 65 per cent, year-over- *Other 0.00 0.00 0.00 1.80 0.00 0
year. At an aggregate level, the amount invested in still relatively RBC 56.20 0.00 56.20 4.40 43.80 445,392
small, representing approximately only 2 percent of Australian State Street 0.00 0.00 0.00 71.10 195.40 0
funds under management. Super funds have also taken the State 0.30 0.00 0.30 0.00 0.00 #NP
plunge and now invest on average between three and five per- UBS 4.00 0.20 4.20 0.00 0.00 104,486
cent of their portfolio’s assets. Mercer Investment Consulting Westpac 91.80 107.80 199.50 0.00 0.00 712,000
Group predicts that funds allocated into hedge funds will be Total 723.20 320.30 1,043.4 281.10 908.10 3,040,923
Source: ACSA
We have developed a genuinely customer focussed approach to delivering the Custody services you want.
To find out how ANZ’s custody capabilities can help your business gain global advantages, contact us on:
www.anz.com
Australia and New Zealand Banking Group Limited ABN 11 005 357 522 Item No. 53590 11.2005 W82909
Country Focus - Australia
back in-house when Rothschilds was pur- investment administration, then costs can checking accuracy of data received before
chased by Westpac. be significantly and adversely impacted input to the unit registry system, future
That said, a large number of retail fund due to the circular nature of the relation- product development must ensure maxi-
managers find themselves under mount- ship between fund valuations, unitholder mum automation of dealing interfaces to
ing pressure as dominant adviser distri- recordkeeping and striking unit prices. enable unitholder activity to be accurately
bution generates increased pressure for In many instances where there are two reported.
desk top data and analytical tools; at the different entities – client and administra-
same time, mature platforms and master tor or two different administrators – pro- Challenges
trusts are putting pressure on fund man- viding these services, if errors or omis- Last but by no means least, there are the
ager turnaround times for processing and sions arise requiring revaluations and challenges associated with the fund man-
unit prices. recalculations of unit pricing, then the ager’s call center and client relationship
Equally, over 70 per cent of the top 40 time and effort required to rectify errors management (CRM) structure. Many
wholesale managers (by funds under can be exponential compared to a bun- managers see unit registry being irrevoca-
management) have retail offerings in the dled proposition. bly wedded to call centre management,
market. The Australian regulatory and Recent anecdotes regarding year-end and so the administrator needs to allay
legislative environment is complex, with adjustments and recalculations confirm client fears of loss of control over client
changing requirements making demands this. relationship management. However, by
on systems capability, incurring costs and In addition, given the complexities ensuring automated STP feeds from the
increased levels of unit registry system
reporting, with a “there will be further pressure on retail fund to CRM systems, and
renewed focus on trans- ASP or remote real
parency and disclosure managers to review their internal unit registry time access to their
to the investors.
Therefore, there will
administration operations and technology” client’s records and
images, the client can
be further pressure on retail fund man- involved, there are many efficiencies that continue to control its investor base and
agers to review their internal unit registry can be gained from having one adminis- develop marketing tools around that.
administration operations and technolo- trator provide both investment adminis- To address the challenges inherent in
gy – prompting them to consider out- tration and unit registry in Australia. The providing accurate and cost-efficient unit
sourcing solutions. same is not necessarily the case in the UK registry services, administrators must be
However, for the moment unit registry and Canada, where it is far less unusual able to offer a solution that addresses a
outsourcing is the domain of boutique to find different entities providing unit fund manager’s strategic and technical
managers and start-ups, specialist whole- registry and investment administration needs. RBC’s own unit registry service
sale managers, and those small to medi- services to a fund manager. In these two model is driven by a robust and scaleable
um sized managers who have run into markets, the nature of the unit registry administration platform.
problems with their legacy retail unit reg- services provided means these services It is critical that our current technology
istry systems that are unable to support can be provided independently. That said, – InfoComp’s Composer platform –
increasingly sophisticated products, web the trend for fund managers is now to interfaces with our other core systems to
enablement and STP. This is down to the look for bundled solutions, as it enables enable full service management for unit
availability of solutions within the market them to obtain greater economies of scale holders by fund managers, and which is
as much as it is due to the complexity of and some efficiencies, as well as manage flexible enough to support activities rang-
products and the risks associated with only one outsource provider. ing from a simple wholesale unit registry
outsourcing this activity. Secondly, there are significant manual to complex product launches and mainte-
input challenges arising from the fund nance.
Interfaces manager’s distribution/dealer network or Freeing up resources through outsourc-
The unit registry business is inextrica- the investment planning market structure ing of unit registry will allow a manager
bly linked to three key interfaces, all of as a whole, particularly if the fund is a to focus on strengthening their business
which provide critical data flows market leader and widely sold. Trading in through deeper client relationships and
upstream and downstream of the unit funds today in most cases involves manu- enhanced performance.
registry product; these have an impact on al inputting, due to the lack of a single Middle and back office infrastructure
the wider product proposition, the func- market structure – such as FundServ in costs are minimised and overheads
tional specifications of any unit registry Canada – that standardizes messaging reduced; the investment required in inter-
system, STP, profitability and the overall conventions, protocols and so creates an nal systems implementation, licensing
service performance and scope of deliv- automated market dealing infrastructure. and maintenance is decreased while miti-
ery. This shortcoming is now being gating operational, financial and reputa-
The first relates to fund accounting, addressed, both at the fund manager level tional risk. Capital can thus be reallocated
valuations and unit pricing systems and via their own internet-based dealer net- to strategic priorities and the focus shift-
providers. work interface initiatives, as well as ed to innovative product development
If a fund manager does not use its unit through wider industry efforts connected and performance enhancement.
registry outsource partner for investment to the Australian Stock Exchange. As
administration, or does not have com- much of the time spent by unit registry Alexander Muto is Managing Director,
plete control over both unit registry and administration staff is focused on double RBC Global Services Australia
Securities Lending Group Results at 26 October 2005 - Values presented in USD$ million
SL Return to
On the
Lendable Total Balance SL Tenure
Security Type Utilisation (%) SL Fee (Bp) Lendable
Assets (M) (M) (days)
Assets (Bp)
Rise
Govt. Bonds 1,357,995 656,123 44.48 10.07 4.54 111
A summary of the Top 10 Equity by Fee > 10 Top 10 Equity by Fee > 100
Source: Data Explorers
3
MEDIS TECH LTD.
MARTHA STEWART
2
3
FAIRFAX FINANCIAL
ARCHIPELAGO
LIVING
4 PREPAID LEGAL SERV.
4 IONATRON
The securities lending analysis focuses primarily on 5 DELTA AIR LINES
5 CALPINE CORP
the state of the securities lending industry at 26 6 FIRST MARBLEHEAD
6 EUROTUNNEL
October 2005. 7 LEVEL 3 COMMS
7 OVERSTOCK.COM
8 ODYSSEY RE
The total balance of assets on loan at this date was 8 ANTIGENICS
9 SNAM RETE GAS
$1,483 bn (in Table 1). Out of the total amount of secu- 9 TASER INTERNATIONAL
10 NETFLIX
rities available for lending ($6,526 bn), about 18.01 per 10 TURBOCHEF TECH.
cent of those securities were utilised in a securities Source: Data Explorers
Source: Data Explorers
lending program. Government bonds were clearly the Top 10 Corp by Fee > 10 < Top 10 Corp by Fee > 100
100Mln Mln
most active participants. Out of the total $1,357 bn
Rank Stock description Rank Stock description
available for lending, 44.48 per cent of that amount
1 CALPINE CORP 1 FED REP. BRAZIL
was utilised in a securities lending programme.
2 CALPINE CANADA 2 JEAN COUTU GROUP
At 26 October 2005, the most lendable equity by fee 3 CALPINE CORP 3 REP. OF TURKEY
was CHR Hansen HLDG (in Table 2), for equities that 4 RITE AID CORP 4 REP. OF ARGENTINA
are greater than USD $ 10 million but smaller than $ 5 DELPHI CORP 5 GENL MOTORS
100 million. 6 FRIENDLY ICE CREAM 6 REP. OF VENEZUELA
7 DELPHI CORP 7 GENERAL MOTORS
Novostar (in Table 3) was the top performing equity at 8 CHARTER COMM 8 FORD MOTOR CREDIT
26 October 2005 for equities that are greater than USD
9 INTER-AMERICAN 9 FED REP OF BRAZIL
$100 million.
10 CHRTR COMM HLDS RESEAU FERRE DE
10
FRANCE
Calpine Corporation (in Table 4) was the top perform- Source: Data Explorers
Source: Data Explorers
ing corporate stock at 26 October 2005 for corporate Securities Lending & Reinvestment Return to
stocks that are greater than USD $ 10 million but Lendable Assets (Bp)
4
smaller than USD $100 million.
3.5
The Federal Republic of Brazil (in Table 5) was the top 3
performing corporate stock at 26 October 2005 for cor- SL Return
to Lendable
porates that are greater than USD $ 100 million. 2.5 Assets (Bp)
2 RI Return
to Lendable
Securities lending return to lendable assets (in Table 6) 1.5 Assets (Bp)
peaked at 10 August 2005, with a total of 14.80 basis
points delivered for all securities. Reinvestment return, 1
on the other hand, peaked at 26 October 2005. At 26 0.5
October 2005 securities lending return was 3.45 basis
0
points. At the same time, the reinvestment return for all
10/12/2005
9/28/2005
10/19/2005
8/31/2005
8/10/2005
9/14/2005
8/24/2005
10/5/2005
9/7/2005
8/17/2005
9/21/2005
10/26/2005
French equities outweighed their European neigh- Pac-Rim Equities on Loan Q3 2005 $ M
bours, with a total on loan worth USD $27,429 m for All Other - $2,645
the third quarter of 2005, compared to USD $22,838
m for the third quarter of 2004. Australia - $7,720
Dare to “This is an impediment that the pooling gods may not have
fully considered,” says Ed O'Brien, Executive Vice President
and Global Head of Securities Finance at State Street. “For
Growth
Ignoring these considerations for a moment State Street
Luxembourg and Dublin have suggests that a fairly large percentage increase will take place
lured investors by offering tax out of these offshore locations, but immediately places future
growth firmly in the context of starting from a comparatively
neutral incentives. How do low base. According to Ed O'Brien, the amount of State
Street's global lending activity originating out of Dublin and
these incentives impact on Luxembourg as a percentage of its global lending book, is
currently less than 10 per cent. He estimates, however, that
securities lending? Brian Bollen the figure could rise to approximately 15 per cent over the
investigates next five years, as offshore business comes to represent the
fastest growing segment within State Street's equities lending
business. Measured to solid growth, as he encapsulates it, or
significant and meaningful, rather than dramatic. “To the
The prospect of continued growth in assets under extent that investors continue to move assets into offshore
management in Dublin and Luxembourg will inevitably
vehicles, our programme will benefit from that,” he says.
lead to further growth in securities lending activity. And
This mustn’t, though, be seen as some kind of new dawn of
that activity will be further fuelled by the opportunities
incremental growth.
created by accompanying growth in the pooling of pension
assets and the creation of the Common Contractual Fund
Complexity
(CCF) in Dublin, and the reinterpretation of (Fonds
The sheer, staggering complexity of the challenge involved
Communs de Placement) FCPs in Luxembourg, to create
in the process means that several years of groundwork have
tax-transparent investment vehicles.
already taken place, probably most notably at Northern Trust,
Industry experts will surely forgive us for concluding that
recognised as a pioneer in the field. Years of preparatory
the answer to the question is both a resounding ‘no’, and a
effort finally paid off on September 1 2005 when it launched
timid ‘maybe’, possibly evolving into a hesitant ‘yes’. On the
one of the small handful of CCFs to have been seen so far.
one hand, it is almost a truism that growth in the volume of
Slightly disappointingly, but understandably given its confi-
assets is always followed by a growth in lending and borrow-
dentiality agreement with its client, Northern Trust refuses to
ing. On the other hand, despite the best missionary efforts
say anything about its new baby, other than that yes, it was
undertaken by sales and marketing teams over the past few
launched on September 1, and that it was for a multinational
years, some underlying investors (or their domestic lawmak-
client. Even a vague indication of its size was not divulged,
ers and regulators) remain implacably imposed to the idea of
again as a result of client confidentiality.
lending securities in any way, shape or form, whatever the
It’s not just a case of assets moving from one jurisdiction to
location of the assets in question.
another, with the lendable base staying the same, commented
This is a multi-faceted technically challenging subject, with
Jacqueline Waller, Director of Securities Lending Sales at
more twists and turns and culs-de-sac than an ancient
Northern Trust Global Investments. “More lendable assets
labyrinth. The uninitiated enter at their peril. “A colleague of
will become available because of CCFs and FCPs. If we can
mine recently commented that multinational pooling is the
lend for those clients from a larger pool of assets comprising
most complex thing he's seen in his 30 years in the business,”
pools that were previously too small individually to lend, or
says Ed Oliver, Securities Lending Product Manager at
were held in a jurisdiction that didn't allow lending, there will
Northern Trust Global Investments. “Adding securities lend-
be an increase in lendable assets. That will be good for us and
ing to the mix does not make it any less complex.”
for clients, for the market and for us,” says Waller.
One of the key problems thrown up is that in the excite-
Rob Coxon, Head of International Securities Lending at
ment of realising that the pooling of assets could help
ABN AMRO Mellon GSS, believes pension fund pooling will UCITS. That's attractive in itself, as are the volume and the
be of consequence to the larger plans (e.g. those of multina- diversity of assets available. The drivers for lending are the
tional companies) that have pension funds in many different same as elsewhere: arbitrage, yield enhancement and fails
jurisdictions. “Typically, I believe that many of these pension coverage. We also see that funds have a better awareness that
funds are already participating in securities lending, therefore, securities lending is a low-risk tool to increase alpha. A num-
I do not envisage any great amounts of new supply entering ber of these fund groups are brand new to securities lending,
the market. Secondly, if the Pension Pooling Vehicle (PPV) is at least in terms of their Dublin and Luxembourg funds.”
able to benefit from “look through” tax treatment to the Richard Steele, Securities Lending Product Manager at
underlying domicile of the pension fund's then there will be JPMorgan, adds, “One of the drivers in securities lending is
no securities lending economic impact. asset growth, and this will create more lending opportunities.
“However, I do believe that pension fund pooling could Asset growth will be a positive for the sector, and any
benefit all participants in the securities lending value chain. A individual pension fund will have attractive assets, lendable at
move away from segregated multidomiciled lending location a premium.” David Claus, Vice President, European Investor
to a PPV situated in one domicile will bring economies of Services, Bank of New York in Luxembourg, points out that
scale. Securities lending has become an incredibly large “$1bn of assets in a CCF is worth less for securities lending
volume business where scale of operation is becoming than the same amount in an old SICAV. What will guide the
increasingly important to all those involved. opportunities is the tax status of the underlying investor.
“And I can see that smaller players will present interesting
Benefits packages that we might not have seen before”.
There are a number of possible benefits, he goes
on. “By pooling their pension assets, the underlying
lender (beneficial owner) will be able to attract “The holy grail is to have a fully tax-efficient
higher securities lending fee splits from their
Custodian Agent Lender compared to those they are structure that is totally tax neutral”
able to attract from smaller pension funds that they
may have with various custodians. The Custodian Agent
Lenders are able to satisfy Borrower demand from one single Changes
lending location with fewer trade tickets thus reducing trans- The tax and legal changes are now in place for a new wave
action and servicing costs. Borrowers may be able to reduce of CCFs, notes Deloitte, another pension pooling pioneer, in
their onerous credit oversight work that they are required to a paper it published on the subject. “Multinationals have been
have in place for all the underlying lenders. In many instances lobbying for many years for investment fund structures that
they may be eliminating exposure to some of the smaller allow assets to be pooled in an efficient manner,” it says. “The
under-funded pension funds.” holy grail is to have a fully tax-efficient structure that is totally
“The CCF does not create new opportunities for securities tax neutral with no drag on performance. Essentially, the
lending” says Bernard Hanratty, Director, Securities and Fund structure and its investors must be exempt from tax in the
services, EMEA, Citigroup Global Transaction Services. “In location in which the fund is domiciled for tax purposes. In
fact, you may hinder the capacity of a participating pension addition, a pooling fund vehicle should be considered tax
fund to lend if other pension funds in the same CCF either transparent by the tax authorities of the investor location,
do not want to, or cannot lend. investment location and fund location.”
“By way of example, if the CCF has a German pension Deloitte was one of the key players in the industry initiative
investor and a Dutch pension investor each subject to 15 per that resulted in the introduction of the new CCF structure in
cent and 0 per cent withholding tax on US dividends respec- 2003, enabling pension funds and now institutional investors
tively. The assets beneficially owned by the German pension to pool their investments in a tax efficient manner. “Pension
are attractive to lend while those owned by the Dutch fund pooling allows companies operating pension funds in several
are not. It may not be possible for the German fund to firstly countries to pool assets into a single pension pooling vehicle.
isolate and then lend its assets within the CCF and therefore The pension pooling vehicle then invests in assets, such as
it may suffer an opportunity cost with regard to lending rev- global equities, bonds and cash, on behalf of the investing
enues by participating in the CCF.” pension funds.”
Karol Hamel, Managing Director, Operations & Product Deloitte cautions that it is important not to confuse pen-
Development at eSecLending, believes that the very fact that sion pooling with a pan-European pension scheme. “A pan-
pooling is in its infancy there is undoubted scope to grow. European pension scheme is some years away but the ulti-
“We see a lot of growth taking place in Dublin and mate objective is that pension contributors in one location
Luxembourg, both in terms of new business and further should be able to participate tax-efficiently in a pension
development of existing business. Dublin has created a scheme located in another territory. Pension pooling on the
regulatory environment that makes it very attractive to set up other hand is where the pension funds in the various loca-
YO U ’ L L E N J OY M A N Y A DVA N TA G ES WO R K I N G W I T H U S .
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Securities Lending - Domicile Review
tions operate as normal but pool their assets in a specially Dutch and British investors, all with different percentage
designed funds structure. holdings in the underlying assets of the CCF. There may be a
different withholding tax treatment for each of these investors
Advantages in respect of a holding in a US security and the system must
One of the main advantages of pooling is that instead of be able to deal with these variations. Solutions such as using
having a number of pension funds in various locations and different classes of units can assist in managing these compli-
having different investment managers, administrators and cations.
custodians, a more streamlined approach is adopted so that “As the name suggests, a CCF is a contractual arrangement
the assets are managed centrally in the pooling vehicle, con- established under a deed which provides that investors partic-
tinues Deloitte. As a result, pooling offers considerable ipate as co-owners of the assets of the fund. A CCF is not a
economies of scale, particularly for smaller pension funds, separate legal entity and is transparent for Irish legal and tax
and this in turn leads to cost savings and enhanced returns. It purposes. As a result, the investors in a CCF are treated as if
also provides greater consistency in asset management and they own a proportionate share of the underlying invest-
enhances control over investment risks. In some cases, the ments of a CCF rather than shares or units in an entity which
pooled fund can employ the services of asset managers who itself owns the underlying investments.” Non-lending clients,
would not otherwise accept their business. of course, if any of them have read this far, can blissfully
“Asset pooling is the same concept as pension pooling, ignore all the above, as none of what we have said affects or
except that the investors are not pension funds but rather concerns them in the slightest.
institutions or other structures pooling their assets into a
single fund vehicle,” explains Deloitte. The Perils of Pooling
Collective investment schemes or uni-
The main challenge in the Irish funds industry has tised vehicles are designed to help
investors benefit from economies of
been to create the administrative infrastructure to scale, diversification of risk and exposure
to specialised investment manager
accommodate pooling structures knowledge, summarises State Street.
However, any resulting income earned
The CCF has many advantages, it says, including: may incur withholding tax, which may often discourage pen-
• It is a fund domiciled in Ireland where the standard of sion funds from investing through collective investment
service provided by managers, custodians, schemes. When pension schemes invest directly into securi-
administrators, legal and tax professionals is high. ties, they typically are entitled to favourable withholding tax
• The transparency of the CCF is supported by specific treatment on investment income. In a bid to preserve the tax
Irish tax legislation and statutory regulations. advantage of pension fund status, while enjoying the benefits
• Investors should benefit from home country treaty of investment in unitised vehicles, pension schemes may want
benefits as a result of the transparent status of the CCF. to consider an intermediary fund structure with an optimal
• The CCF is available in a UCITS or a non-UCITS tax status. Examples of these funds include the Common
structure. Contractual Fund (CCF) in Ireland, the Fonds Communs de
• Investors in the CCF can be pension funds and/or Placement (FCP) in Luxembourg and the Pension Fund
institutional investors. Pooling Vehicle (PFPV) in the United Kingdom. Each is
• Multiple unit classes can be issued. designed so that taxes apply to the underlying investor and
• No subscription tax applies to the issue of units. not the investment vehicle, which preserves any tax advantage
• VAT is generally not applicable to the CCF. enjoyed by pension scheme investors.
• No withholding tax on distributions made by the CCF. From an operational standpoint, these types of funds carry
• No net asset value tax applies. complex reporting requirements. Dual reporting at the fund
level for asset valuation purposes and the participant level for
The Finance Act, 2005 enhanced the CCF structure to per- income and taxation purposes is needed.
mit both a UCITS and non-UCITS vehicle. In addition, State Street conducted an examination of the impact with-
changes made now permit institutions as well as pension holding taxes have on pension schemes that invest in a variety
funds to invest in a CCF. The only restriction on investors is of fund vehicles in different jurisdictions, and on those
that the beneficial owner of the units cannot be an individual. investing directly in securities. Withholding tax is generally
Deloitte says it has worked with a number of promoters not a material issue for bond investments, as aside from a
structuring CCFs either as single-manager pension pooling small group of select sovereign issues, bond lending is not
funds or multinational pension pooling funds. that significant by comparison. However for the equity mar-
kets, it is a significant issue as the volumes of equities on loan
Infrastructure (and the trades that revolve around their dividend plays are
One of the main challenges in the Irish funds industry has far more numerous) dwarfs that of non-US bond lending,
been to create the administrative infrastructure to accommo- where most lending is done only for short term portfolio
date pooling structures, notes Deloitte. The infrastructure has financings and the occasional short covering trade. Pension
to be able to accommodate different investors receiving dif- funds investing solely in U.S. equities through a CCF-type
ferent returns from assets in different locations. The systems structure have the potential to save about 60 basis points a
must be able to track and reconcile the various holdings to year as opposed to investing through a regular offshore
the investor. “For example, the CCF may have German, collective investment scheme. ISJ
eSecLending provides services only to institutional investors and other persons who have professional investment
experience. Neither the services offered by eSecLending nor this advertisement are directed at persons not possessing
such experience. Old Mutual (US) Trust Company, an eSecLending company, performs all regulated business activities.
Past performance is no guarantee of future results. Our services may not be suitable for all lenders.
Hedge Fund Performance
Wheels of Fortune
September 2005 revealed positive results for the hedge
fund industry, according to findings from Hedge Fund
Research Incorporated. ISJ presents the latest data
Hedge Funds performed favourably during September 2005. The Hedge Fund Research Incorporated Fund Weighted Composite Index
managed to deliver a return of 2.06. Total performance for the year to September 2005 was 7.36.
The HFRI Emerging Markets Index recorded the best performance, with a return of 4.51 for September 2005. Year to date performance for this
index was also favourable: 15.99 for the year to September 2005.
Market Benchmarks Monthly Rate of Return September 2005
The HFRI Market Timing Index delivered a return of 2.95 for September 2005. HFRI Fund Weighted Composite
Year to date performance for this asset class was 11.14.
S&P 500 w/ dividends
The HFRI Equity Hedge Index had an extremely good year, with a year to date
performance rate of 2.32. This index delivered a return of 7.92 for September NASDAQ Composite
The worst performer in the HFRI Hedge Funds Index was the HFRI Regulation D Lehman Aggregate Corp. Bond
Index, with a return of -0.57 for September 2005.
Lehman Agg. US Govt. Bond
The HFRI Equity Market Neutral Index: Statistical Arbitrage Index delivered a
return of 0.46 during September 2005. On a more positive note, the same index -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5
Source: HFR
delivered a return of 3.27 for the year to September 2005.
The HFRI Fund of Funds: Strategic index performed well, with a return of 1.99 for Market Benchmarks Rate of Return - Year to
September 2005
September 2005. Year to date performance for this index was 7.26.
HFRI Fund Weighted Composite
The HFRI Fund of Funds Composite also performed well, with a return of 1.42 for
S&P 500 w/ dividends
September 2005. Year to date performance was 5.05.
NASDAQ Composite
At the bottom of the table, the HFRI Fund of Funds: Market Defensive delivered a return of
0.78. Year to date performance was 1.73. MSCI Indices US$ World Index
The HFRI Fund Weighted Composite index performed well against the main market bench- Lehman Aggregate Corp. Bond
marks. The top performer was the MSCI Indices US$ World Index, with a return of 2.47 for Lehman Agg. US Govt. Bond
September 2005. Year to Date performance for this index was 4.71 .
-2 -1 0 1 2 3 4 5 6 7 8
Source: Data Explorers
HFRI Relative Value Arb. 1.58 4.48 HFRI Fund of Funds: 1.99 7.26
Strategic
HFRI Sector (Total) 2.2 7.95
HFRI Fund Weighted 2.06 7.36
HFRI Short Selling 1.96 9.21 Composite
Source: HFR Source: HFR
FINACE® is currently the only fully-integrated solution which FINACE® is a product of IFBS AG
supports future business models within the areas of Securities
Finance and Collateral Management. With flexibility at its core, Main Office:
customer-driven modifications and extensions can readily be Buckhauserstrasse 11, CH-8048 Zurich
implemented. Phone +41 (0)44 218 14 14
Emerging Realities
Securities services providers
debate the key challenges and
prospects in the Central and
Eastern European Region
Harry J. Devroe is currently Director Securities Services, CEE with Harry Devroe
ING Bank N.V., Amsterdam, The Netherlands. ING Bank has four
branches and four subsidiaries offering Securities Services, in addi-
tion to other banking and brokerage products and services, in Central
and Eastern Europe. Devroe first joined ING Bank N.V. in 1994 as the
Operations Manager in Prague, Czech Republic before moving to
Amsterdam in 1997 to his current position.
Prior to joining ING Bank N.V., Devroe worked for Security Pacific
National Bank for 21 years in such diverse places as New York,
Bahrain,Texas, Japan and Hong Kong. Devroe developed Securities
Services as a new product for Security Pacific in Japan in 1983 and
when he moved toHong Kong in 1986 as Regional Operations
Manager in Asia, he brought the product to offices in Hong Kong, Pawel Muszalski
Malaysia, Singapore and Thailand.
Pawel Muszalski, Director, Head of International Banking & Custody,
Bank Pekao S.A. Joined the brokerage house of Bank Pekao S.A. in
1991, when a capital market in Poland was recreated. He was respon-
sible for developing relations with international clients. Muszalski
participated in the creation of custody services at Bank Pekao S.A.
He was Head of Custody from 1998-2001 and a Member of the
Management Board at OFI sp. z o.o., one of Poland’s leading Fund
administration companies. In 2001, Muszalski rejoined Bank Pekao
S.A. as Director of the Custody Department, which later emerged
into the International Banking & Custody Department, delivering
services to financial institutions. Muszalski is a Member of the Board Jürgen Sattler
of Custodian Banks Committee at the Polish Banking Association.
Jürgen Sattler, Head of Sales and RM. Sattler joined RZB in January
2005 and is responsible for regional sales and relationship activities
of the entire Raiffeisen Group in CEE and Austria. Before that time,
he spent nine years in the custody group at BA-CA, starting his career
as Relationship Manager for the Austrian sub-custody business. He
headed the Austrian client relationship team at BA-CA from 1998 to
2000, and in 2001 became Global Head of Sales and Relationship
Management for the entire central and eastern European region.
Normunds Vigulis, Head of Treasury, Head of Custody of Parex
Banka and Member of the Board of Parex Asset Management Normunds Vigulis
He obtained a Bachelors of Science degree at the University of
Latvia. His professional experience in Parex banka commenced with
the role of internal auditor, followed by Asset Liability manager. He
currently heads the Treasury and Custody businesses of Parex and
also maintains the bank’s liquidity. As a member of the Board of
Parex Asset Management he organises the financial management of
the company.
Filip Zahorik, Securities Country Manager, Czech Republic, Global
Transaction Services, Citigroup Filip Zahorik joined Citigroup in June
2004 and is currently responsible for Global Securities Services in
the Czech Republic. His major responsibility includes product
development, relationship management of direct custody and Filip Zahorik
clearing clients and formulating of local strategy in this area. From
1999-2004 he worked as the head of Public Markets and Settlement
Systems Department of the Czech Securities Commission where he
participated on changes to the local legal and technical framework
for securities trading and settlement.
44 INVESTOR SERVICES JOURNAL
Panel Discussion - Central & Eastern Europe
Comment on the latest developments to affect securities was triggered a couple of years ago when clients started to think
services providers with interest in the CEE region. What about creating regional networks around the globe. At the begin-
makes the region the current favourite among global ning of the trend small and medium sized clients were searching
providers of securities services? for a cost effective solution. The new trend includes clients with
substantially higher asset levels in their books.
Devroe: New and revised regulations continue to move towards The driving force for providers is about creating rock solid prod-
European Union standards and are attracting foreign investors into uct solutions with reliable partners that focus on the CEE region
the CEE region. region from a strategic and long-term view. This is the basis from
Local market legislation is aligning itself toward the European which to steer the product effectively and to be in a position to mit-
Union and directives now apply to capital markets, thereby reduc- igate the risks arising from the inefficiencies of those markets.
ing some of the onerous paperwork required of financial institu- What makes the CEE region a current favourite? The story is
tions. The full nominee concept was introduced in Hungary this quite simple - the majority of countries in the region are aggres-
year. sively interested in becoming part of the European Union.
This follows the introduction of the nominee status and the That means the entire market infrastructure needs to catch up
Capital Market (CXX) Act in 2001. These steps did not fully cover with international standards, laws have to be adjusted and pension
the international investor’s needs, for example the tax legislation systems are going to change. The bottom line is that we are wit-
did not address tax reclamation. In Poland, a new Securities Law nessing a tremendous investment story in our part of the world i.e.
has come into force. the economies of the CEE region countries will grow much faster
Three new acts have replaced the Law on Public Trading in than the old economies in Western Europe.
Securities. The new Securities Law has considerably modified the Dynamic growth of the markets that guarantee constantly grow-
framework of the securities market and has adjusted Polish legisla- ing revenue streams is attractive for securities service providers.
tion to meet with European Union standards.
Generally, a more friendly investment environment,
market transparency and a progressing maturity have “Following European Union enlargement,
convinced foreign investors to invest more into these
markets. the majority of CEE countries are now
Muszalski: After the recent European Union enlarge-
perceived as more favourable and stable in
ment, market regulators have concentrated on two political and economic terms”
things - the adjustment of the local laws to to meet with
European Union directives and the creation of a more
favourable environment for market participants. Markets in the
CEE region are more open to co-operation with other markets. Vigulis: CEE region countries that joined the Western political and
Central depositories have created settlement links with other economic community as European Union members, helped to fur-
depositories, thereby enabling cross-border settlement. In Poland ther Westernise these countries and their populations, including
for example, recent changes in the law have done away with the their money management preferences.
obligation to execute equity transactions on a regulated, official This Westernisation implies a shift from traditional bank deposits
market. towards investment in financial markets, both directly through bro-
Such developments create new opportunities and challenges for kerage companies and indirectly through mutual funds. According
market participants. These participants will have to carefully to the Investment Company Institute data, mutual fund assets in
analyse how to take advantage of the opportunities that have aris- the 15 EU countries total 50 per cent of GDP, whereas in Czech
en and how to cope with the challenges of globalisation. Republic, for example, this indicator stands at 5 per cent, Estonia at
A combination of stability and potential make the region a cur- 8 per cent and Latvia at 1 per cent The numbers point to limitless
rent favourite. Following European Union enlargement, the majori- growth possibilities.
ty of CEE countries are now perceived as more favourable and sta-
ble in political and economic terms. Companies in the CEE coun- Zahorik: Local and foreign investors’ interest in this region contin-
tries have performed well after they joined the EU. ues. In most countries the pension reforms are in progress or
They have improved their businesses after 1 May 2005. The preparation. This can have a positive effect on the demand for local
economies of the CEE countries are performing better and political investments and prompts securities services providers and market
risk has been reduced, thereby enabling these countries to become infrastructures to improve and develop their services.
attractive places for investment. The continuous growth of equity markets in the region over the
These factors have attracted more and more portfolio investors, last few years and the harmonisation of the European Union legal
who are looking for good investment opportunities. On the other framework has attracted many institutional investors and related
hand, securities markets in the region are still half way there com- securities services providers. The markets predominantly offer
pared to the markets of the “old” European Union members states. plain vanilla securities services and a relatively high potential for
The interest from global providers in these markets has also growth in the area of more sophisticated products such as securi-
increased. ties lending/ borrowing or multilateral repos exists.
Work is still required in order to fine-tune the local legal frame-
Sattler: Firstly, we need to accept that a bold consolidation process work to allow the safe and efficient provision of more complicated
is in progress among custody providers in CEE region. This trend products, but the increasing demand will speed up the process.
Muszalski: STP and the automation of operational processes were internal clients, local depositories and stock exchanges.
vastly improved over the last couple of years. The core securities However, external settlements with other counterparties are still
companies invested in software solutions and analysed their busi- processed manually. Apart from brokerage companies, banks have
ness processes. rarely secured automated confirmation and instruction distribu-
The majority of large players are technically well prepared for tion, reception and processing of OTC deals. This approach,
STP, but due to external factors such settlement and payment sys- excluding the savings on IT systems, presents a positive sign - the
tems and operational regulations, they are unable to progress to substantial percentage of timely, unsettled deals in the securities
the next step. settlement practice, means that manual processing is faster and
Any further development, at a country level, will be driven by more effective in cases of unmatched instructions.
market participants who lobby for the improvement of the settle-
ment system.
Sattler: The more liquid the markets in the CEE The extent of STP in the market is dependent
region, the higher the level of automation. We can
confirm a clear variation in the levels of STP,
on the automation of processes among securi-
depending on the size of the institution. ties providers and also on the technology used
The smaller markets still work on a semi-automat-
ed basis, whereas larger markets need to be fully by the market infrastructure
automated for the processing of settlements, recon-
ciliation and corporate actions. Zahorik: The extent of STP in the market is dependent on the
automation of processes among securities providers and also on
Vigulis: CEE banks have automated a range of internal processes, the technology used by the market infrastructure. The level of
which are connected to securities processing and settlement, for automation among particular service providers is relatively high.
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Panel Discussion - Central & Eastern Europe
Muszalski: Key players who are present in the CEE countries that
are part of the EU will have to build or strengthen their position in
countries that are going to join EU.
Even if business is not profitable, the custodian banks must show
their clients that they cover whole region. Setting-up businesses
after these countries have joined the EU will be too late. Securities
services providers have gained easy access to the markets of “new”
Europe.
Prior to EU enlargement, these providers had to create a sub-
sidiary or branch in countries they wanted to do business in. This
step is no longer necessary.
All in all, the stability and potential of the region, and free access
to its markets, create good opportunities for securities services
providers.
the region, compared to providers who are not present here. On banks, which are willing to provide financial services without open-
the other hand, a local market presence is still very important for ing a branch, we don’t have any reasons to forecast any immediate
clients. changes in the competitive landscape yet.
Therefore, the ability to serve several countries from one place, in
the area of custody services, for example, is not likely to become a Zahorik: The consolidation process in the Czech Republic, Poland
successful scenario in upcoming years. and Hungary is almost complete.
We can expect some ad hoc mergers and acquisitions within cer-
A substantial number of mergers and acquisitions have tain countries, but the mergers and acquisitions on the regional,
occurred among banks in the Central & Eastern European European Union or global level are more important. The issue of
region. Do you expect this to continue and how important scale is important, but not crucial.
is the issue of scale among providders in the region? Foreign investors and intermediaries usually look for the best
provider of securities services in a particular country.
Devroe: Over the last several years, numerous indigenous banks A relatively narrow scope of specialised services are sought by
have been sold to foreign financial institutions, either through the clients. The size of the bank in a country or the number of markets
privatisation of state owned assets or through strategic invest- covered can help, but if you are behind the competition in terms of
ments. technology or the quality of services, you can hardly expect many
This process has been extended through Unicredito Italiano’s mandates.
acquisition of HVB Bank. Unicredito Italiano is the owner of Bank
Pekao in Poland and Bulgaria’s Bulbank. In Romania, the Which types of regulatory developments in the securities
Romanian Savings bank is currently undergoing a restructuring industry, both internal and external, are likely to affect
process and is up for sale. About nine foreign banks are bidding securities services providers in the years ahead?
for the Romanian Savings bank, three of which already have a
strong position in Romania. Devroe: The regulatory environment is changing in order to align
The Romanian Commercial Bank is also up for sale. Foreign itself with European Union directives.
banks already dominate the Romanian banking system, owning New products and services will be added to the standard custody
over 68 per cent of the share capital of all authorised banks. offering, including securities lending and borrowing, collateral
Foreign investors, global custodians, broker/dealers, hedge funds management and derivatives trading. Securities providers need to
and other investment funds prefer to keep their assets with a keep up with the new developments or they risk losing clients to
Western bank rather than with a local bank. the competition.
Conversely, in several other CEE countries, local investment Growing pension funds are assisting in the development of capital
funds and pension funds usually prefer to keep their assets with markets.
their primary, indigenous banks. One can anticipate the easing of foreign investment restrictions
for pension funds, which will help local providers evolved into
Muszalski: This process will continue. It will originate outside of global custodians.
the CEE region and, in some cases, its results will affect banks in
our region. Banking groups, which entered the CEE
region over 10 years ago, can now benefit.
The securities business in CEE region is divided “Although some of the smaller international
among ING, Deutsche Bank, Citigroup, KBC,
UCI/HVB and domestic providers in certain markets.
players are gaining on the basis of price, their
The merger between UCI/HVB will have big impact distribution network remains a key factor”
on the region, not only in terms of securities services
but also in other banking areas. Other groups will have to redefine Muszalski: The development of the CEE regulatory environment is
their strategy in the CEE region. mainly driven by the development of the local securities infrastruc-
ture and the introduction of new financial products.
Sattler: The consolidation process has not yet come to an end. This type of development became evident from the creation of
Depending on the market, the existing environments seem over- capital markets in CEE region. Markets “emerge” and, as a result,
banked. A good example is Slovenia. regulations “emerge” too. Countries which joined the European
The market is too small for the number of banks, which are active Union last year have to face common European Union regulations,
in this market. Clients will keep searching for synergies and region- which generally focus on standardisation and free competition
al providers are the only ones that will be in a position to deliver across the European securities industry.
the solutions for the clients' needs. The problem is that capital market tracks in the “old” European
Union countries extend too long to allow entities from the CEE
Vigulis: Increased retail customer segmentation in the large banks region to compete. A number of the local players are part of big
is driven by major investments. Although some of the smaller financial group. Local independent players will probably not be able
international players are gaining on the basis of price, their distri- to compete.
bution network remains a key factor. (Banks) are expected to con-
solidate even more, as the level of demand from customers Sattler: The market will opt for European Union regulations. How
increases, and factors like advanced online banking begin to play a this process will impact the new European Union member states is
more important role. not easy to predict as certain initiatives are still pending in western
Despite the substantial increase in the number of EU-based Europe.
“emerging” and is likely to develop quickly in the coming years. In reach full STP. There is great pressure from competitors resulting
order to boost this segment, governments will implement regula- in downward pressure on fees.
tions, thereby encouraging more investment from future pensioners. There is a tremendous need to reduce the manual work in order to
keep costs to a minimum. More clients are requesting STP reports
Sattler: Pensions industry reform in the CEE region has begun. The which can then be used to negotiate lower fees.
legislation is changing in order to begin work on the new pension
models. Muszalski: Countries that generate interest among institutional
The trend for service providers is clear: leave the wholly owned investors are also interesting for custody providers.
state pension schemes aside and focus on the private and corpo- Opportunities are still present in countries such as Romania and
rate contributions. Bulgaria, which will become part of European Union in the future.
The new model guarantees a growing pension and mutual fund Owing to its size, Romania is very attractive from a long term
industry that will feed worldwide markets with fresh assets and perspective. The other countries may be less attractive due to polit-
capital. ical reasons and by virtue of their size. However, they present the
However, CEE region investors pay a lot attention to their home- only way in which to expand into the CEE region.
markets. Providing services in these countries is a must for players who are
We expect that the markets in this region will benefit dispropor- seriously thinking of staying in the business for the long term. At
tionately from this fact. the same time these markets are becoming more and more com-
petitive, including for securities services providers.
Vigulis : The Baltic pension system reform began
about five years ago. Since then, both pension plan
assets and consumer understanding of investment “The regulators have consulted more frequently
products has increased significantly.
The pension money management became one of with market participants who have helped shape
the industry cornerstones for domestic securities
service providers. This is especially relevant for the
the new regulations to be more favourable to
second level or so-called state-funded pension seg- foreign investors”
ment. Take the example of Latvia: currently the sec-
ond level pension fund assets stand at EURO 110m.
This is only the beginning. According to Parex estimates, rising Sattler: The complexity of the CEE markets will consolidate and
contributions to pension plans (from 2 per cent to 10 per cent of more emphasis will be placed on value added services such as
salaries), the increase in salaries and insignificant pension payouts securities lending.
over the next five years will result in second level assets rising to IT infrastructures, as a way of managing the rising volumes and
EURO 1 billion by 2010. higher levels of automation will move further into the spotlight .
This is not much in absolute terms, but nevertheless represents a One of our core objectives in the years ahead will be to take an
significant amount for the domestic industry. active lobbying position vis-á-vis the authorities, in order to sup-
port the transformation process and to make our clients' voices
Zahorik: This local industry has a huge potential for growth, as heard in the various markets.
pension reforms in the region get under way. Securities services
providers can expect more opportunities in this field, especially in Vigulis : Rapid growth in the pension and mutual fund industry in
the area of fund services. the CEE region and further pending European Union expansion are
likely to attract new securities services providers, leading to higher
What are the key challenges and opportunities for competition in this segment. Local asset managers will have to
providers with interests in the Central & Eastern devote increasingly more attention to the quality of services.
European region in the years ahead? Sooner or later, the convergence of asset price is expected to end.
Even now, some market segments (Baltic equities, for example)
Devroe: The regulatory environment is in a state of change and seem to be fairly priced.
development. Generally, the changes come into effect when they This means a shift in investment styles, for example, from growth
are officially published in the local Gazette or other official to value investing. Companies’ interest in securities financing (tak-
publications. ing into account the number of IPOs and bond issues) will
They are then translated into English, verified among various continue to increase, which bodes well for the securities
authorities and then communicated to clients and prospects. origination business.
There are frequently various interpretations of the new regulations
or these regulations may compare with other regulations. This vari- Zahorik: The key challenge for current providers will be to keep
ance leads to a barrage of questions from clients and prospects. pace with investments into more developed technologies, which
Over the past few years, the regulators have consulted more fre- will become a standard in the European Union. Within securities
quently with market participants who have helped shape the new services, opportunities exist in the area of more sophisticated
regulations to be more favourable to foreign investors. The local products and fund services, where the level of external services
market requires a local custodian in order to effectively provide a provider usage is relatively low in comparison to Western Europe.
service and to represent foreign clients. This characteristic of the
CEE region will remain key in the coming years. ISJ: Thank you
Another challenge is to make continual improvements in order to ISJ
Time to
Management UK & Ireland at ABN AMRO Mellon, com-
mented: “If as a pension fund you need a long-term
growth rate of say 8-9 per cent and the market is paying a
lot less than that, while interest rates are 3-4 per cent, then
Hedge?
you're going to have to achieve that somewhere else - and
that is why hedge funds are growing. Hedge funds offer
the prospect of a higher growth rate than has been avail-
able in the market in the last few years.”
Various research studies are providing mixed messages
about just what is happening on the ground. In February
Watson Wyatt reported an increased appetite for alternative
investments among its clients. Over 2004 clients increased
their allocation to alternative investments by 40 per cent
over the previous year, with £1bn going to hedge funds.
Research
Recent research from Russell Investment Group shows
the percentage of institutional investors using hedge funds
growing from 21% to 35 per cent in Europe. Hedge fund
use in Europe, in particular, has put on a remarkable surge
over the last couple of years, with a doubling of usage
among those who replied to the survey, from 24 per cent
to 48 per cent of respondents between 2003 and 2005. But
it appears to be in continental Europe where hedge funds
have really taken off.
A much more cautious picture emerges from research
from Greenwich Associates in the US. In a report which
focussed on the effects of new European accounting stan-
dards on pension fund investment strategies, it concluded
that European pension funds’ appetite for risk was being
curtailed by the effects of IFRS/IAS accounting rules, and
as a result allocations to hedge funds and private equity
remained static at around 1 per cent of assets for each of
the last three years. With recent disappointing hedge fund
Pension fund trustees’ attention returns, the report found that the proportion of pension
funds planning to venture into the asset class dropped
has shifted to plugging deficits, from 19 per cent in 2004 to 8% in 2005, with the propor-
thereby affecting their taste for tion expecting to hire a hedge fund manager plummeting
from 23 per cent to 8 per cent.
hedge funds It is fund of hedge funds that are taking in the lion’s
share of investments in Europe, according to Russell. Some
Christine Senior investigates 86 per cent of users opted for funds of funds, while the
percentage investing in single and internally management pension funds wary, I really do,” said Doherty.
funds actually decreased in 2005. Another disincentive is the issue
So has it been all talk over the last couple of years or of fees. Hedge funds typically
have UK pension funds begun to sit up, take notice and charge an asset management fee of
act to invest in hedge funds? There has been some action, perhaps 1 per cent of assets plus an
particularly among bigger funds. The BT pension fund is additional performance related fee
committing around 2 per cent of its portfolio to hedge of 20 per cent of any gains.
funds via its investment manager Hermes, itself a hedge “The fees are definitely higher
fund manager able to construct a suitable hedge fund but in theory the returns are sup-
portfolio. Railpen, the railway pension fund, has also made posed to be higher too,” said Fergus
the leap, but its strategy has been to appoint three US Healy, global product head of alter-
based managers, Blackstone Alternative Asset native fund services at Citigroup’s
Management, Grosvenor Capital Management and The Global Transaction Services. “To
Rock Creek Group to run a £600m portfolio on its behalf. Fergus Healy get the returns you have to pay the
Each manager has selected around 30 hedge funds for a price. It is an issue but the per-
diversified portfolio. formance fee is based on absolute returns – fees are not
Still these seem to be the exception rather than the rule. paid when the funds are down.”
One well placed industry source commented: “Over last Where pension funds have taken the step into hedge
couple of years there has been a lot of noise about UK funds, the preferred route has been funds of hedge funds.
pension plans investing in hedge funds but from every- This is the easiest to implement for funds who wish to
thing we can see there has been very little action. Some of test drive the asset class. On the downside it is the strategy
the larger more active schemes have made an allocation to that costs them the most in fees, with two-tier fee struc-
hedge funds and have funded it, usually via fund of hedge ture for the fund of fund and for the underlying hedge
funds. However the vast majority have not done that.” funds.
Priorities
A lack of knowledge among trustees about
“To get the returns you have to pay the price. It
hedge funds and also the fact they have other is an issue but the performance fee is based on
more pressing matters to address are behind
this lack of action, according to Bill absolute returns – fees are not paid when the
Maldonado, CEO, HSBC Alternative
Investments at Halbis Partners. “I think there
funds are down.”
are several reasons,” he said. “One is the old chestnut of Changes
trustee understanding of these investment strategies - Changes in the structure of the hedge fund market are
there are lots of things that are difficult to explain to likely going forward, according to Healy: “We see more
trustees like private equity, hedge funds, TAA overlays. institutions setting up their own hedge funds. We see con-
And secondly there have been a lot of changes to legisla- tinued convergence between hedge funds and traditional
tion in the way schemes have to be run. funds - UCITS now trade some esoteric instruments, cred-
That has occupied trustee boards quite a lot and hasn’t it default swaps etc.”
given them the time they need to assess new strategies like Our anonymous industry source is convinced that cur-
hedge funds.” rent trends in pension fund hedge fund activity are unlike-
Currently the top priority issue occupying the minds of ly to change, mainly because the turnaround in equity
trustees is funding deficits. Though the recent revival in market performance has reduced the pressure to act.
equity markets has at least reduced funding gaps, deficits “I don’t think things will change much. In the last couple
are still very much a feature of the pension fund land- of years pension funds have been bailed out by roaring
scape. The effect has been to put a brake on pension equity markets so the trustees are sitting there thinking
funds’ appetite for riskier assets like hedge funds to add ‘what was all the fuss over the bear market – it’s mainly
alpha. come back now . With a couple of really good years run-
“My view is it’s a matter of focus and priority,” said Ann ning high equity weightings worked really well.’ The
Doherty, Client Management Executive at JPMorgan imperative to do something hasn’t been there.”
Worldwide Securities Services. “A pension fund in deficit is Any growth is likely to be more of the same - slow and
concentrating more on making sure the deficit doesn’t get steady rather than a sudden rush. Doherty summed up: “I
any bigger and trying to close that gap. They are far more do not believe there will be a headlong rush by pension
likely to be using hedging and derivatives to support the funds into single strategy hedge funds. There will continue
asset position rather than making alpha bets within a to be an upward tick, but it will not be that dramatic. I
hedge fund strategy.” think things like private equity with longer time horizons
Press reports about hot money cascading into hedge in terms of returns is something that would more natural-
funds has also served to scare off naturally cautious pen- ly suit the culture of a pension fund – private equity, prop-
sion fund trustees. erty, commodities and to an extent derivatives – long term
“Because of all the newspaper reports about so much hot derivatives with 20 year durations as well as hedge funds.”
money going into hedge funds, I think it’s making some ISJ
You’ve Yes.
One of the most manually inten- everything, one can expect to see the
fee billing function being manually
sive functions of a financial insti- intensive,” states Thomas Dackow,
president of Interactive Technologies,
tution’s back office is about to the leading vendor in this space with
over sixty cus-tomers.
become a primary candidate for He says that in
outsourcing, writes Rekha recent years the
fee billing func-
Menon tion or revenue
management as it
is often referred
to these days, had
become highly
complex.
“It has gone
much beyond
mere debiting or
Thomas Dackow producing invoic-
es to include the
analysis and control of revenues.
“Firms now require a revenue manage-
ment system that handles the entire
process from import of data to the analy-
sis and forecasting of fees.”
“In order to calculate client fees, the fee
says. “From the that rather than cost reduction, regula- billing solutions for banks, Kumar adds:
outside, fee tion or increasing volumes, the key driv- “Financial services firms today are look-
billing appears a ers for firms beginning to focus on fee ing at improving overall operational effi-
very simple task, billing was the growing need to minimise ciency though a centralised administra-
but is in actuality errors, reduce cycle times and move per- tion platform. This improves their cross-
a very complex sonnel on to more value added tasks. selling ability by offering cost-effective
process. There is Dackow gives the example of an and customer-specific product bundles.
a lot of workflow Interactive Technologies' client which Relationship-based pricing across the
involved. drastically cut down the number of enterprise allows financial firms to intro-
Managing com- billing clerks from 90 to 12 after duce customer-specific product bundles,
plicated fee automating the fee-billing process. which forms an effective way of main-
structures and “When faced with the increasing level taining and retaining the customer base.”
Catherine Doherty the timing of dis- of complexity of the billing process, often
count structures it is very tempting for firms to add anoth- Niche Market
requires sophisticated automation.” er clerk. While that might work in the Despite the numerous benefits of fee
short term, it doesn't in the longer term billing automation and the interest from
Increase because firms soon realise that they gain financial institutions, fee billing remains a
Industry participants report an increase much more if they automate the process very niche market and there are very few
in interest among dedicated fee
fund managers in
recent years in fee
“Auditors are coming down strongly on finance billing vendors.
Instead firms
billing and revenue departments and the realisation is dawning that often go with fee-
administration. billing modules
Recently, Excel spreadsheets are just not good enough for from portfolio
Newton
Investment
calculating fees and getting good audit trails” management sys-
tem vendors or
Management, a even with ERP
UK-based asset management subsidiary and their personnel get involved in a vendors like Peoplesoft and Oracle
of Mellon Financial Corporation, decided more value added task.” Financials.
to license California based fee billing ven- Along with improved cash flows and These solutions are not very compre-
dor, Redi2 Technologies’ solution to auto- better reporting, Dackow says that they hensive or if they are adequately cus-
mate its revenue management processes. have found that by automating the fee tomised, then the overall cost becomes
In addition, Mellon’s Investment billing process, their customers can too high. Giving the example of a New
Manager Solutions business has decided often gain through an increase in revenue York based institutional investment man-
to integrate Redi2 Technologies’ solution generation by 3 to 7 per cent per ager which conducted a gap analysis
into its outsourcing platform to provide year. between their installation of Redi2’s solu-
billing and revenue accounting services to This is a result of corrections made to tion and a PeopleSoft-built billing solu-
its clients. Seth Johnson, CEO of Redi2 billing practices, which over time, have tion used by a company they had previ-
Technologies suggests that regulatory failed to fully charge for services ren- ously acquired, Johnson says that Redi2
changes have been the key driver for rev- dered. won the comparison and the customer
enue management becoming a priority at SunTec, a fee billing solutions provider migrated its customer accounts from
firms. “In the US especially, with SOX whose clients include HSBC, ING Bank, PeopleSoft to Redi2’s solution.
regulations, auditors are coming down Lloyds TSB, SEI Investments and ICICI “Firms realise that often, the customisa-
strongly on finance departments and the Bank, emphasises the importance of fee tion cost of general purpose solutions
realisation is dawning that Excel spread- income to end user. CEO Nanda Kumar way exceeds the cost of the original prod-
sheets are just not good enough for cal- says: “The fee income diversifies a bank's uct itself. In addition, in terms of cost
culating fees and getting good audit revenue stream. In the long run, expan- and complexity, these solutions are much
trails. sion for non interest activities has peaked more difficult to sustain,” comments
“Audit trails are also very much in and those intermediation based products Dackow.
demand in the UK due to the changes in and services will remain the central busi- The biggest competition for dedicated
VAT rules,” he says. ness activity of a bank. Moreover, today, vendors such as Redi2 and Interactive
However, Doherty of Investit believes banks are moving towards becoming still remains the in-house IT team.
that more than regulation, it is a focus on financial supermarkets and therefore However, Dackow suggests that the
risk reduction that is driving attention on require more customer touch points. The realisation is slowly dawning that the
this arena. earnings are more sensitive to sales and cost benefits offered by off-the-shelf
Investit did a survey of the state of fee- technological advancements are required solutions firms are much better. “Inhouse
billing at UK investment management to enable this change in the revenue development can cost a firm up to a few
firms at the beginning of the year. streams. Therefore it is significant that million dollars, while off the shelf solu-
The study, which found that nearly 60 financial institutions want to adopt the tions such as ours with similar or much
percent of UK fund managers had auto- fee management approach.” better functionality are available at a
mated their fee billing process, concluded Highlighting the key advantages of fee fraction of the cost.”
Objective
One of MiFID’s main objectives is to increase trans-
parency and efficiency in the European Union market
With a new Directive on the place. “There is a greater obligation on pre- and post-
trade publication of data for quotes and limit orders,” says
horizon, financial services Webb. “The timeliness of publication is also important.”
The role of the systematic internaliser is highlighted
providers in European are under MiFID. A systematic internaliser is a firm which
unsure of the impact of MiFID crosses orders internally, off-exchange and outside of a
recognised market. “Firms which are internalisers have
on their business certain obligations to fulfil and have to make their quotes
public, not just to their clients but to the market under
its pros and cons for sell side and buy side institutions. reasonable commercial terms,” says Webb. “There is cur-
Introduced by the European Union in April 2004, the rently no clear mechanism for doing this.”
publicity surrounding MiFID is gaining momentum. While the European Union has made clear to firms what
“The amount of conversations we’re having with clients is it wants from the introduction of MiFID, it has not
evidence of the fact that people have suddenly woken up expressed how these aims should be achieved.
to the Directive,” says Steve Webb, a Partner at Capco. The sell side will be affected by the quest for best execu-
“Firms need to set aside budget now for project work that tion and will have to consider greater pools of liquidity for
they will need to perform in 2006 and 2007” . price discovery and ensure it is achieving best execution.
MiFID is being introduced following the four stage “MiFID does away with concentration rules, and recog-
Lamfulussy Process, which is currently at the stage of nises MTS and the role of systematic internaliser,” says
“Level Two” text. “The level of certainty with which you Webb. “In future sell side firms cannot merely check the
can determine the impacts of MiFID is difficult to achieve local market prices for a best execution benchmark
at this time” says Webb. “Until the Level Two text is trans- because a systematic internaliser could be publishing a
lated into national law, one can only determine what the better price than what is published on the local exchange.”
lawmakers are aiming for.”
Liquidity
Impact The implementation of MiFID also implies a fragmenta-
The likely impact of MiFID on capital markets is cur- tion of liquidity in Europe. “Liquidity is currently concen-
rently based on a set of industry predictions. “The direc- trated on a country by country basis in the form of
tive brings into scope a wide variety of products and national stock exchanges,” says Bennet. “When liquidity
instruments, which weren’t previously covered by reconcentrates it may not do so around those same ven-
European regulation, including derivatives and commodi- ues. There will be new venues, some of them may be
ties,” says Webb. multi-market or multi-country venues. Firms must
“The Directive seeks to clarify distinctions between accommodate the fact that the market will fragment and
home market regulation and host market regulation. If reconsolidate in a different shape. This presents a variety
your services are permitted by the home market regulator, of connectivity challenges for the IT specialist in terms of
under MiFID you can passport them into other countries.” ‘what instructions do I need to send where?”
Technology
The cost of technology has raised the bar vis-à-vis the
scale required to offer collateral management as a specialised
service to trading counterparts. There are currently only a
handful of institutions with the critical mass to provide col-
lateral management as an outsourced service. “The techno-
logical barriers to entry are continuously rising as users
become ever more sophisticated in their trading structures,”
says Sood. “This is a scale business, requiring the maximisa-
tion of operating leverage.”
The Bank of New York has created an infrastructure which
transcends its $9.7 trillion global custody franchise and its
$1 trillion collateral management franchise. “There are many aim to provide a global outsourcing service, to help banks to
commonalities between these businesses, e.g. they both comply with Basel 2,” says Sood.
require securities data warehousing to value securities and The repo buyer has unsecured intra-day counterparty
report to clients on what asset classes are being held in their exposure in a bilateral repo during the pre-settlement phase.
collateral accounts. “We have created a common data ware- In a triparty environment, book entry, delivery versus pay-
house or securities market database, using multiple securi- ment effectively eliminates unsecured exposure.
ties information vendors which can be utilised by multiple “Fails free, real time movements reduce operational risk,”
business franchises across the bank,” says Sood. says Sood. “by outsourcing this post trade, pre-settlement
“Ordinarily this would require separate subscriptions from function to an independent specialist, credit and opera-
our custody, lending, ADR and collateral management tional risks can be reduced.”
teams. By achieving minimum efficient scale, we are able to A $1bn government repo might consist of between 10 and
subscribe to additional specialist data feeds . The unit cost of 20 individual lines of bonds, whereas an equity repo of the
our service decreases as you amortise these fixed overhead same value could consist of several hundred lines of stock.
costs across a large customer base.” “The settlement and valuation infrastructure required to
manage equities drawn from 30 different markets is very dif-
Regulation ferent to the infrastructure required to manage very liquid
The financial services industry continues to be inundated and highly rated government bonds from the same 30 mar-
with regulatory compliance requirements such as Sarbanes kets,” says Sood. “The processing power, staff training and
Oxley, the Patriot Act and the
International Accounting Standards
(IAS39). “But it is Basel 2, and Europe’s “It is incumbent upon collateral managers, who
capital adequacy directive, which is likely
to have the greatest impact on the collat-
aim to provide a global outsourcing service, to
eral management industry,” says Sood.
“Basel recognises the collateralisation
help banks to comply with Basel 2”
of credit exposures more broadly than
before. Under the old credit exposure regime of the first data management required to perform the collateral man-
basel accord, the range of collateral required to confer regu- agement function increases exponentially .
latory capital relief was essentially limited to government “As a general rule, the collateral provider pays for this
debt and supranational issued paper domiciled in OECD service in its entirety, thereby enabling the investor to get
countries. 17 years on, Basel 2 attempts to account for the comfortable with moving down the collateral curve and
ways in which the banking industry and risk management accepting a wider range of securities as collateral. Tri-party
best practice have evolved.” agents act as gatekeepers and facilitate the automatic “dvd”
The increased volatility of financial markets, particularly (delivery versus delivery) substitution of any ineligible col-
following the rise of hedge funds, and the greater use of lateral, or collateral which the broker dealer has sold, auto-
derivatives, have changed the industry’s perception of collat- matically replacing it with assets of equivalent quality and
eral. “The more widespread use of leverage and investment value so that the investor is confident that he is always fully
in complex off-balance sheet instruments, together with collateralised. In a bilateral environment, securities are
some high profile corporate failures have been a catalyst for immobilised when delivered to an external counterpart. A
the creation of enhanced risk management tools and tech- dealer’s unfettered ability to buy and sell collateral on an as
niques, such as VAR analysis and loss-given-default proba- needed basis could be of infinite value.”
bilities,” says Sood.
For the first time, Basel 2 recognises the importance of Tri-parties
operational risk in the banking system and proposes JPMorgan kick-started its European tri-party collateral
advanced methodologies for measuring, controlling, report- management service in 1992, when it performed a third
ing and mitigating these risks. Basel 2 also recognises the party equity financing deal. Commenting on the growth
importance of specified forms of collateral, which may be since then, Rajen Shah, Head of Clearance and Collateral
used to offset or mitigate counterparty credit exposure. Management at JPMorgan Worldwide Securities Services,
“Basel 2 acknowledges that a collateralised credit is less says: “The main trigger for growth
risky than unsecured credit and permits such marked-to- in 1992 was securities lending. The
market collateral as prime index equities, secondary index securities lending market has grown
equities, convertible non-investment grade debt and publicly and the repo market started to see
quoted UCITS and mutual funds to qualify for regulatory substantial growth as well. There is
capital relief,” says Sood. no significant difference between
the financing requirements of these
Services markets.”
Attempts to reap the regulatory rewards of these diverse Collateral is all about mitigating
forms of collateral practically requires the deployment of credit risk, says Shah. “However,
more sophisticated VAR risk management techniques for taking collateral generates other
banks employing Basel’s advanced internal ratings based risks, such as legal and operational
approach. “It is incumbent upon collateral managers, who Rajen Shah risks,” he says. “The taking of collat-
eral presents certain challenges for banks who keep this Head of Product Management SIS SegaInterSettle, is the
function in house - it is not a core competence, but a neces- opportunity for them to increase the number of counter-
sary evil in their process. Banks either invest great amounts parts they do business with. “There are no restrictions on
or they don't invest enough, thereby running the risk of the number of banks they can do business with,” he says.
something going wrong. Basel 2 makes the situation more Hartmann adds: “We can offer a framework whereby
acute in that if you don't have the infrastructure for collater- lenders and borrowers can connect with a variety of coun-
al management, you are now financially penalised with capi- terparties. Lenders and borrowers don't have to deal sepa-
tal charges.” rately with each counterpart and they don't have to have
A handful of solutions are available to ensure collateral is bilateral agreements with each and every counterpart. We
duly managed. “There are fewer systems in the securities offer multilateral agreements with all counterparties and
lending and repo markets than those which are managed provide lenders with one agreement for an entire market
inhouse,” says Shah. “JPMorgan provides Comet 2, in order place. The benefit is that everybody is treated the same way
to address banks' risk and to ensure they can optimise their and banks can utilise one agreement for the whole market.
collateral. This is our core business - we can provide the This makes a lot of sense from a risk management point of
advice and the solution.” view and reduces a bank's connection costs. The benefits of our
Scale is extremely important for collateral management Eurex connection to the wider financial marketplace is that it
providers. “The chance of default is rare, but the risks are involves more counterparts in a more secure environment.”
quite high,” says Shah. “As a provider we can share the costs SIS is currently rolling out its securities lending service for
Eurex trades. The key
challenge is to generate
“We will see a strong demand for automated solutions” sufficient client interest.
“As soon as we have
among a wider client base. The market is realising it is better enough clients on board, we can concentrate on volumes,”
to put collateral in tri-party arrangements. Broker dealers says Eberhard.
have traditionally managed equity silos but these silos are “We have enough flexibility to offer individual and bilat-
consolidating. eral solutions.”
“There are economies of scale benefits to consolidating To facilitate the development of the repo and securities
these instruments with one provider. Many of our clients lending service, Eurex and SIS have created a market advi-
have different silos for equity and fixed income trades, but sory group.
they can benefit from optimising these programmes at a “Our delivery versus delivery mechanism in the SecLend
global level.” service also enables us to connect the security to the collat-
As unsecured trading passes out of eral behind it and meet the implications of Basel 2, in a sim-
fashion, the finite pool of collateral ilar way that the Swiss franc repo market will be handled
taken is directly impacted. Shah under Basel 2,” says Eberhard.
explains: “European ABS issuance SIS is working towards a degree of standardisation for
has grown by 30 to 40 per cent. clients' differing views on acceptable forms of collateral. “We
People feel these instruments are also enable participants to re-use collateral in order to cover
not as secure as others but they are their exposures,” says Eberhard.
of very high quality as collateral and As repo and SecLend trading increases, banks and broker
will be used in the future. The chal- dealers are faced with the challenge of creating a collateral
lenge here is about pricing. We're overview availability. Companies are also challenged to opti-
working with data providers to cre- mise their collateral usage and to reuse collateral received
ate standardisation as we believe from counterparties.
René Eberhard ABS will be the next big form of These organisations need centralised and standardised
collateral.” reporting, they need to keep costs low and automate
processes. They also need to achieve a state of zero intraday
Partnerships risk exposure. According to SIS, corporate actions handling
The international service provider SIS SegaInterSettle - for equity trades will become increasingly more challenging
based in Switzerland - is currently strengthening its partner- and the need for automated collateral substitution will
ship with the Eurex Zurich trading platform to provide tri- become more apparent.
party repo and new securities lending and borrowing serv- The key challenges for collateral management providers
ices to trades executed on the Eurex market. René Eberhard, include the ability to pool collateral without losing trading
Head of Repo & SecLend Products at SIS SegaInterSettle, opportunities, to mobilise as much collateral value as possi-
explains: “Eurex is seen as the trading platform or 'market- ble and to use collateral to the best extent possible. This is a
place', which has been enhanced by our SecLend products. market where we will see a strong demand for automated
We provide settlement, loan administration and collateral solutions,” says Eberhard.
management services to all Eurex Repo and SecLend trades.”
The status afforded by a link with Eurex enables SIS to Cross Product Offering
deliver back office services as well as fee calculations for Tri-party agent Euroclear Bank also provides collateral
trades executed on the platform. The benefits of the link to management services to counterparties involved in bilateral
securities lenders and borrowers, explains Daniel Hartmann, transactions.
responsible for such large transactions, I listener and people person, he believes in
was proud to be involved. your ideas and goals and helps you to
reach them, he inspires me to be a suc-
Systems. with WM, which he has held since January 2004. Prior to joining Standard & Poor’s, Price
State Street acquired WM in January 2003 in con- worked at Thomson Financial in Asia for three
State Street junction with a substantial portion of Deutsche years in business development and product man-
Corporation has Bank’s Global Securities Services business. agement, launching products across the region.
appointed Peter Steve Wisson has been appointed to a new role Before that, he was with Coleman Bennett
Baker as head of as senior vice president responsible for client International for five years as a market data con-
State Street’s integration within State Street’s investment oper- sultant, working for global financial institutions.
Investor Services ations outsourcing group. Wisson joins State “We welcome James aboard. We look forward
business in the UK, Street having served for three years as the global to working with him to identify new opportuni-
Middle East and head of operations for AXA Investment Managers ties as well as enhance our strategic approach to
South Africa. Baker (AXA IM), a role in which he worked very closely content distribution,’ says Biltoo. “His appoint-
assumes the role with State Street in forming their landmark out- ment further supports our strategy of working
from Jeff Conway, sourcing partnership. with financial-sector clients to provide high quali-
Peter Baker who will return to ty information and analytical tools that are
Boston at the end of Mellon Transition Management Services embedded in their internal systems.”
the year to take on a new role as head of State announced today that John P. Egar has been
Street’s Executive Operations and Strategy (EOS) appointed to the position of vice president, mar- The Bank of New
and Investor Relations. keting, Canada. “John brings extensive business York has appointed
“Our Investor Services business in Northern development and sales experience to Mellon Robert Darmanin as
Europe couldn’t be stronger, and I am pleased to Transition Management Services (MTMS),” said Head of European
hand over the reigns to Peter,” said Conway. Mark A. Keleher, president. “Based in Toronto, Custody and
“Although I will miss working with my col- John will be focused on further developing our Pensions. Based in
leagues, we have a deep and talented manage- presence in Canada. With his wide-ranging expe- London, he reports to
ment team in place which will continue to lead riences in the Canadian investment industry, he Stephen Richardson,
our business. Peter has been a crucial part of is a strong addition to the company.” Executive Vice
that team and I am confident in his ability to Egar, a Fellow of the Canadian Securities President, and Head
build on our strong growth.” Institute, will have overall responsibility for of Investor Services
State Street has achieved notable successes in building a strong sales team and developing Europe.
Northern Europe thus far in 2005. Full-service strategies to support the investment and transi- Darmanin’s previous
middle- and back- tion management needs of CIBC Mellon and Robert Darmanin role was in the
office investment Mellon clients based in Canada. bank’s investment
operations outsourc- Prior to joining MTMS, Mr. Egar held executive managing division based in New York where he
ing partnerships management positions at a number of large, headed up corporate finance activities, business
have been formed nationally renowned investment dealers, includ- development and the overall relationship with
with AXA Investment ing Wood Gundy and CIBC World Markets. investment management clients. Prior to that, he
Managers and MTMS, which provides premier global transition was Head of worldwide sales, service and prod-
extended with management services to institutional clients, uct management at Bank of America.
Scottish Widows focuses on reducing transition costs by minimiz-
Investment ing market impact and maximizing market liquid- News Flash: Sir John Bond, 64, Group
Partnership. State ity in a risk-controlled environment. Chairman of HSBC Holdings plc since 1998, will
Street also continues Supported by state-of-the art trading and ana- retire at the Annual General Meeting on 26 May
to build its market lytical systems, a dedicated portfolio 2006, after 45 years service. Sir Bond will be suc-
Jeff Conway share with prominent management team oversees the transition ceeded as Group Chairman by Stephen Green,
mandates to service process from pre-trade planning to post-trade 57, who joined HSBC in 1982, and is currently
asset owners and asset managers such as the analysis. Group Chief Executive.
UK’s Pension Protection Fund (PPF), Merseyside Stephen Green will be succeeded as Group
Pension Fund and Liontrust Asset Management. Standard & Poor’s Chief Executive by Michael Geoghegan, 52, who
“I am very excited to assume this role,” said has appointed Jamees joined HSBC in 1973 and is currently Chief
Baker. “We have achieved tremendous growth Price as Director of Executive of HSBC Bank plc, the Group’s princi-
and success during Jeff’s tenure and I look for- Market Development pal subsidiary in the UK.
ward to building on this foundation.” for its European data These appointments have the unanimous sup-
Baker, age 44, has served as managing director and information serv- port of the Directors and have been made after
of State Street’s Investor Services business in ices business. consultation with representatives of major insti-
London for the past 18 months. Prior to this role, Based in London, he tutional investors and explanation of the succes-
he served as the managing director of State will report to Krishna sion planning and independent external search
Street Australia for three years. Biltoo, Managing process.
State Street Corporation has also enhanced its Director of European Michael Geeoghegan will be succeeded as Chief
UK presence with two appointments within its Data and Executive of HSBC Bank plc, subject to necessary
Investor Services business in Northern Europe. Information. approvals, by Dyfrig John, 55, who joined HSBC
Michaael Walsh, currently head of WM James Price One of Price’s main in 1971 and is currently the bank’s Deputy Chief
Performance Services, has been named manag- roles will be to Executive.
ing director and head of State Street’s business strengthen the recognition of Standard & Poor’s
in Scotland. Walsh assumes the role from John as a critical provider of financial information and
Corcoran, who is returning to Boston to take up analytical tools as well as to increase the firm’s A selection of the appointments
a role in State Street’s mutual fund administra- outreach to credit markets. He will head a team updated daily at WWW.ISJFORUM.COM
tion group. Walsh will continue to retain his role of five professionals based in London.
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