July 2009

ASSET SERVICING: (2) Funds Europe panel 2009

Mark Briol • Biff Bowman • Nadine Chakar • Jaron Van Dam • Susan Ebenston • Andrew Gelb • François Marion • Rob Wright meet round a table with Nick Fitzpatrick Funds Europe: Asset Servicing Panel 2009 contributors • Mark Briol, CEO, Pictet Custody Services
• Biff Bowman, CEO, Northern Trust, Emea
• Nadine Chakar, head of asset servicing, Emea, BNY Mellon Asset Servicing
• Jaron van Dam, global head sales & relationship management, Fortis Prime Fund Solutions
• Susan Ebenston, head of global fund services, JP Morgan Worldwide Securities Services
• Andrew Gelb, head of securities and fund services, Citi, Emea
• François Marion, chairman of the management board, Caceis
• Rob Wright, global head of product & client segments, RBC Dexia Investor Services

in the company of Nick Fitzpatrick, editor of funds europe Nick Fitzpatrick (Funds Europe): The financial crisis and the Madoff scandal have caused a debate about the liability of custody banks. Regulatory developments suggest a possible move towards increasing the level of responsibility and liability for custodians. For example, in France custodians were forced to return securities that were held in the safekeeping of their failed sub-custodians following Madoff. Is this the right way forward?

François Marion (Caceis): In Europe the playing field is not level. We have seen countries that have developed full investor protection, with the result that depository banks are virtually turned into mono-line insurers. A clarification is necessary and whichever way it goes will be welcome. But if we move towards a solution where the depository bank is responsible for everything, that could change the financial business model of the depository bank business.

Marc Briol (Pictet): The debate around the obligation of a custodian to actually give back assets in case of failure is very much politically affected. There is a lot of political noise in this discussion and I think it is giving investors a false sense of comfort. But this is the type of model that we are going to end up with.

Rob Wright (RBC Dexia Investor Services): If it were the common practice to return securities, as happened in France, in the event of a significant systemic failure of an institution with worldwide effects, the obligations that banks would inherit would overwhelm their balance sheets. Policy makers really have not thought about the implications of multi-billion-dollar failures and the immediate restitution of assets that some of them call for.

For custodians we have to do our due diligence and try to ensure that client assets are held properly, under controlled circumstances and segregated away from the balance sheets of sub-custodians.  But to take accountability for another failed institution would be completely beyond our control. I don’t believe that anyone prices that risk premium into the business today.

Andrew Gelb (Citi): It is worth noting that the current system survived the Lehman Brothers collapse quite well. The unwinding of Lehman Brothers proceeded in a very orderly fashion considering what could have happened and, in part, the success was due to regulation. There are interesting lessons to be learned from this success, but they don’t necessarily translate into completely new regulations.

Nadine Chakar (BNY Mellon): The Lehman Brothers debacle proved we have a very good infrastructure when it comes to ensuring that third-party assets are safe. It showed that controls are there and we’ve proven that the regulatory framework for securing client assets – by ring-fencing them and putting them off balance sheet, etc – works. I don’t know what else we can humanly do to ensure this works any better than it already does.

There are always lessons to be learnt, of course. We operate in a truly global environment and we are so interlinked that the action of one bank triggers consequences for others. That’s another dimension people should be looking at. Anybody in risk management these days probably has a job for life! But I’m really not sure there’s much more that we as asset servicers can do.

Custodians, in order to compete and acquire market share, may have done things that were a little bit foolish in commercial terms without fully recognising the implications. When a client hires you as custodian or administrator, you’re putting your balance sheet at their disposal. I don’t think, given our pricing arrangements today, we even take that into consideration. Hopefully, as an industry, we will go back to basics and make sure we get full value for the services we provide.

While from a safety and legal perspective there’s not much more we can do, from a commercial and business perspective, we need to be a lot smarter about how we price for putting our balance sheet at a client’s disposal, because there is an intrinsic risk that comes with this that is way beyond our control.

AG: I agree: client assets are safe with a custodian. Regulation born out of the Great Depression in the US defined the role that the custody industry would play. The one area where there’s probably further room for development – and a market opportunity – is within the parts of the asset management industry that do not use custodians today. Hedge funds, for example, could be in such an area because historically they have not employed custodians, although market forces mean many are looking to do so now. The custodian model has been proven to be safe and so it is the model that the market is now seeking out.

Susan Ebenston (JP Morgan): Custodians have stood strong and safe even though many balance sheets went from being large to being quite small. The problem is that not everything can be ‘custodised’ – and that’s where some of the surprise came for our clients. One change is that instead of leaving the more material assets with prime brokers, hedge funds are now shifting them to custodians. Although we welcome that, there is the issue of what to do with assets that cannot be custodised. We live in a de-materialised world and there are a lot of assets that are not really assets, or at least they are non-material assets. You may, for example, have a Sicav at the top level, but sitting under it there is a whole set of structured products where there is complete opaqueness about what these assets are.

What we have discovered is that assets had a book value of one number, but a real value of another, and because you may not actually have the real underlying assets in custody, you may not actually know what the real value is.

Jaron van Dam (Fortis): Hedge funds used prime brokers as their custodians, but their assets were re-used by prime brokers and were not then clearly identifiable. That is what’s changing now: the historic model of prime brokerage is in question. Hedge funds want custodians that keep assets separate, and that allow them to have a clearly identifiable pool of assets that belong to hedge funds and which can not be used for rehypothecation. That’s the major change stemming from Lehman Brothers.

NC: I agree with that and that’s our point. Hedge funds are shifting away from prime brokers, which I don’t think were subjected to the same scrutiny as custodians. Even with traditional pension plans,  custodians are holding a lot of assets on our books that we just have no insight into. Take real estate, for example. Is it our job to make sure a building truly exists and that there are rent-paying tenants in it? And if there are no tenants paying rent, do we foot the bill?

Those are some of the dynamics we are all struggling with. We are safe in the knowledge that the assets for which we have oversight are held securely and are segregated, but as people put more money into assets that are not securities, it is more difficult to uphold our responsibility.

FM: In fund management there is the situation whereby pricing is bundled and yet responsibility is unbundled. I think responsibility needs to be bundled more, too.  At the moment there is the distributor, the fund manager – who may also delegate to another manager – the prime broker, the fund administrator and the custodian. There are sometimes as many as ten parties in the whole chain. Either nobody feels responsible, or everybody thinks the other person is responsible. Regulators will have to specify the two or three parties that are responsible and for which part of the process. Then there will be a change of pricing to adjust to the effective risk.

NC: My concern is that regulators might place the burden of responsibility on the party with the deepest pockets and when you compare a bank to an asset manager, you know where they’re going to go.

NF: Let’s take a specific issue here: Nav pricing. Where does responsibility and liability lie here, especially in a full-service organisation where administration, custody and trusteeship may be offered under the same roof?

Biff Bowman (Northern Trust): We say the fund board is accountable for that.

SE: That’s right, because we are the administrators, not the fund board.

BB: But I bet we all get challenged on this issue though.

JVD: It would represent a very large change if the administrator were to be held responsible for the Nav. The fund board or directors are the persons/entities responsible for the investment process and, in our view, where the responsibility regarding valuation should lie. Putting such a responsibility on the administrator increases liability on the service providers as they will be required to take up the valuation role, which is traditionally borne by the fund manager or fund directors. This will invariably lead to increased costs to the fund and ultimately to the investors in the fund. As an administrator, we are price gatherers, not price makers.

SE: Yes. There is a lack of clarity about who owns what part of the process. We, the asset servicers, are administrators. If we are doing as we are instructed, how can we be held accountable if the instruction is wrong? Certainly the regulators would like us to be responsible because we tend to have deep pockets. But there are investment managers and investors making a decision out there too. There are a number of people in the value chain who have to be responsible for their own functions. You can’t just move responsibility to the end of the value chain and say, ‘You have the deepest pockets; you’re responsible’. Somehow the legislation has that kind of flavour to it.

NC: At the end of the day, if there is an accounting inconsistency, if there are hard-to-value assets, it shouldn’t be left to the entity that’s most removed from the entire investment process to be responsible. Custodians are responsible for the integrity of the accuracy of the Nav. But with pricing it is different. If there are securities that are hard to value, we are not responsible. We can help, we can provide advice, we can model, but just because the function has been outsourced to a custodian does not mean that the liability is outsourced too. It’s the fund board that is responsible for this along with the people managing the assets.

It’s unfair to take the entity that is most removed from the process and hold them fully accountable. Fund managers do not ask our opinion when they invest. If we were given veto rights on buying this security versus that security, you could make an argument, but as mentioned, we do as directed.

MB: As administrators and custodians, we must, however, be reasonably comfortable with the price before taking assets on to our balance sheets. Can we really argue that it is too complex?

NC: I do not disagree with that. That is our responsibility as a depository. But if you can’t price something and you turn it over to the people that bought the asset, or you’re looking to them for advice on which accounting treatment to use on an impaired asset, just because they’ve hired an administrator they cannot outsource the responsibility they have for their funds. That’s really important to note.

AG: Indeed, existing regulation in many parts of the industry keeps that responsibility with the fund board and with the investment manager.

NC: That’s what we had in Luxembourg.

SE: Yes, that is the dynamic. If you look at Europe, there is a clear delineation of responsibility, but this is under threat from some of the legislation coming through.

RW: It demonstrates that regulators in some cases really don’t fully understand the nuances of our business. They are trying to create some independence between manufacturers, which in some cases were prime brokers, who created prices that were then used by fund managers who purchased products from the same prime brokers. But the regulators, in fairness, are trying to separate some of those functions to give independence to them. However, this must not be confused with guarantees or total responsibility or liability for custodians and administrators if something goes wrong. The spirit of what regulators are trying to do makes some sense, but it seems as though they haven’t really thought through the different parts of the business.

AG: A traditional asset manager’s duties are clear and fairly well segregated. There tends to be little confusion about responsibilities and this could serve as a very useful model for regulators as they look to set the pace for alternative investments and other asset classes. NF: But isn’t liability dealt with in contracts between you and your clients?

NC: It is, but Luxembourg regulators had an issue with that. In France this has been even more pronounced and as custodians we have to look again at our business model and make sure that we’ve truly accounted for those liabilities that historically we’ve taken for granted.

SE: There are market conventions and legal structures that give custodians and depositories protection. But recent developments have turned this around and there are now expectations that custodians and depositories are standing behind these liabilities, and that is a step too far.

JVD: If that is the way forward then it will impact us and we will have to charge to allow for insurance premiums that will be necessary in the new landscape.We would need to be insured and that could have a massive impact on pricing for our clients.

FM: If you slice and dice the players in the chain too much, they all become independent, but they may also become irresponsible. Personally I’m in favour of having the administrator, the depository and the custodian in the same house, but not the asset manager, of course, nor the distributor.

NC: And being under the same umbrella does not mean there is not a separate governance for each unit. All depositories are ring-fenced. In our situation we have a sub-company, with a separate board and external people who sit on the board. We also use separate systems, so although we share a common name, these entities are ring-fenced and they provide an oversight function. There are benefits from bringing all these together, even from a regulatory perspective. The regulator looks at the depository and we are actually more heavily scrutinised than the standalone trustee. In the current market environment I don’t know if a standalone trustee model works, so it’s possible that clients’ assets would be indirectly in jeopardy if they were with an external trustee. There are also Chinese walls between all these units under the same umbrella.

AG: Yes, there are strict Chinese walls between these activities. But the reason you often find them under one roof is because the market has driven them there.

BB: There are also efficiencies to be gained from doing this.

SE: In some markets you have to be both a trustee and a custodian.

JVD: Institutional clients like to use institutional service providers and this means they are pushing to bring services together. At the end of the day, institutional clients also want to do their business with providers that have deep pockets.

BB: Individual services are separated in our firms, but perhaps what needs improvement is the definition of the responsibilities and accountability of each of these. There may be a need to delineate responsibilities rather than separate functions.

NF: What would be a potential conflict of interest within the Nav function if it were in the same department as fund administration?

SE: For example, there could be a concern that the trustee may choose which price to use if there is a discrepancy. But, in my experience, that doesn’t happen. I’ve heard it asked why this could not occur when both trustees and administrators sit together. The answer is that we don’t actually sit together and we look at it from completely different angles. There is therefore an issue about education, to make people understand the contribution that each player in the process makes to the value chain.

NF: Inconsistency between regulatory regimes has always been a complication for global asset service providers. A new regulatory landscape is emerging due to the financial crisis, so do you anticipate a greater regulatory consistency or not?

SE: There is definitely a rush to introduce more regulations and my concern is that this rush may mean that measures are not necessarily all thought through and may lead to inconsistency with some very damaging consequences. It could get to the point where it would drive some fund managers out of business or out of Europe.
I understand the need for more regulation but I don’t think we’ve seen enough consistency or accuracy in the way it is currently proposed.

BB: If there is a lack of consistency, we run the risk of regulatory arbitrage between markets and I believe that is not the goal of any regulator around the globe.

MB: The big issue we have as an industry is to develop not a common front, but well thought-out proposals. It’s something that the relevant institutions should be thinking of.

RW: One of the dangers right now is that politicians are taking the lead. We really don’t have an organised response or industry-wide position on certain issues that directly affect our business. It’s part of an obligation on behalf of our clients and stakeholders to become involved in the process and explain the rationale of why the regulatory environment should unfold in a certain way.

NC: I agree generally. Regulatory arbitrage is clearly there and liquidity constraints are a very good example of where we’re all shifting our position just to be able to do the day-to-day job.The FSA right now is a prime case in moving from its rules-based approach to something much more proscriptive. There are also proposed regulations for hedge funds that, if we are not careful, the impact of which could drive a lot of funds out of Europe.

FM: We don’t need more regulation – there’s enough already – but we need more effective regulation.For example, we need regulation to know who exactly is in charge of protecting the interests of investors, to know how to avoid systemic risk, how to avoid market risk. So far we have got regulation that is very picky and detailed, and which gives us a lot of duties to perform, such as different reporting requirements in each country that we operate in. We spend a lot of time and money to carry out this reporting – yet it’s probably ineffective. We need a change in regulation, not just more regulation.

JVD: We live in a global world with a global industry and protectionist measures by any country will damage our clients and our industry in the long run, so they should be avoided through action by industry trade bodies.

NF: Again, let’s take a specific example and one that is relevant to your hedge fund client base. The Alternative Investment Fund Managers Directive from the EC has been criticised by Aima, an industry body. Aima claims the proposals are hurried and are a disproportionate response to the impact of hedge funds. How do you feel about it from a custodian perspective?

JVD: We support the idea of rebuilding confidence in the hedge fund industry. However, certain parts of the proposals would be very detrimental to the industry.The directive proposes the way for hedge funds to value their assets and a key change to the role of the global custodian and the sub-custodian. This needs to reconsidered. Some other points for fund managers also need to be addressed.We believe that a consultation period with input from the alternatives industry would result in an improved directive, which could be for the better, and we have to be a part of it.

MB: I am not convinced that the proposals are really effective over the longer term. There are proposals for liquidity constraints, yet you can’t put liquidity constraints on certain types of vehicles. The demand for monthly liquidity for certain funds is not realistic and it would be dangerous to give investors the idea that it is. We would actually go back to square one, for example, if the impression were given that asset-backed securities were very liquid. Certain products simply are illiquid, and it’s a question of selling them to the right investor with the right risk exposure.

NC: The way the proposed directive is drafted now looks like a double-edged sword. As a custodian and administrator, my concern is around the responsibility of the depository if you are forced to appoint a certain prime broker. As an industry I’m not sure we’re able to accept that level of liability. While transparency would be good, it will put more non-EU-based hedge funds at a competitive disadvantage as far as trying to distribute in the EU is concerned. And in any case, 50% to 60% of hedge funds are based in the US so they would not be subject to this regulation.

JVD: Not just hedge funds but also offshore-based service providers will significantly suffer from this regulation too.

NC: The proposed directive targets everything that is not Ucits – even UK retail funds could potentially fall under it. More work is needed.

RW: These proposals mean there will be capital guarantees in support of the funds and the underlying assets and in turn this may place capital obligations on custodians. I don’t think any of us are against transparency and proper operational requirements and we support initiatives in that regard. But politicians need to take a step back and look at the consequences of this.

FM: The prime broker issue is an important point that needs to be addressed. Currently, prime brokers are in between the fund manager and the custodian. But no custodian or depository will be in the position to subsidise the prime broker without having any control over what he does. In the Lehman Brothers episode, Lehman was a prime broker that lent securities that had been put up as collateral by other clients. This meant that fund managers thought their assets were with Lehman Brothers, when in fact they were not. This directive will address this main problem.

Prime brokers will have to become custodians in a sense, or custodians will also have to become prime brokers. I doubt that we can have independent prime brokers as we had in the past, because they were not responsible for any risk taken, and this may not be the case for much longer.

MB: First of all, there are not many prime brokers left anyway. Second, there are different functions performed by the prime broker and these functions will not disappear, they will simply be provided by different actors. The funds function is still there and a regular bank can provide it. There will be a push towards more asset segregation.
BB: If the EU wishes to accomplish more transparency, I’m not sure that this is the way to do it. There is a need to define what is actually wanted. It’s almost like there was a need to draft something immediately around these instruments without thinking what was needed.

SE: There could be a lot of unintended consequences.  Regulation needs to be thought through from beginning to end. Legislating in one place can have consequences elsewhere.

NF: We’ve heard that custodian pricing models may have to change if the burden of responsibility and liability falls upon them with greater weight. How will pricing change?

AG: Pricing models in the industry will change and some have already started. There will be more unbundling of services and prices at every level in the value chain and we will see more pricing for risk. There’s been an under appreciation of risk in the market for a while now, and the value-added in various processes does not really get priced. You can see that throughout the industry.

FM: When somebody goes to a retail bank to buy a Sicav, on average 70% of the margin goes to distribution, 26-27% goes to the asset manager, and 2-3% goes to the rest – accountants, fund administrators, custodians, etc. But you cannot insure the risk by having just 2% of the margin, which is roughly what we have at the moment. Between countries there is a huge difference in margins taken by depositary banks and administrators. Italy is high, but France is probably five times lower than Italy. Globally, margins are very low compared to the rest of the value chain.

MB: The industry has developed an unrealistic pricing structure. Every single company has to be paid and unbundling is going to take place. On average prices will go up across the industry. Fees will be shared with clients more and more – I’m talking about distribution, securities lending, class actions, etc.

RW: Historically we’ve offered bundled services and pricing, but now our firm is unbundling the pricing component. There are some legacy pieces out there, but by and large unbundling is how clients of our industry will have to pay for getting a proper service and controls in future. It’s always hard to be the first mover in an industry when it comes to changing pricing models.

BB: In the past, the balance sheet cost to our businesses has been underestimated and, to a degree, we’ve underestimated the risk premium – something we’ve all seen in recent scenarios quite frankly. There’s a real cost to capital and our businesses need to be measured in ways that are more tightly aligned with that cost of capital.

SE: Our clients are under incredible cost constraints, so it’s actually harder now to have conversations about proper pricing than it has ever been.

NC: Custodians operating in many countries are getting hit many times by the same things. But at the end of the day there’s a new paradigm coming out which is about stability. Conversations with clients have to be frank. They have to pay for our balance sheet. It’s a hard discussion and it’s been the worst nine months that I’ve had professionally, but it’s a conversation you have to have.

AG: We all agree about the importance of pricing for risk and cost in our industry. Another point is how the asset management industry itself evolves and how products change. That will drive price and cost in our industry going forward. I expect there to be fairly significant change in the asset management industry as a result of the last 12 to 18 months, and that will manifest itself in a whole series of products. We may not even understand yet how this will affect pricing.

For example, the buy-and-hold strategy that many retail investors pursued through their asset managers is probably something of the past. It will shift to new types of investments or targeted investments that will lead to different types of cost, different types of risk, and different types of pricing in our industry.

SE: The other entity that needs to be included in this is the distributor.  They do not get paid for retail advice - that’s for IFAs and intermediate professionals. There hasn’t been a model where the retail investor pays asset managers for advice and so it has been paid for through some other mechanism. The whole dynamic of the industry, every part of the value chain is changing, but everyone needs to be paid for what they’re doing and the risk they assume. That’s where the legislation actually starts to bite. Regulation is moving risk from one part of the equation to another part, and that genuinely needs to be paid for.

FM: The problem of pricing shows that there is an oversupply in the asset management industry and there will be consolidation. Also, somebody will have to pay for the insurance against risks and at the end of the day this may well be the final investor.

NF: So bundling used to work when times were good. Now times have changed, is that bundling simply too cheap to be sustainable?

NC: We can still bundle services but we just have to make sure we get the intrinsic value. The client base is looking for simplified interfaces, so we want to bundle to the greatest extent we can. If anything, by bundling we should be able to extract more value, not less value as we have in the past.

NF: What services that were previously bundled now aren’t?

AG: A classic one is settlement. In certain parts of the industry settlement charges remain quite high in relative terms, but that settlement fee goes to pay for a myriad of other services, such as corporate actions. For corporate actions, in particular, many firms do not charge explicitly for corporate actions processing, yet there’s a lot of risk in processing corporate actions. It’s subsidised by other parts of the rate card.

SE: A lot of the push for unbundling is actually coming from the clients too. In some cases they are looking for ‘componentisation’, where they will do one thing with us, but want to do something else with another provider to mitigate concentration risk. It is the same in the hedge funds and alternatives space, where they may only want services for Ucits funds.So a lot of the push for components is actually coming from the client just as much as it’s coming from us.

JVD: In the current environment clients are trying to push more components to us in order to reduce costs.

NF: When can your clients expect to see pricing start to trend upwards?

BB: Partly this will happen when the new regulatory regime emerges. If what is going on in Luxembourg now sets the new standard of liability, pricing is going to have to change pretty quickly – particularly for some players that don’t have the financial strength to deal with the new risk profile.

NF: Can we expect a wave of consolidation in the industry?
NC: There are more businesses on the market than there have ever been. Consolidation will be a direct consequence of what is happening, particularly for firms where custody and asset management are not core, scale businesses. There are several businesses on the market and I know people are kicking the tyres in different areas. But people are clinging on to really high and unrealistic valuations. Once the reality settles in, I think you’ll see a lot more movement. However, in this environment some of us are restricted by regulatory hurdles and this would probably make it a little bit more difficult.

MB: We’ll probably end up with four or five main providers and a couple of niche providers. There’ll be far more consolidation than we currently have. The current polarisation between manufacturers and distributors will push a lot of business on the street again.

SE: There is a wave of consolidation that needs to happen within actual funds themselves. There are something like 30,000-plus funds, of which 21,000 have got under €50m in them. It’s uneconomic for fund managers, for the fund servicer, and the administrator.

AG: I’m not sure consolidation is necessarily the issue. The industry will change as products change. Consolidation may be the outcome, but it does not have to be. When you’re faced with a financial dislocation you can consolidate to cut costs, you can figure out ways to increase price or you can create new products. The end game might be some combination of the three, but I don’t think consolidation alone is the answer and certainly in this industry the consolidation process has been going on for some time. To a large extent it’s already consolidated.

BB: I think there will be more consolidation because there are two camps here. There are firms that will need to sell non-core businesses, and asset servicing may not be core to some  institutions. They will need to sell for capital raising reasons and because of local government intervention. But you will also have some institutions, even where asset servicing hasn’t been core, that have seen their asset servicing capability weather the storm better than some of their other businesses and they may feel that it is worth making an acquisition in the sector to expand. I think a lot of that thought is going on.

SE: Yes, we’ve been an annuity-like income for them and flattened out some of the worst of the earnings curve.

RW: This industry has consolidated more rapidly than other industries in the financial services world where the big bought the small, but now banks of all sizes are going through a consolidation phase. There are brokers consolidating into big banks and we are starting to see some high-level consolidation in the asset management community.

NF: I’d like to talk about another issue affecting the asset servicing industry and your fund management client base, and that is automation of manual processes. This appears to be a difficult transformation for the industry to make.

AG: I don’t think the industry as a whole is doing that much to address manual processing. As individual firms, I’m sure we’re all making various efforts and there are some specific industry groups that take up these issues. But, at this point, I don’t see many industry-wide initiatives.

NC: If anybody’s got a TA [transfer agency] business, you’ll know that is the area in which we struggle the most because orders are sent on the back of napkins! I think Swift is coming out with new standards, but I’m not sure there’s any value in them yet because if we continuously rush to, for example, Swift capabilities, yet our fund manager clients don’t have these capabilities, it’s a case of just spending money for the sake of it. But I agree that we’re all improving our processes to reduce risk, but as an industry, aside from Swift’s unveiling of their new format at Sibos this year I don’t think there’s much going on.

RW: The biggest challenge in the TA business centres on distributors, because they are not part of the food chain for us normally. The inducement to get distributors to partake in some form of automation is very difficult, especially if you’re in the off-shore, cross-border TA world, that’s where you really struggle.  Domestic markets have some form of automation and some are better than others. The off-shore market will remain more difficult until we engage our clients to ensure that those they hire as distributors of their funds are committed to some form of automation. It is always going to be difficult to automate the distribution process without regulatory pressure.

JVD: The alternatives industry needs to make further steps to welcome automation. The Swift initiative is a good way to try and achieve that, but whether that will form a single standard is an unresolved question. But it is a step in the right direction for the industry to come together and use a common methodology and move away from manual processes.  In the current financial climate, organisations are hampered by the lack of ability to invest in technology because of a focus on cost reduction. But this issue is key for our industry, especially on the alternatives side, to become more competitive.

FM: We have to be careful with standardisation. When we create a new standard, there is a chance that it just creates one standard more, because we usually keep the other standards also, and this increases the problem.

JVD: In the alternatives industry at the moment there is still too much business transacted on faxes or using couriers, and there are no standards there.

NC: But isn’t that the nature of some of the investments? There is clearly a fair amount that Swift can automate, but there are some things that just can’t be automated.

MB: You’re right, and that issue is less on the custodian’s side than on the asset manager’s side, where there is far less structure and standardisation. It’s in the interest of the asset manager to invest in technology.

RW: As custodians, we have multiple tools to support global STP including Swift and other FTP and web-based tools. It’s just hard to get parts of the fund management industry to take them up.

NF: Are the asset managers pushing standardisation at all?

NC: Not really. We’ve tried to incentivise some of our clients to try different STP methods. We can pretty much capture anything and translate it back into formats as we need, but the problem with fund managers is that we have less leverage. Unless they happen to be a direct client, then you have a little bit of leverage there, but if they’re third-party managers, its very difficult to get them to do anything.

NF: Finally, how do you feel the financial crisis is unfolding? Are there signs of recovery?

NC: Hopefully there will be a lot more clarity around the various regulations that are coming out, and a little bit more clarity on how this impacts our clients and the fund management industry in general. But the most important thing is for markets to stabilise to get business back to normal a little more.

JVD: For the first time in a few months we’ve seen subscriptions exceeding the number of redemptions. That’s a good sign of where the industry is going. There is cash at the sidelines waiting to be invested.

MB: Hopefully in six months time we will still be on the path of recovery. To a certain extent recovery is triggered by government. A year from now we’ll probably have more regulation than today – it’s just a matter of fact that regulatory pressure will increase and we’ll have more duties and have to spend more money on compliance and controls.

SE: Stability in markets will be an important part of the long-term recovery, but until the legislative changes currently proposed on both sides of the Atlantic are classified, we are not 100% clear on the road ahead.  However, we can be fairly certain that the landscape will be different from what we see today.

©2009 funds europe

Executive Interviews

INTERVIEW: Put your money where your mouth is

Jun 10, 2016

At Kempen Capital Management, they believe portfolio managers should invest in their own funds. David Stevenson talks to Lars Dijkstra, CIO of the €42 billion manager.

EXECUTIVE INTERVIEW: ‘Volatility is the name of the game’

May 13, 2016

Axa Investment Managers chief executive officer, Andrea Rossi, talks to David Stevenson about bringing all his firm’s subsidiaries under one name and the opportunities that a difficult market...


ROUNDTABLE: Beyond the hype

Oct 13, 2016

The use of smart beta investing continues to grow. Our panel, made up of both providers and users, discusses what the strategy actually means, how it should be used and the kind of pitfalls that may arise when using this innovative investment technique.

MIFID II ROUNDTABLE: Following the direction of travel

Sep 07, 2016

Fund management firms Aberdeen and HSBC Global meet with specialist providers to speak about how the industry is evolving towards MiFID II.