November 2010

ASSET SERVICING: taking on the world

Patrick_ColleWith its former chief executive ousted, its global structure reorganised, and two middle-office contracts potentially lost, Nick Fitzpatrick asks what’s going on at BNP Paribas Securities Services The ‘middle ground’ is a place many companies in financial services would like to avoid. In fund management, if you are not either a niche boutique on the one hand, or a fund factory on the other, then you had better just pretend that you are.

Asset servicing is similar, but it’s also worse because for most of the custody banks that comprise the asset servicing industry, it’s a game of scale, and if you don’t look big in some way – either because of asset size, service range or geographical footprint – then forget it.

The claim to be a ‘global’ player in this section of the industry has always looked less convincing when it comes from the mouth of a European custody bank than when confidently asserted by a gigantic US player.

Where its asset size is concerned, BNP Paribas Securities Services (BNPP SS) is in the middle ground, though at €4.33trn in the 2010 Funds Europe Global Custody Survey it was at least not in the very thick of the quagmire. Citi, the smallest of the US giants, was just one place ahead – albeit by €5trn euros – and no other European, even HSBC, led BNP Paribas. It placed higher than America’s Northern Trust, French rival Société Générale and Belgian-French-Canadian RBC Dexia. (The survey was based on March 31 figures.)

Looking at its range of investor services, BNP Paribas appears well represented where it matters. Its Luxembourg presence is big, Aberdeen Asset Management is a key client and growing well in emerging markets, and counting the large Brevan Howard hedge fund among its clients means it can tick the hedge fund box with credibility.
But what about its geographical presence? Surely this is where it matters most in global custody, especially for a bank that says it likes to be close to its clients, most of whom invest across the world.

Patrick Colle, CEO since April, put globality at the centre of his recent reorganisation and tells Funds Europe that an aspect of this is for BNPP SS to increasingly provide its own sub-custody in foreign markets. Greater control
The move is in many ways a response to European regulatory changes that threaten to make global custodians strictly liable for client assets, even those lost by a sub-custodian in their network. This liability is particularly worrying in certain emerging markets where ownership laws are less defined and general market infrastructure less robust.

“AIFM [the proposed Alternative Investment Fund Managers directive] means it is more important than ever to control assets from a local position,” says Colle.

“Those locations where we provide our own sub-custody cover about three-quarters of our assets under custody, and as we expand into Asia and Latin America, the intention is to become our own sub-custodian more and more. We want to control an even bigger percentage of our assets, but we will still use some external sub-custodians, though probably for a smaller chunk of assets.”

BNPP SS already provides itself with sub-custody in most of Europe and in 22 out of a total of 102 markets worldwide. In expanding its self-sufficiency, BNPP SS will be emulating HSBC and Citi, who say their proprietary sub-custody networks put them in strong positions to deal with the regulatory induced liability pressures.

But it was not European bureaucrats alone that led to BNP Paribas’ reorganisation. The primary goal was to get a tighter grip on key business lines, which now stretch further around the globe following the firm’s expansion.

Over the past two to three years BNPP SS’s expansion has accelerated, particularly in Eastern Europe with Poland and Hungary, and also Asia, Latin America and other selected emerging markets like Morocco.

In Asia, over the past three years the firm has opened in Singapore, Hong Kong, Mumbai, and established a representative office in Beijing.

“The key driver of our reorganisation is the desire to become totally global, to manage our business in a global way. It is a reflection of the fact that we are in many more locations now than we were before,” says Colle.

Due to this expansion, and to AIFM, Colle says there was a need to create the four global business lines recently defined. These are: asset & fund services; clearing & custody services; corporate trust services; and market & financing services.

“The point was to bring together under the four new business lines those functions that were not together before – operations, IT, product development and sales – because
this allows for better global management of the P&L.”

Colle, who is French, had headed the UK operation of BNPP SS since 2008. His promotion came after the firm forced its previous global CEO to leave in November 2009, alleging a breach of interanl rules. Colle’s appointment was announced in April 2010.

“Patrick looks like he is trying to realign BNPP SS so that the focus is on client segments and revenue gain in those segments,” says one observer, who did not wish to be named. “This has given them a stricter focus on new client revenues.”

This could make BNPP SS a more effective sales organisation. Arguably the firm needs to break out of its core client base, at least in the UK, of Henderson and Aberdeen, though at least these managers are large. Aberdeen manages £168.8bn (€205.9bn) of assets.

“They get good feedback from Aberdeen. Aberdeen is a success,” says the observer.

“The reorganisation looks sensible,” was another opinion canvassed. But: “They need to do more to win higher margin middle-office business.”

The executive reshuffle resulting in Colle’s appointment came in the same twelve-month period or so when the firm had to fight hard to retain an operations contract with Henderson, the large UK fund manager. More recently, the firm lost a smaller middle-office mandate with Artemis and is under review at Scotland’s Martin Currie. Strategic partnership
It is understood from sources close to the matter that when it retendered the contract for investment operations, Henderson considered giving the business to JP Morgan Worldwide Securities Services, but then kept BNPP SS when Henderson initiated the acquisition of New Star, which took place in January 2009.

Asked about this, Colle said the tendering process was a competitive situation and that the new agreement with Henderson “signaled a move from a supplier-provider relationship to a strategic partnership between the two companies”. He said the two key elements of differentiation for BNPP SS were the wide range of services it provides and its ability to support clients’ merger activities.

“I’m convinced that one of our greatest competitive advantages is to handle mergers. New Star was migrated in record time and we did that also with Aberdeen and Credit Suisse Asset Management. We are doing it now as well with Fortis and BNP Paribas.”

Asked about the situation with Artemis Colle said   it had been a very good relationship, “but the strategy that we have evolved in the UK over the last 18 months to two years is not to provide middle-office outsourcing only. We want to build global strategic partnerships and as a result we were brought into discussions”.

He adds: “A middle-office-only model is not good for clients or for providers.”

Colle says there are no other mandates like this that BNPP SS may also depart from for these reasons.

With BNPP SS’s new approach to managing its business, we should be hearing more about mandates won rather than lost in future, and if Colle can properly energise these international business lines and leverage its proprietary sub-custody network, BNPP SS might emerge from the middle ground.

©2010 funds europe

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