The CEO at BNP Paribas Securities Services tells George Mitton about adopting an Anglo-Saxon mentality, pursuing global growth, and the revolution in over-the-counter derivatives clearing.
“Don’t think of us as a French custodian,” says Patrick Colle, chief executive officer at BNP Paribas Securities Services (BNPP SS), as he settles down to lunch in his Paris office. “We are not French. We are a global securities services provider that happens to be headquartered in France.”
It is meant in earnest. Two-fifths of the executives at the firm’s top table are non-French and 70% of its staff are based outside the country. Even at the company’s new complex, a former flour mill in the Pantin district in the north-east of Paris, Colle insists that “we speak more English than French”. When asked if Colle, who was previously the company’s UK head for four years, will bring an Anglo-Saxon approach to the company, he replies: “I hope I’ve done it already.”
Colle is serious about being a global company. When he took the CEO job in May 2010 he laid out a plan to more than double the revenue share coming from outside Europe. The firm has expanded in the Asia Pacific region, where the company now has 15% of its staff operations, by enlarging offices in Hong Kong, India and Singapore. It has also opened its first office in Brazil.
These efforts appear to be bearing fruit. BNPP SS is now the largest third-party clearer on the Hong Kong stock exchange 18 months after setting up its office there, a fact Colle is visibly proud of. And the firm has more plans. It has just opened a representative office in Beijing and signed its first deal with a Chinese asset manager from its Hong Kong base.
What is helping the company win mandates in Asia is the growth of the Ucits brand. Half the new funds sold there are Ucits vehicles, and BNPP SS is one of the biggest administrators for Ucits funds in Europe.
“When we pitch to asset managers in Hong Kong and Singapore who need their Ucits to be processed, we are an ideal port of call,” says Colle. “We can talk to them about regulation, how to set it up, the nitty-gritty of everything, much better than any Asian bank.”
Behind the Asian success is a very serious motive. The asset servicing industry is struggling under increasing cost pressure and global growth is essential to offset declining profits. The sector has also been buffeted by financial storms. Many United States players saw their revenue decline by a quarter during the financial crisis, when firms such as State Street, Bank of New York Mellon and Northern Trust announced layoffs.
“We saw it in 2008 and we saw it this August,” says Colle. “When you have a market crisis and valuations come down, all the revenue sources of the buy side come down together. Safekeeping fees, securities lending fees.
BNPP SS has suffered, too; however, Colle says the company has an advantage over the US banks because it also serves the sell side. During the crisis, this kept the firm buoyant.
“The only thing that was going up was volume of transactions, settlement fees, the clearing and settlement business, where we are probably the leader in Europe,” he says.
This was a “mitigating effect” that meant his firm’s revenues only came down by about 13% during the crisis, preventing layoffs. In fact, Colle claims BNPP SS continued to hire during the crisis and did not diminish its investments. By serving both the buy and sell sides, the firm gets a more stable revenue stream, he says, and prevents the cycle of “stop-and-go” typified by the layoffs and recruitment sprees seen by the US banks.
Recruitment and regulation
Besides global growth, the company is looking to recruit new clients. Key targets are alternative investment firms such as hedge funds, which will be compelled by law to do business with custodian banks.
“All the new pieces of regulation are pointing towards hedge funds relying on strong administrators,” he says. “Custodians to safekeep their assets in a segregated way away from the dealer.”
Colle says BNPP SS already has well-known hedge fund clients. Although he wouldn’t name them, Brevan Howard is known to be one.
Another piece of regulation that could push new clients Colle’s way is the Dodd-Frank act in the US, which requires that the majority of over-the-counter derivatives are centrally cleared. Derivatives such as swaps that were previously bilateral will have to go to a central counterparty clearing house, which will guarantee the deal by taking deposits from both parties and promising to pay if one of them defaults. The idea is to make buying and selling derivatives safer.
Colle says it is natural for the firm to help the buy side adapt to the new environment, in which derivatives buyers will have to supply large amounts of capital to the clearing house.
“For a typical asset manager or a pension fund, it’s more than a new world, it’s a revolution,” he says. “All the flows are different. We are talking about $3 trillion (€2.2 trillion) of collateral that will need to be mobilised.”
A problem for many asset managers will be that not any capital will do. The clearing house requires safe, unencumbered capital such as cash or government bonds. If an asset manager wants to secure the deal with something else – equities or corporate bonds, for instance – it will need a securities servicing firm to transform the assets into eligible collateral. Colle says providing this service will be crucial.
“It’s going to be the name of the game,” he says. “Clearing is only the visible part of the iceberg, behind it is collateral management and transformation.”
BNPP SS launched its third-party collateral management service in December and now counts the Spanish central bank as one of its customers. Colle says the firm is well positioned to bid for new business as it has done clearing of listed derivatives for ten years, unlike some competitors.
“US trust banks were not typically offering derivatives clearing. Now they’re scrambling, making announcements,” he says.
Because of the promising effects of Dodd-Frank and other laws, Colle says of regulation that “as much as it is a burden, it is also a business opportunity”.
As he looks to the future, Colle is optimistic about Latin America. He has “big hopes” about Brazil, where the firm opened its São Paulo office last year. The company is also monitoring discussions in the region about creating a consolidated financial market consisting of Chile, Colombia, Peru and others, as this would offer opportunities for exporting the firm’s clearing practices.
BNPP SS may also expand through acquisitions. The firm has bought an average of two companies a year in recent times and Colle says this trend could continue if the price is right. They will be small buys, though.
Colle believes increasing cost pressure will prevent any big mergers, either from BNPP SS or the wider industry. “I’m sceptical about more big acquisitions,” he says. “Acquisitions are expensive.”
©2011 funds europe