June 2010

EXECUTIVE PANEL: at your service

Asset Servicing CEOs and heads of business Paul North (BNYM), Philippe Seyll (Clearstream), Patrick Colle (BNP Paribas), José-Benjamin Longrée (Caceis), and Andrew Gelb (Citi) talk about the impact of fund consolidation and domiciles
left to right: Longrée, Seyll, Colle, North and Gelb
What impact on servicing costs will the consolidation of funds under Ucits IV have for you and your client base?

Paul North, head of product management Emea, BNY Mellon Asset Servicing
“At this stage there is perhaps not a lot of evidence to suggest that Ucits IV itself will directly lead to a consolidation of funds in Europe. However, Ucits IV in combination with other regulatory change will impact the cost base of our clients.

We are still studying how all these changes will impact our services and we are engaging with our clients to understand the impacts on their businesses. Some see these changes as both a challenge and opportunity, and as part of this will look at their servicing models and costs and look to drive our costs savings wherever possible. In this regard business does not change. However, opportunities to drive costs further are harder and harder to achieve and we do sense that ultimately costs will need to rise in some areas.”       

Philippe Seyll, head of investment funds services & member of the executive board, Clearstream Banking
“2009 saw for the first time the number of new funds launched outperformed by the number of funds merged and closed. Yet it is still unclear whether Ucits IV will effectively lead to a drastic reduction of funds in Europe. It will provide some facilities, like cross-border mergers, which could help with the reduction of the number of funds but it remains to be seen whether some local barriers (like tax) will not prevent such tools to deliver their full benefit.

A real and significant reduction of the number of funds could have a positive impact on costs as it would reduce the number of set-ups and data maintenance needed. It is also likely to reduce the number of B2B transactions overall in the market. However, the latter effect would then go along with an increase of the average size of these orders and hence an increased operational risk which would have to be mitigated – at a cost. So, the overall net effect on cost of the potential consolidation triggered by Ucits IV is difficult to assess at this stage and rather difficult to quantify.”

Patrick Colle, CEO, BNP Paribas Securities Services
“It is important to stress that cross-border distribution and efficiency were as important as cost reduction in driving this new directive. How asset managers take advantage of Ucits IV will very much depend on their existing funds, business model and strategy. Indeed, distribution policy will be the main driver of their choice of location for their own structure, their fund domicile and/or their asset servicing provider.

We are, however, likely to see cost benefits coming from the master-feeder, company passport and notification procedure. Although it must be said that cost related to the implementation and maintenance of the key investor document may reduce anticipated cost savings, at least in the one-year transition period. Another area for economies of scale may be that as managers limit the number of funds and domiciles, fewer services providers are required. 

It is hard to give a definitive answer as to the cost impact on securities services providers as the majority of asset managers have not yet finalised their Ucits IV strategy as level 2 texts have yet to be voted on and transposed into national law.”

José-Benjamin Longree, deputy CEO, Caceis
“The provisions of Ucits IV will enable our clients who are well established in the pan-European funds arena to rationalise their existing fund ranges, streamlining unnecessary product duplications via cross-border master-feeder structures and mergers. We have already witnessed strong demand by our clients to accompany them in their product review, to define which is the most efficient Ucits IV target fund structure. This product rationalisation will generate economies of scale for fund managers and reduce the aggregate servicing cost basis.

Globally, servicing costs will undergo pressure. The caveat is, however, the extent to which additional oversight requirements may offset cost reductions.”

Andrew Gelb, head of securities and fund services, Emea, Citi
“Citi does not believe that the pooling of assets will substantially reduce custody and administration costs.  The asset mix is likely to remain constant and therefore servicing costs should be similar. In addition, custody is generally highly automated so a reduction in transaction flows will not directly correlate to a reduction in processing cost. 

However, if there are lower transaction flows the bottom line will come under some pressure.  This should be offset by an increase in safekeeping revenue from higher consolidated asset values which is likely to make the overall impact revenue neutral. We would expect, and recommend, that clients open negotiations on new custody tariffs for consolidating asset pools with major custodians.”

Which fund jurisdictions in the Europe region do you think will be the most dominant in five years time? Will there be any change to the current status with off-shore smaller jurisdictions increasing their presence?

Paul North, BNY Mellon
“This is a very complex question to answer because Ucits IV will change the way our clients view, and operate within, Europe. Under Ucits IV, funds can be organised in a very different way and so different jurisdictions may become dominant in one regard – but not as we look on it today. For example, it is hard to imagine that Luxembourg will not continue as the dominant centre as the domicile for cross-border funds. However, it may not continue to be a dominant centre for the administration of certain types of funds that could potentially move to other centres.

Likewise, London is currently a key centre for investment management and could become the dominant centre for management companies. Issues such as tax, access to resources and the role of the regulator will likely play a part in determining this.”

Philippe Seyll, Clearstream Banking
“The feedback from a number of actors and recent studies seems to suggest that Luxembourg and, to a certain degree, Dublin, will not suffer from the implementation of Ucits IV. Both centres could even strengthen their relative position in Europe. A recent study by Lipper for Alfi suggests that Luxembourg could increase its relative market share up to 38% of the overall European market by 2014 with an average growth rate of 10.4% compared to 6.8% on average for the rest of Europe.”

Patrick Colle, BNP Paribas
“According to recent market studies, the trend is that Luxembourg will attract more assets thanks to Ucits IV. Regarding the location of choice for the management company, the situation remains unclear due to tax uncertainty between the home management company’s member state and that of the fund.
The fund administration delegation rules and the domicile’s reputation  will play an important role. Here Luxembourg and Dublin have a good story to tell. On the other hand, some domestic markets appear to be taking measures to promote their market to attract international investors as well as asset managers.

It must be said, however, that staff costs in historical processing centres seem to be rising too swiftly for the securities services business to make money. This is the reason why some flexibility on the outsourcing of fund administration is key to reaching a certain economy of scale that at least stems this increase.”

José-Benjamin Longree, Caceis
“The recognition and track record of the longstanding European cross-border funds’ jurisdictions, namely Luxembourg and Ireland, brings them to the forefront of the Ucits IV challenge. This does not preclude having newcomers building a competence as fund jurisdictions through the opportunity that Ucits grants to EU member states. We will certainly witness new jurisdictions entering the Ucits arena with aggressive approval timeframes and cost structures, which will inevitably enable them to gain market share but will also lead to capacity constraints, which the longstanding jurisdictions have already been through.”

Andrew Gelb, Citi
“Citi’s impression is that there will be no significant changes in fund domiciliation, in the short term. As ever, tax is a primary driver here. We do not see the smaller jurisdictions making a significant impact unless they are able to offer real tax benefits to management companies and funds. Luxembourg and Ireland are both already marketing themselves as the domicile of choice for the location of management companies and they should retain their dominant positions.”

©2010 funds europe

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