February 2009

HEADS UP: The day Lehman Brothers failed

Nadine Chakar (pictured), EMEA head of BNY Mellon Asset Servicing, talks to Nick Fitzpatrick about world domination and staying up late to rescue clients from Lehman Brothers... nadine_chakar.jpg Hard times like these are when custodian banks do well. Their investor services operations see a spike in income due to greater turnover in client portfolios, while an expected increase in outsourcing by cost-conscious fund managers can bolster revenues in the longer term. 

But hard times like these are also when custodians earn their keep. The Lehman Brothers failure had Nadine Chakar, executive vice president and head of EMEA for BNY Mellon Asset Servicing, up until the small hours.

Chakar was at an annual technology event when Lehman blew up. She recalls: “It was Sibos weekend when this began. We were getting concerned about exposures to Lehman Brothers weeks before, but we really believed that Lehman Brothers would be bailed out.

“We went into ‘business resumption’ mode on the Saturday night. BNY Mellon was at the meeting table at the Federal Reserve in New York that weekend, so we had real-time info coming in.

“It was mainly a case of making telephone calls at first. I went to bed at 5am Austrian time, but we were ready for business on Monday morning. When Lehman Brothers filed for bankruptcy we had already begun client communications and we were able to give people a snapshot of where they stood in relation to the failure.”

But it was only the beginning of a long week, Chakar says.

“Clients had some exposures through securities lending and on the money market side. We decided that we would support them via capital support agreements – after all, we’d enjoyed the good times and so wanted to share the pain with clients too.”

She adds: “It’s in the bad times that as custodians we earn our keep. Our securities lending team did a phenomenal job recalling securities and rebalancing portfolios. All 12,000 people in asset servicing were in business resumption mode at that time.”

Too much scale to fail
The Lehman event stress tested BNY Mellon’s model, which is a huge trillion-dollar affair. “We are extremely risk averse and this episode tested us and it tested our methods.”

This was also at a time when large banks could not so easily rely anymore on their scale to bolster confidence. When The Bank of New York merged with Pittsburgh’s Mellon Financial Corporation in 2006, a key message that the newly formed BNY Mellon wished the world to know was that it now had more than $18 trillion under custody and administration.

Custodian banks, particular the US operators, are bold and brash when it comes to talking about their size. Sometimes this feels a bit distasteful to Europeans, but maybe that’s just jealousy.

Yet it was BNY Mellon’s American rivals that were upset last year after the bank won a flagship mandate from the US government.

No ordinary contract, the work sat close to the heart of the US Treasury Department’s efforts to stabilise the sub-prime crisis – the Troubled Asset Relief Program (Tarp), which aims to purchase and insure billions of dollars worth of toxic assets. The US government appointed BNY Mellon to provide various services, including holding all cash and assets related to the programme.

At a time when belief in financial institutions had shattered, here was a massive vote of confidence in BNY Mellon. For the custody bank itself, the appointment also marked a milestone since the merger.

Chakar says: “There are mandates we can take on today that I know no-one but us can do, and that is largely as a result of our merger. For example, look at the TARP custody contract last October. There were 70 firms that bid, ten qualified on the rules but only one bank – us – could offer what was required.”

Accounting and valuing complicated assets is part of what the TARP contract requires. The Lehman trouble stress tested BNY Mellon on this too. A BNY Mellon pension fund client was caught in a transition management exercise with the failed bank, meaning the fund did not know exactly where its assets were because Lehman had itself acted as the principal counterparty to the trades.

“We had to dig deep into the transition and closely scrutinise all the legal documentation to establish exposure and ownership for the fund,” says Chakar.

In general, the Lehman problem revealed just how complicated investment had become in recent years.  Yet one of the big selling points for investor services is the supposed ability to streamline all kinds of investment activities.

“It’s mind-boggling how little people knew about where their investments were or what those investments were doing,” says Chakar. “We’ve been big fans of Charlie McCreevy’s [European single markets commissioner] philosophy of promoting transparency and harmonisation in financial markets.”

She says BNY Mellon has worked to facilitate standardisation. “If the industry can get 80% of [derivative processes] automated, then it would help demystify the complex nature of those instruments and everyone would be better off.”

The trouble is, custodians do not always speak with one industry voice when it comes to harmonisation. Their clearing and settlement activity is a case in point. Doesn’t a lack of harmony really create additional revenues for custodians?

“It would not be true to say that custodians have made money by the inefficiencies in Europe’s clearing and settlement landscape. We see low margins in trade settlement and we would make more money if straight-through processing and automation were introduced,” she says.

She adds: “Standardisation and automation allows us to control our clients’ risks and turn things around more quickly. Certainly, I’d rather deal with one European depository and one exchange than have to deal with multiple different protocols, interfaces and processes as is the case today.

“Unfortunately, custody banks do not always speak with one voice when it comes to standardisation, except in the area of OTC derivatives processing. On the ECB’s integration paper, there was some disconnect. We come together in forums but generally we could do more collectively in terms of driving harmonisation.”

Again it is the scale of custodians that should help drive standardisation, as long as they work towards industry standards and not their own individual standard procedures.

World domination
The BNY/Mellon merger is one of the most significant of the past ten years, yet there is still more room for growth. Chakar admits to wanting her business to achieve world domination, although in a “nice way” that creates competition. But she admits there are places where BNY still has to properly capture ground.

“We are not at our optimal capacity yet. There are a ton of other things that we could do in EMEA. Switzerland is a place where we’ve been underrepresented in the past, for instance, and the Middle East is, of course, a fascinating area…”

The aim is to build non-US revenues to around 50%, but she admits this won’t always be easy, no matter how big a custodian is.

“In some ways we are restricted. We cannot do business in Italy, for example, unless we are a bank with a pension fund licence – there is still that element of protectionism within Europe.” ©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.