The asset servicing industry in the Nordics is fiercely competitive, though increased demand for compliance and consulting services means there are business opportunities. But it's all hands on deck to deal with the waves of regulation ready to hit the industry.
Annalisa Winge Bicknell (SEB Merchant Banking), Brian Blanchard (BNY Mellon Asset Servicing)
Belinda Burgess (Northern Trust), Aet Rätsepp (Swedbank Markets Securities Services)
Anne-Sofie Strandberg (Citi), Bo Thulin (JP Morgan Worldwide Securities Services)
Funds Europe: There has been uncertainty over which of the Nordic central securities depositories (CSDs) will support Target2-Securities (T2S). What is the current state of play and how will the decision to participate, or not, affect your business?
Annalisa Winge Bicknell, SEB Merchant Banking: Our understanding is that Finland has decided to join and Denmark is thinking about it for 2018, whereas Norway and Sweden have said no for the moment, but apparently they’re still leaving the door open.
Anne-Sofie Strandberg, Citi: I think Sweden has been the most ‘negative’ country in the Nordic region. It seems that the Swedish market has no real business case today. Finland is certainly in but they’re waiting for 2018-2019 and we think Norway’s going to go the same route. Denmark is still pending its decision.
Brian Blanchard, BNY Mellon Asset Servicing: The issue of Target2-Securities makes a lot of sense for eurozone members because they’ve already got central bank cash [securities will have to be settled in central bank cash under T2S]. But for other CSDs you’ve got the creation of a template and everybody’s got to change their systems to fit it. Also, Denmark, Norway and Sweden are not eurozone members. The decision to cede control of their currency and interest rate decisions to the European Central Bank is a much larger and more sensitive issue and I think that’s where a lot of the reticence is coming from.
The feedback that we’ve had from some of the banking associations and user groups is that they want to delay to see if this initiative pans out and how successful it is.
Belinda Burgess, Northern Trust: It’s important to be reminded that - although we are talking about the Nordic countries in general, each of which has different challenges, regulators and views - an important consideration when it comes to Target2-Securities is also to look at pricing, whether the cost would be moving to the buy side or the issuer side and how that will play out in terms of the competitiveness in the marketplace.
Bo Thulin, JP Morgan Worldwide Securities Services: This last point is really important because when speaking to our colleagues in the other Scandinavian countries, what really has not been investigated is what it means to not be a part of Target2-Securities. Of course, there are upfront costs, but at the end of the process, we will see a more harmonised market, more ease of access and more support for cross-border investment.
Aet Rätsepp, Swedbank Markets Securities Services: It makes it even more political because you’re being sold this cross-border settlement with cost of domestic ones, so in all countries the cost for domestic transactions will be higher, and this is definitely not pleasing to the local players.
Thulin: One concern is that CSDs will have to adjust their operating model. They may lose some business because settlement is going to happen somewhere else. CSDs need to invest because their business model is changing.
Rätsepp: It is definitely true that whether our home countries join now, later or never, it will change our business definitely. We need to change our ways of handling transactions and settlement. There are a lot of tiers and dependencies to analyse about how the environment will be in the future.
Funds Europe: How are Nordic asset servicers coping with the ‘tsunami’ of regulation that is flooding the industry, or set to flood the industry? And, second, which pieces of legislation are the most challenging?
Blanchard: You can paraphrase the tsunami of regulation as, ‘all hands on deck, everything at once’. You’ve got Fatca, Dodd-Frank, Emir, as well as market specific items such as RDR in the UK. Let’s not forget Solvency II with all the look-through that’s required. Dealing with these is about finding the right balance versus the resources available and that depends on where in the organisation people find themselves. People need to agree which one is the most important to them right now. However, you can’t ignore any
Burgess: That’s the important thing, you can’t ignore them – regulation will affect every one of our clients, be they fund managers or institutional investors. Our role is to help them manage the impact of these and, depending on the region and our client’s segment, there’s going to be different regulations, some overlapping, so you certainly can’t say one’s more important than the other.
Rather than looking at each regulation in isolation, Northern Trust has a group looking at all regulations globally and how they affect our clients. In some cases there are synergies and we can plot these for our clients.
Sometimes the impact in local markets and potential in certain segments isn’t as apparent, perhaps while regulations remain in draft format. I think Fatca, for example, was more far-reaching than a lot of people initially anticipated.
Strandberg: The Aifm [Alternative Investment Fund Managers] directive is having a large effect on our client base. I think that organisations such as ours have the staff and the knowledge, but for the underlying sophisticated investors in Scandinavia, there is potentially a resource constraint at their end. That’s where we need to try to be assisting in a consultative way by asking ourselves “how do the different regulations affect Nordic investors”? Trying to analyse that for and on behalf of investors gives us a big role to play here.
Bicknell: We see that there are opportunities for those who have asset servicing as a core business, who have competence and expertise and are actively involved with the regulators. We’re present at the local forums and the international forums, so clients see us as having influence and being informed which make them look upon us as a trusted adviser. That reassures them, and we have seen clients reaching out to us and increasing their business with us. We’ve seen the positive side of the challenges.
Burgess: It comes back to us, as an asset servicer, having the data. It’s data that’s key to all this. There’s a lot more demand for daily, intra-day, real time data, which is an opportunity where we can help clients with different products and reporting streams.
Rätsepp: I totally agree that in light of added regulation there is a really good opportunity for us. One thing is that clients see us as advisers or as a knowledgeable party. The other thing is that because they are a bit afraid of what additional regulations may bring, they would choose to outsource more than they used to.
Blanchard: One of the roles that we play is supporting the governing bodies through participation in Alfi in Luxembourg or Efama and ETDF throughout Europe, to determine what the guidance notes will be on the implementation of the AIFM directive and Ucits V. One of the big concerns has been whether we are turning banks into insurance companies by making custodians responsible for assets held outside the custodian network, such as time deposits and repos, for example?’
There’s been a huge amount of progress in working to make some of these rules more clear and consistent throughout, for example via meetings with Esma and the EU Commission, and responding to various consultations. All of these still remain works in progress.
But the point is that institutions such as global custodians need to share their expertise and experience with those government bodies. They are very knowledgeable in a lot of areas; but they don’t necessarily bring practical experience from the market. They’re doing a great job and I think they’re trying to act in the best interests for the underlying investor. But we need a workable solution that doesn’t drive up the cost for the investor, because if you pass insurance costs onto the banks, it’s going to end up coming back to the investors in higher fees to reflect the risk premiums.
Funds Europe: Would you say clients are now more interested in risk and compliance issues than they were? And does this mean you must hire more risk managers and compliance officers?
Blanchard: The answer is pretty straightforward because, as we’ve just discussed, they’re extremely interested. The question is how do they go about doing it? Annalisa mentioned a consultative approach and Aet mentioned looking to us as advisers. For a lot of clients, their capacity’s a limit. A lot of the back offices for the large insurance pension funds are 15 people managing €20 billion or €40 billion in assets. They need the ability to make sense of the information. They’re looking for data warehouse solutions.
A lot of these use a solid system that does what it’s designed to on custody and accounting, but now you’ve got Solvency II, you’ve got look-through requirements, you’ve got to note your global exposures, you’ve got to have VAR [value at risk] analysis whereas the commitment approach to risk used to be the norm. This all needs new systems or add-ons to be able to manage the information and that’s where they’re looking to their partners, like the global custodians, to provide some of these products off-the-shelf.
I don’t want to go off on a marketing spiel about BNY Mellon’s services, but I think almost everybody’s got high-end data warehousing solutions or advanced risk systems that can be made available to the investors here. Maybe it doesn’t make sense for clients to buy systems themselves but to work with a partner like us.
Burgess: What it comes back to is the cost of upgrading and a lot of clients (fund managers, institutional investors) are sitting back and wondering, “What is the payback for this in terms of the timeline?” Sometimes it is easier just to outsource that to a sophisticated provider who already has the capability to support them.
Where a lot of the global players such as ourselves come in is that we have integrated technology platforms so it’s easier for us to reclassify data for clients. We can help them if they need access to data that sits within one system which you can’t readily move or transfer to another system, and which is in the appropriate format. As a global fund administrator, we can remove the administrative burden and help our clients with their risk and reporting, enabling them to focus on their core business.
Strandberg: Also, the regulation sometimes stipulates the investor to mitigate risk and that means they need to move risk away from themselves and pass it on to service providers such as us.
Thulin: When clients buy these kind of services, the question that now arises is, “How much risk can I pass on to my provider?” This question has become top of the agenda, but it doesn’t necessarily mean you hire more risk managers.
Historically, you had a person at a bank, pension fund or an asset manager who was responsible for risk and compliance. Now this function is built into the corporate culture, so you can no longer say, “I have one risk manager, I’m fine.”
Regulators need to look through the whole system. They need to know what kind of training is given and how aware the staff are at managing and looking into risk. It’s a new era of risk awareness within organisations. We are used to it, coming from a global bank, but locally it’s a big shift for the client side.
Rätsepp: For local clients or fund managers, they are just learning with this new risk and compliance environment. The local FSA has been more active recently, there have been a lot of fines made of fund management companies that were not being compliant with certain regulations so this is something that either makes them look at their own organisation or look for help outside. We have put a lot of extra effort in to strengthen our depository compliance services and we see that clients are appreciating this. If they have a partner with strong depository compliance they feel safer and are willing to pay for it.
Bicknell: What we’re all saying is that information is ultra-important now. We have lots of regulations and clients are desperate for help. We run regulatory seminars because there’s so much going on and they are well attended. We see that clients are very relieved that they can go to someone who has got the information, who can help them interpret the regulation so that they can decide whether to implement it themselves or outsource it to someone else.
Burgess: It’s interesting, on that point of the seminars. We’re organising similar ones and we’ve found that clients are actually learning from each other, again around the interpretation, so there’s almost a validation for some of them. There is a lot more information sharing.
Funds Europe: Are Nordic asset managers becoming more comfortable and even enthusiastic about outsourcing?
Thulin: Nordic asset managers are realistic about outsourcing due to regulation or system upgrades. There is a need to have a more open approach to buying services from outside firms. Traditionally, in the Nordics, in-house has been the key word, a do-it-yourself approach.
Outsourcing in the past was purely cost-driven, but now it is much more risk-driven. Over the past few years, a dialogue which has been gaining momentum, is around how can firms partner with someone to mitigate risk and at the same time achieve a cost-efficient way of managing the business?
Burgess: We are seeing an increasing demand not just from the asset managers, but asset owners as well who are showing a lot more interest. Again, it’s not from the traditional asset management people who would look to outsource primarily for cost and efficiency purposes. It is about having access to the best platforms, data and systems and asking, “What do I need to do today? How do I do that and who can help me with that so I can focus on my core business?”
Bicknell: Before, outsourcing was more of an emotional issue. There was this feeling that you should have functions in-house, you should monitor functions in-house, that is your role and that’s what you should do. Also, possibly the cost savings weren’t there to make it logical to outsource. But now the markets and the regulations are so complex, there’s a strategic decision on the table of, “Do I build or do I buy?”
We have seen a huge increase either in partial outsourcing or complete outsourcing, and the area we see people focused on, in particular, is around fund administration.
Rätsepp: The same from our side. We see a lot of interest for outsourcing and yes, especially fund administration. Maybe collateral management, a lot of different risk and performance reporting requests, and transfer agency. Clients need to upgrade their old legacy systems because of regulations, due to the additional or added instruments, increased complexity in the investments that they are doing, maybe enhanced reporting requirements from investors. There are a lot of drivers nowadays forcing asset mangers to make a decision and outsourcing is quite often on the table.
Funds Europe: In which global regions are you seeing your Nordic client base looking to invest in the future?
Rätsepp: I would rather say that there are no specific global regions. Clients are looking for alpha wherever they can get it, as far as their risks are managed and they are compliant.
Strandberg: The latest trend also means that some investors are bringing back assets to their home market – that’s fair to say even with the Nordic lines. China is still attractive and there are a lot of discussions around QFII and how to gain access to the domestic market. Africa and Latin America are also regions that we see an increased interest in at this moment.
Bicknell: We are also seeing a great interest in eastern Europe. SEB is local in many of those markets because our clients are asking us to give them faster, direct access to the markets and local experts. We arrange international investor trips which are always very popular. We are getting a lot of requests from clients to meet with our market experts because they want to increase their investment wallet in eastern Europe.
Thulin: If you look into the pensions and insurance industries, regulation says that you have to risk-class your investments, which means you receive perhaps less investment in the emerging market and alternatives world, which is drawing more investment into safe securities in order to reach the solvency targets requirements.
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