September 2012

CUSTODY DIRECTORY PART 2

Two French banks saw their global assets under custody shrink during our survey period, while Citi' formerly the largest custodian of European assets' was overtaken by an American rival, finds Nick Fitzpatric.

RBC Investor Services
Ian Sinclair, director of product management, custody

How has your custody business developed from pure custody to become a broader asset-servicing offering?
On 27 July, 2012, RBC announced the completion of the agreement to purchase Dexia’s 50% share of RBC Dexia Investor Services. The business became a wholly-owned subsidiary of RBC and its name changed to RBC Investor Services. Launched in 2006 as a joint venture equally owned by Dexia and RBC, it offered an innovative range of services from inception. It completed the acquisition and transfer of UBI Group’s depository bank business in mid-2010.

What has been the single most important development in your business since the start of the financial crisis  for confronting a custody or asset servicing challenge?
Since the financial crisis of 2008 and the intensifying of the eurozone crisis, clients have placed more emphasis on risk minimisation and asset safety, requiring service providers to be even more transparent about the ownership of assets, set clear rules on segregation of assets and enforce strong processes to guarantee accessibility to assets. At RBC Investor Services, strong policies and procedures are in place within network management, risk management and operations to meet this challenge and with it client needs.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
For the Alternative Investment Fund Managers Directive and Ucits we have continued to evaluate the impact of these new legislative measures and ensure that we provided clients with leading-edge solutions, along with regular updates and information.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
The risk management of sub-custodians is of key importance to us as a global custodian and we place a strong emphasis on selection and ongoing monitoring processes. We have developed a best of breed approach and since the financial crisis, selection criteria have been further strengthened. We have also developed a unique continuous risk assessment approach, which all providers must accept and agree with. Post-financial crisis, certain sub-custodians have been removed from our selection for not meeting these criteria.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
In a dramatically changing environment of new regulation, low interest rates and weak growth, custodians need to adapt and transform their business model relatively quickly. To this end, RBC Investor Services conducts continuous and extensive reviews of its services. The scope of asset classes has recently been broadened to include many alternative assets. New services have also been launched covering new regulation, with this trend set to continue. Product and service launches are combined with an intensive cross-selling and up-selling process, enabling us to protect business profitability.

SEB
Göran Fors, global head of GTS Banks

How has your custody business developed from pure custody to become a broader asset servicing offering?
SEB has been in the custody business since 1888 but the last 20 years have seen more changes than the previous one hundred years. We have established ourselves in more markets and are now a leading provider in Northern Europe.

SEB’s client offering has expanded in several respects, including the growth in the number of markets we offer, and enhanced and more efficient methods of communication. [Growth has also been seen in] fund administration and prime investor services.

SEB started serving fund administration clients ten years ago and today we offer this service in Luxembourg and Sweden. The growth of our fund administation has been significant. Traditionally, institutions in our region have run their own fund administration but recently more and more have decided to outsource to SEB instead.

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
One significant area is trustee/depository services where there has been an increasing demand on SEB as our clients’ custodian and trustee to monitor the activities of fund companies. SEB has continuously built on its compliance and regulatory monitoring capabilities to support the fund segment.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
Our belief is that fund management clients are becoming more and more aware of the developments and over time they will also realise that the changes in regulation will mean a change in price. Prices will most likely not increase at an overall level but a change in the price model will be necessary to take account of the increased risk element.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
Our approach has not changed in any significant way and we have not made more than a handful of changes in our network. The processes have been established for a number of years already.

As usual, SEB monitors its sub-custodians closley and has a process of regular evaluation. During the past few years we have seen a shift towards regional providers but our policy is to have local providers with local expertise.  

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
Our focus has been to establish more efficient processes within operations. This includes off-shoring to our operations centre in Riga, Latvia. The successful set-up of a centre of excellence has meant increased quality and more efficient processes.

Societe Generale Securities Services
Etienne Deniau, global head of business development, asset managers and owners

How has your custody business developed from pure custody to become a broader asset-servicing offering?
Societe Generale Securities Servies (SGSS) has been active in the securities service sector for more than 50 years. SGSS was created in 2004. Since then, the SGSS offering has grown by organic development, acquisition and lift out.

In 2006, SGSS increased its custody and transfer agent capabilities in Italy and Luxembourg with the respective acquisitions of UniCredit’s securities services business and European fund services. The acquisition of Pioneer Investments fund administration in Germany strengthened the fund administration and spezialfonds offer in 2007. Asset servicing teams and systems of asset managers have regularly been lifted-out and integrated into SGSS.

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
Right after the onset of the crisis, the challenge was probably the surge of activity in the hedge fund market. It generated an important flow of orders, new types of orders and an intense activity – on the asset manager side – on gate activation side pocket creation, and inter fund corporate event. Giving the appropriate level of service and support were key.

The current challenge is to help asset managers in their pan-European fund distribution, namely with regards to the specific local tax computation required for local distribution. Tomorrow’s challenges are clearly linked to the Alternative Investment Fund Managers (Aifm) Directive, Solvency II and collateral management.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
Continental clients have a better understanding than Anglo-Saxon ones to foresee the Aifm Directive’s consequences as it is an extension of their existing regulations. Fund managers understand how the fund trustee will give their clients’ assets much better protection. However, they do not want the cost of this additional protection to be confused with their own fees.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
Rather than changing sub-custodians, we have worked extensively with them to share a better understanding of risks and mitigate them as much as possible.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
SGSS launched a process optimisation programme in early 2009 to adapt its teams’ size to workload, and to listen to the voice of customers, optimise quality and efficiency using a thorough Lean Six Sigma approach. This programme has been renewed every year since its inception.

Furthermore, we partner with our key clients to adapt to their needs and we have workforce dedicated to the improvement of our mutual operations.

State Street
Joseph Antonellis, vice chairman

How has your custody business developed from pure custody to become a broader asset-servicing offering?
As our clients’ needs have changed over the years, we have built on our track record and singular focus on institutional investors to develop a broader asset-servicing offering. Since the early 1990s, our focus has been on information delivery and technology innovation, and we have significantly expanded our business into areas such as middle-office outsourcing, e-trading, investment analytics and alternatives servicing.

What has been the single most important development in your business since the start of the financial crisis  for confronting a custody or asset servicing challenge?
The global financial crisis and subsequent low-yield environment have led investors to seek new ways of generating returns. One consequence is the increased institutional inflows into alternative assets, including hedge funds, private equity and real estate. State Street has built out its existing strong alternatives servicing business through acquisitions, including Mourant International Finance Administration in 2010 and our recent agreement to acquire Goldman Sachs Administration Services. Investors also want advanced risk tools that give them more insight into their investments and allow them to deliver on their growing data management and reporting requirements, and we are well placed to support these requirements.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
State Street’s recent survey with the Economist Intelligence Unit showed that while most European asset managers expect regulation to have a significant impact on their business, only 41% said they were actively investing in their in-house systems to stay ahead of anticipated changes. Against this backdrop, it is incumbent on asset servicers to underscore the value they can add by helping clients adapt to a more complex regulatory environment. As asset managers seek solutions to these challenges, there is an opportunity for asset servicers to help them navigate this complexity.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
Globally, more than 90% of assets under custody with State Street are either self-custodied or with an international central securities depository. Where we use sub-custodians, State Street has a rigorous selection process for choosing our agent banks. Where possible, we select local branches or affiliates of major global financial institutions that specialise in sub-custody in multiple markets, and they must meet multiple strict criteria. In addition, we have formalised a network of contingency providers for continuity of custody and cash clearing services. In the wake of the financial crisis, we have continued to focus on conducting ongoing assessments, formal due diligence reviews and periodic re-appraisals of all agent bank relationships.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
Amid the current environment and rapid evolution in client needs, we recognise the need to be faster, more efficient and more agile than ever. Our business operations and IT transformation programme, launched in 2010 and set to complete in 2014, is focused on streamlining our operating model and leveraging technology innovation, such as private cloud, to deliver service excellence and increased value to clients. We estimate being able to cut new product development time by 30% and deliver faster onboarding for clients.

Swedbank
Aet Rätsepp, head of fund services

How has your custody business developed from pure custody to become a broader asset-servicing offering?
Custody services have been offered by Swedbank for more than 25 years. The addition of fund administration services to fund management companies was introduced in 2002, followed by the evolution of transfer agency and distribution support as separate service offerings.

The initial offering was for plain vanilla funds primarily to Swedbank’s fund management subsidiaries. This gradually evolved into a complex range of services with a much wider client base within our home markets of Sweden, the Baltics and Luxembourg.

Swedbank’s main focus and objective is to follow the service and regulatory needs of the asset management community and be able to offer a flexible and service-minded product solution.

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
The biggest development has been in setting up a new depository supervision and control procedures in order to fully meet today’s, and also future, requirements from regulators as well as expectations from investors. Another specific area of development is within the network management area with regard to due diligence and monitoring of our service providers – internal and external.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
Our clients are aware of the implications of the increasing regulatory pressures on them as fund managers as well as on us as the service provider/depository bank. Obviously, clients are not very excited about increased prices but at this point are more interested in discussing how we can assist them in meeting regulatory changes. The most difficult cases will be funds that are unable to adjust their fees to the end investor.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
We use a global custodian and we constantly monitor their approach with its underlying network of sub-custodians. The fund-of-funds network will be more consolidated within the group going forward and the stringent monitoring principles currently used for our global custodian are, and will continue to be, used for our fund network.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
Organisational efficiencies through co-ordinating asset servicing operations and competencies across the group; technology efficiencies and developments; continuous monitoring and development of operational processes and procedures (operational risk audits).

UBS
Endo Baumgartner, head of asset servicing

How has your custody business developed from pure custody to become a broader asset-servicing offering?
In recent years, clients became increasingly professional and exhibited more complex and heterogeneous needs. It became important for them to get solutions from fewer expert sources in an integrated manner rather than receiving different solutions from several providers. Therefore, UBS has combined its wide range of long-standing and established infrastructure and reporting services to a dedicated asset servicing business line, responsible for the delivery of cash management solutions, custody and securities lending, risk reporting and fund services as well as providing direct access to execution platforms. Through this approach, we deliver our clients high-quality services combined with a holistic advisory competence from a single source.  

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
The importance that clients place on risk management and investment management objectives reflects two key goals: to preserve and grow their wealth. For example, we are seeing an increased number of clients implement a private label fund solution to professionalise their wealth management. Another development is the growing importance of cost control. Clients want full transparency on the source of their costs, allowing them to understand the subsequent management of internal and external providers. With this in mind, we aim to adapt our services and solutions constantly, making sure we can support clients.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
Thanks to the awareness efforts from trade associations, consultants and industry players, fund management clients are waking up to the challenges and opportunities of the Alternative Investment Fund Managers Directive and Ucits IV and V regulations. Today, our fund management clients understand better the benefits to their clients and the costs that they will have to pass on or absorb in order to improve segregation of duties, substance requirements and risk management.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
UBS applies a best-in-class approach to appointing and managing sub-custodians worldwide to safeguard our clients’ wealth and to ensure top-service quality. Our global network management has a clearly defined and well structured due diligence process with regard to its sub-custodian selection and maintenance, capturing all requirements from the various regulators in all covered regions and countries. In addition, we perform monthly assessments on our entire agent network, analysing market, counterparty and operational risk topics.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
UBS set up a wide-ranging initiative called ‘industrialization’. It involves defining a new operating model for the firm, standardisation and leaner processes as well as a streamlined product offering to reduce our overall costs significantly. As an example of this, we recently launched the new business section transaction banking, which offers a full service range covering cash management solutions, trade and export finance and asset servicing solutions. All these measures are changing the dialogue with our clients, allowing us to demonstrate professionalism as well as generating new sources of revenue.

©2012 funds europe