September 2015

GLOBAL CUSTODY: A patchwork world

PatchworkFunds Europe asked leading custody figures about overlapping reporting requirements and dealing with fragmented approaches by countries to fund retrocessions.

JEAN DEVAMBEZ, GLOBAL HEAD OF PRODUCTS AND CLIENT SOLUTIONS FOR AFS, BNP PARIBAS SECURITIES SERVICES

To what extent is regulatory overlap in terms of reporting requirements a problem?
With the plethora of new regulations, there was bound to be some overlap in terms of the information that needs to be reported to the regulators. This highlights the need for powerful data management tools and the importance of using third-party providers to help asset managers deal with this burden and avoid duplication of efforts.

What are the challenges posed for fund managers providing funds in regimes with different approaches to retrocessions? How can asset servicers help create efficiencies?
While MiFID II should provide some harmonisation in Europe, we anticipate that we will still see differences between countries. Fund managers will have to be ready to manage multiple share classes to cope with various regimes and develop a multi-channel approach to distributing their funds. Platforms will become a strategic feature in fund distribution, providing a choice of investment funds and administration services as well as added-value services.

Which are some of the main industry trends you would highlight at present to do with your fund management client base?
The move to digital is perhaps the single most important trend. Innovations such as blockchain technology and sophisticated data management tools will transform fund distribution as we know it. Growth in multi-asset strategies, development in private equity/real estate and growing interest from institutional for alternatives will trigger the development of managed account platforms.

PAUL NORTH, ASSET SERVICING PRODUCT MANAGER, BNY MELLON

To what extent is regulatory overlap in terms of reporting requirements a problem?
Regulatory overlap, in general and in terms of reporting, will probably be at its height over the next couple of years, driven by the volume and complexity of regulatory, tax and market infrastructure changes. These changes impact the operation and governance of custodians themselves, such as capital requirements and tax reporting, and their broad range of products and services.  

What are the challenges posed for fund managers providing funds in regimes with different approaches to retrocessions? How can asset servicers help create efficiencies?   
This is a global issue. Whilst Europe may standardise on one model for commissions and retrocessions, other regions may develop different practices. Many asset-servicing firms help their clients in servicing global distributions, including calculating, collecting, paying and reporting on fund retrocessions. The need for transparency to investors, distributors and regulators, in addition to the costs of maintaining complex retrocession arrangements, may force firms to eliminate, simplify or standardise their practices.  

Which are some of the main industry trends you would highlight at present to do with your fund management client base?
Regulation is probably the most universal theme across our clients and to some degree this is crowding out other changes. Aligned to this is the issue of transparency including concerns around data, data quality and the cost of data. For some clients this also means a focus on costs and cost management with some looking at fund ranges and operating models. Discussions around technology and digital strategies have become more common.

PIERRE CIMINO, MEMBER OF CACEIS EXECUTIVE COMMITTEE

To what extent is regulatory overlap in terms of reporting requirements a problem? Are there any particular areas you would highlight?
Despite the fact that there are many initiatives that require reporting (such as Fatca, Emir and AIFMD) and that there are very large volumes of data involved in producing these reports, there is surprisingly little overlap in the information displayed. There are more pressing inefficiencies in areas such as KYC/AML reporting, which must be performed by both an investor’s bank and the asset manager/asset-servicing company. 

What are the challenges posed for fund managers providing funds in regimes with different approaches to retrocessions? How can asset servicers help create efficiencies?      
In the recent research paper Caceis published with PwC Luxembourg, we identified the many challenges facing fund managers and distributors in this respect. Asset-servicing companies can help to create efficiencies by helping asset managers sell products to the new generation of millennial investors using our back-end services that allow clients to subscribe to a fund directly through a fund manager’s website via mobile devices. Asset managers maintain contact with the end client and reduce distribution costs.

Which are some of the main industry trends you would highlight at present to do with your fund management client base?
We are seeing steady growth in traditional investment products, but private equity and real estate is proving to be a major growth area. This trend is particularly visible among our existing and prospective clients and is the major driver behind the heavy investments we have made into IT systems and human resources.

SANJIV SAWHNEY, GLOBAL HEAD OF CUSTODY AND FUND SERVICES, CITIGROUP

To what extent is regulatory overlap in terms of reporting requirements a problem? Are there any particular areas you would highlight?
As most asset managers continuously expand their reach and businesses, they face an increasingly complex regulatory environment and must grasp the interconnectedness or indeed disconnect from the requirements that impact their business models. Against that background, it has become impossible to look at specific regulation in isolation. In Europe alone, reporting requirements are contained within AIFMD, the MiFID II proposals, Emir and the Securities Financing Transactions Regulation. Whilst there are similarities, complexities arise in terms of the differing data field requirements per instrument captured. Similarly, regulatory changes are impacting clients differently across all other non-EU geographies. Clients need an increased level of support to effectively navigate the regulatory environment when operating across global jurisdictions. 

Which are some of the main industry trends you would highlight at present to do with your fund management client base? 
There are a number of industry trends converging towards a greater demand for direct access to local market information. The array of regulatory measures that managers face across jurisdictions – coupled with macro events impacting markets and the transparency demands that investors are placing on asset managers – all create an increased need for managers to build flexible operating models allowing them to adapt to a rapidly changing landscape. Against that background the successful custody and fund service providers will be the ones who can provide the right infrastructure, both from a technology and scale perspective, to offer integrated and consistent services across geographies coupled with access to on-the-ground knowledge and real-time information around local developments. 

JOHN VAN VERRE, HEAD OF GLOBAL CUSTODY, HSBC SECURITIES SERVICES

To what extent is regulatory overlap in terms of reporting requirements a problem? Are there any particular areas you would highlight?
Risk of inefficiency and cumbersome processes as reporting is required by multiple regulations. There is future scope for increased harmonisation of reporting, for instance by leveraging on Emir derivatives reporting for satisfying the MIFID II derivatives transaction requirements. Aspects of the Dodd-Frank Act, being a single piece of legislation, appear more co-ordinated than the numerous EU reporting demands.

What are the challenges posed for fund managers providing funds in regimes with different approaches to retrocessions? How can asset servicers help create efficiencies?      
In the Netherlands, inducements were banned with no grandfathering period. In the UK, commission continues to be paid on legacy holdings. It appears that MiFID II will allow individual countries to determine specific elements of their own local implementation. Therefore fund managers may need to cater for many different models, depending on the extent of their cross-border distribution. From an administration perspective, transfer agents will be required to have technologies that can recognise the jurisdiction of the distributor and apply the appropriate terms at share lot level, depending on local interpretation. We will work closely with our clients to ensure that their distributors can be catered for in as automated and seamless a manner as possible.

Which are some of the main industry trends you would highlight at present to do with your fund management client base?
The drive for increased transparency and usable data to meet regulatory obligations and investor requirements. 

Furthermore, the expansion of investments in liberalising markets such as China and Saudi Arabia.

MATTHEW BAX, EMEA GLOBAL HEAD OF CUSTODY, JP MORGAN

To what extent is regulatory overlap in terms of reporting requirements a problem? Are there any particular areas you would highlight?
As a custodian, we provide our clients with key data for their reporting obligations. Key issues identified are: 

• Consistency: Local requirements are often divergent, leading to duplication of effort;
• Collection: Accurate definition of what data is needed, identify where it is stored and how to aggregate it, check consistency and accuracy, and produce reports in a streamlined way;
• Cost: Putting together systems and teams to produce a variety of reports puts challenges on budgets and resources.

What are the challenges posed for fund managers providing funds in regimes with different approaches to retrocessions? How can asset servicers help create efficiencies?      
As a global provider to a broad client base, we support multiple models. There is a variety of approaches, ranging from the launch of (super) clean share classes with low management fees and no retrocession terms to new share classes, orientated to specific markets or investor segments. As regulation is still in progress of being defined, providers and promoters should jointly establish pragmatic standards through industry groups.

Which are some of the main industry trends you would highlight at present to do with your fund management client base? 

• Dependence on the state during retirement is reducing.  This presents opportunities for the asset management industry.
• Mutual fund industry grows as regular contributions increase. This increases the consistency of net inflows for fund providers.
• Demographics and ageing population may favour outcome-orientated products.
• Passive investments represent an increasing share of global AUM. 

TOBY GLAYSHER, HEAD OF GLOBAL FUND SERVICES, EUROPE, NORTHERN TRUST

To what extent is regulatory overlap in terms of reporting requirements a problem? Are there any particular areas you would highlight?
Regulatory overlap in terms of reporting requirements is a growing industry issue. A good example is the distinct reporting requirements required by the European Market Infrastructure Regulation (Emir) and the forthcoming Markets in Financial Instruments Regulation (MiFIR). The Emir and MiFIR reporting regimes were established for different purposes, with the former being to monitor systemic risk and the latter to monitor market abuse. The two require fundamentally different information. An Emir report would not fulfil MiFIR reporting requirements without significant data enhancement. 

What are the challenges posed for fund managers providing funds in regimes with different approaches to retrocessions? How can asset servicers help create efficiencies?   
Inconsistencies between countries are unhelpful and usually lead to jurisdictional arbitrage and increased costs. Various regulations have an intention to bring more harmonisation and reduce any jurisdictional differences, which should help in regards to fund retrocessions. There is still uncertainty around this aspect of MiFID II but if it does transpire that research accounts are needed, asset servicers may have a role to play in administrating those accounts. 

Which are some of the main industry trends you would highlight at present to do with your fund management client base?
At a macro level, regulatory change continues to drive product development behaviors by asset managers. For example, funds are continuing to redomicile to those fund locations which offer a more robust level of regulation. In parallel, new fund structures are being driven with the advent of Ucits V in mind. 

With regards to specific fund sectors, we are seeing growth across the alternative asset classes including hedge funds, real estate funds, and private equity. There is also growing momentum for the UK’s new tax-transparent fund, the Authorised Contractual Scheme. 

Also, we are seeing ETF share classes forming part of traditional fund umbrellas together with funds domiciled in multiple locations and feeding into one Ucits master fund.

SEBASTIEN DANLOY, HEAD, CONTINENTAL EUROPE & OFFSHORE AND CHIEF EXECUTIVE OFFICER, RBC INVESTOR SERVICES BANK

To what extent is regulatory overlap in terms of reporting requirements a problem? Are there any particular areas you would highlight?
Regulatory requirements must be met at local, regional and global levels. There is some overlap, notably, in reporting requirements for Fatca and CRS and under Ucits V and AIFMD from a depositary responsibility perspective. Custodians, such as RBC I&TS, that combine a strong global operating model with local expertise, along with a commitment to regulatory compliance and sound risk management practices, are best placed to support clients.  

What are the challenges for fund managers providing funds in regimes with different approaches to retrocessions? How can asset servicers help create efficiencies?
The fund distribution landscape presents a challenging environment, due partly to the expansion of cross-border distribution, and jurisdictional variations arising from regulatory change. Custodians must provide solutions to help clients leverage opportunities and adapt to this market. Technology solutions that increase the visibility of offerings while ensuring neutrality, as well as provide transparency and data management on the distribution network, are beneficial in helping to drive efficiencies, while respecting local requirements.

Which are some of the main industry trends you would highlight at present to do with your fund management client base?
Ongoing regulatory change and challenging economic conditions are driving fund managers to identify opportunities that enhance operational efficiencies and effectively manage expenses. The greater responsibilities placed on depositary, custodian and trustee services have led to bundled outsourcing models, and a move towards value-added services. 

ETIENNE DENIAU, GLOBAL HEAD OF BUSINESS SEGMENT, ASSET MANAGERS AND ASSET OWNERS, SOCIETE GENERALE

To what extent is regulatory overlap in terms of reporting requirements a problem? Are there any particular areas you would highlight?
Reporting is tedious and generates huge investments as the requirements have significantly increased since 2008. If we recognise the need for more transparency, we firmly advocate for a balanced approach based on simple principles: a transaction for example, should only be reported once, based on a proportionate level of discriminatory data and on reporting formats consistent across regulations. Discussions about reporting SFTs (securities finance transactions) under MiFID II are a good illustration.

What are the challenges posed for fund managers providing funds in regimes with different approaches to retrocessions? How can asset servicers help create efficiencies?      
We have a strong experience in managing a mixed approach of fund distribution with the central securities depositary model with earmarking of orders, and the transfer agency model with sharp account segregation. SGSS continues to develop its offering by enlarging its network of local representative agents in central and eastern Europe and launching a management company solution to assist asset managers to set up and market Ucits funds.

Which are some of the main industry trends you would highlight at present to do with your fund management client base?
Alternative funds saw a strong increase over the last year. Institutional investors particularly are looking for those solutions which generate significant income in the current low-yield environment and we believe the trend will persist. Furthermore, alternative fund managers are not only looking at their local market and have global needs. 

SUSAN DARGAN, VICE-PRESIDENT AND HEAD OF STATE STREET GLOBAL SERVICES IN IRELAND AND THE CHANNEL ISLANDS

To what extent is regulatory overlap in terms of reporting requirements a problem? Are there any particular areas you would highlight?
Several regulations have emerged, including Emir, MiFID II, Ucits IV but also non-EU rules such as Fatca and Dodd-Frank. This leads to challenges including the sheer volume of reporting. We believe there’s a strong case for greater collaboration between the financial sector and regulators, particularly regarding the development of a financial data reporting and standardisation regime. This would ensure international data harmonisation and consistency. More importantly, companies will need to consider whether they wish to do the reporting in-house or outsource. 

What are the challenges posed for fund managers providing funds in regimes with different approaches to retrocessions? How can asset servicers help create efficiencies?   
Potentially different distribution models exist depending on whether retrocessions are allowed or not. While MiFID II is intended to bring some degree of harmonisation across the EU, detailed knowledge of local market requirements is often needed. 

Which are some of the main industry trends you would highlight at present to do with your fund management client base?
We recently surveyed 400 asset managers globally. The industry is in positive mood, with nearly nine in ten seeing opportunities for profitable growth. Forty-six percent are evaluating acquisition opportunities. But they also recognise that investor needs are changing. There’s an increased focus on transparency and outcome-based solutions. And 79% expect new competition from non-traditional entrants such as technology firms.

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