Luxembourg’s asset servicing specialists review the impact of digital transformation, the growth in private markets investment and the application of data science and AI.
Jeremy Albrecht (head of continental Europe, global client coverage, RBC I&TS)
David Claus (Luxembourg country head, BNY Mellon)
Kieran Dowling (head of relationship management, Luxembourg, Northern Trust)
Georg Lasch (head of client development, BNP Paribas Securities Services)
Mathieu Maurier (Luxembourg country head, Societe Generale Securities Services)
Funds Europe – What are the major factors that are steering your development strategy as a Luxembourg asset-servicing specialist? In which direction are your clients taking you?
Kieran Dowling, Northern Trust – Northern Trust has established a European client advisory group involving representatives from our top client franchise relationships across the continent. This acts as a forum to discuss key industry trends, as well as driving our product development road map. There has been a strong focus from our clients on regulatory compliance and how we can support new ways of managing and delivering data to enable them to focus on what is important to them – for example, fund performance and distribution growth. As a result, we are developing Northern Trust Matrix, an event-driven data fabric which will become the new core of our global operating platform. The first release from this initiative will go live this year.
From a sector perspective, we are experiencing strong demand from managers seeking to establish Luxembourg-domiciled alternative funds across private equity, real estate and private debt and are addressing this through a combination of product enhancements and investment in our core infrastructure in Luxembourg. Having completed the acquisition of UBS Asset Management’s fund administration business in Switzerland and Luxembourg in October 2017, we are now realising the benefits of the service enhancements, and the wider European client base this has provided for our fund administration services. This has facilitated, for example, an extension of our service range for exchange-traded products to service physical replicating ETFs in the Swiss market. We are now integrating this on to our global funds platform.
Georg Lasch, BNP Paribas Securities Services – ‘Digital’ has become a buzzword for our industry – and, in practical terms, our clients expect us to provide flexibility and control in how their data is managed, along with sophisticated data analytics and reporting. In line with these commitments, at BNP Paribas we are expanding the ‘data-as-a-service’ solution supported from our global funds platform, providing an early release of those functions to a client in the Asia-Pacific during 2019 and extending this across our global platform during 2020. Our data-as-a-service solution addresses the complexities of cleansing, normalising and aggregating data, removing the costly and difficult tasks related to data management, enabling asset managers to focus on their core investment management activities and benefiting from advanced data analytics.
A second priority is to become a leader in sustainable finance. BNP Paribas Asset Management has been extending its commitment to ESG-compliant assets across its fund ranges and this has been the case for a number of other asset management clients that we support. More broadly, our presence in the US market was strengthened with the acquisition of Janus Henderson’s middle and back-office operations in October 2017 and we continue to extend the fund accounting and mutual fund services that we offer to US collective investment funds from this platform.
Mathieu Maurier, Societe Generale Securities Services – During the past two to three years, Luxembourg has experienced strong investment flows into private assets, reflecting the flexible range of investment structures that Luxembourg’s financial authorities have made available to investors and the expertise it demonstrates in alternative fund (AIF) administration and depositary services.
Alongside our expertise in servicing Ucits and AIFs, SGSS has been developing a business-to-business platform for exchange-traded fund (ETF) providers, delivering connectivity to key participants along with a full range of associated post-trade services.
Two-thirds of our client base in Luxembourg is in the asset management segment and we constantly refine our service package to support their investment objectives. This includes strengthening our suite of middle-office services and helping asset managers to optimise their operational set-up, to capture the benefits of new technology and to manage the cost pressures that are confronting them.
David Claus, BNY Mellon – Beyond the points already raised, our priorities lie particularly in digital transformation, in supporting the growth of private markets investment in Luxembourg, and in helping asset owners and asset managers to meet their ESG (environment, social, governance) responsibilities.
One point that is typically understated is the importance of working with clients to deliver service innovation and efficiency gains. We operate in a business where we get noticed particularly when something goes wrong. The high standards of resilience and asset safety that we bring to the industry often go unlauded, but are essential to its safe functioning. We are in regular dialogue with clients about how we can support their investment strategies, and requirement for resilience and efficiency, in new and creative ways. Every instance of where we help the client to be successful is a success for our business and for Luxembourg’s funds industry as a whole.
Jeremy Albrecht, RBC Investor and Treasury Services – A priority for RBC I&TS during 2020 lies in developing our data strategy. We have been on a data journey for the past three years, extending our range of data visualisation skills and developing a data lake that allows clients to manage structured, semi-structured and unstructured data efficiently in a consolidated data pool. There is no one-size-fits-all solution and our data-as-a-service solution provides flexibility to meet the data requirements of a diverse client base.
As others have noted, there has been significant growth in investment in private capital in Luxembourg and we have expanded our team to meet this expansion from 60 in 2017 to 140 currently. Approximately 80% of the new projects that RBC I&TS is taking on currently are in private capital services.
Lasch – This has also been our experience. To meet this important growth in private capital investment, we have expanded our private capital operations team in Luxembourg from 30 people two years ago to more than 100 people today. We managed this growth by strategic staff appointments and expert hires from the audit and other private capital businesses that is now allowing for future sustainable business growth. Alongside people, we have also invested in technology and have taken a strategic stake in the capital of the German fintech AssetMetrix. This provides our private capital clients with powerful analytics and reporting for their investors via a dedicated and interactive web portal for real-time monitoring and live scenario analysis. This facility was not widely available in the market previously and has proven attractive to clients.
Dowling – Investment in technology and people is fundamental to the development of the asset servicing sector. Northern Trust has been operating out of two locations in Luxembourg, but is bringing these teams together and relocating to Leudelange, south-western Luxembourg, during 2020. This will enable us to be ever-more agile and collaborative in the way we support our clients as we enter the new decade.
Funds Europe – What have been the most significant business opportunities and challenges that your organisation has experienced during 2019?
Albrecht – Market compression is presenting a major challenge. As asset servicing specialists, we are under pressure from our asset management clients and also from competitors. Some competitor organisations are forcing prices downwards, effectively ‘buying assets’ by delivering services at such low pricing levels. A major challenge for the industry is to provide the right level of service at the right price.
Digitalisation is enabling us to become more efficient, but at the same time we need to remain client-centred and responsive to clients’ needs. We differentiate ourselves not simply by our digital offer, but particularly by the quality of the people that are servicing our clients.
In terms of opportunities, we have been active as an alternative investment fund administrator in Luxembourg for many years and have benefited from the recent growth in private capital investment.
These opportunities are coming not just from established specialists in private capital, but also from asset managers that have traditionally specialised in more liquid assets and are choosing to diversify into private assets.
Claus – Our private markets business has grown, both as a result of new business won in 2019 and because wins from 2017 and 2018 are now starting to ramp up and deliver asset growth. It can take time in this sector for initial investments to build into a strong revenue stream and there can be a high level of costs in the early stages.
We should not forget, however, that we also have a sizeable Ucits book. The industry is excited by private capital investment and that is where a lot of the new product creation is taking place. But when we consider what pays the bills, our Ucits book of business is vitally important. With healthy growth in both private assets and traditional collective investments, this is a strong combination.
We cannot ignore some of the challenges. The low interest rate environment limits our ability to generate net interest income – and when aligned with periods of low market volatility, it can, in addition, be difficult to generate revenue from ancillary services such as foreign exchange and securities lending.
We remain mindful of the need to access and retain high-quality staff – particularly in high-demand areas, given the pace of market innovation and regulatory change. Our staff turnover in the past year was around 10%, which is slightly higher than we would wish. However, we note other asset servicing firms and other locations where staff turnover rates are higher. Given the importance of staff expertise that we have all highlighted, we are directing constant attention to our strategy for talent acquisition and retention.
Albrecht – The growth of institutional and retail investment in ETFs has placed additional pressure on the margins generated by asset managers. In response, asset management clients are seeking more efficient operational models and pushing a part of this cost pressure down towards the asset servicer – seeking to reduce costs to compete with the growth of ETFs and (for active managers) passive investing.
Dowling – There is a core package of services that we all provide very well. Around this, there are opportunities to extend higher-value services that generate greater efficiency for our clients and help them focus on their core portfolio management requirements. For example, through Integrated Trading Solutions, we provide global trade execution, matching, and transaction cost analysis reporting. It is an opportunity to lower costs, reduce risk, help manage compliance and enhance transparency and operational efficiency.
Maurier – Negative interest rates have been with us for some time, so this is nothing new. Following from Kieran’s point, there is clear value in being able to offer an integrated package of investment solutions from execution and financing through to custody and asset servicing. SGSS created a bundled service, encapsulating trade execution, middle- and post-trade services, that delivers an optimised solution to asset managers that spans the transaction value chain. For the single-digit-billion-euro asset management firm, typically they do not wish to source these services on a modular basis and to build the connectivity required to link these together – the task is too complicated. Instead, this integrated ‘out of the box’ type solution does the work for them.
Custody now rarely forms a major part of the discussion when engaging with clients in an RFP [request for proposal] process. However, technology and data management are typically high on clients’ priorities in the selection process. How can we deploy technology that helps the client to get more out of the systems they already have in place? Technology can often deliver value to the customer without decommissioning their existing platforms. By using APIs, creating data lakes, we have been able to rejuvenate the post-trade ecosystem.
Lasch – The task of processing anti-money laundering (AML) and know-your-customer (KYC) reporting obligations for financial transactions remains people-intensive. But as a financial community, Luxembourg has focused on delivering greater efficiency in this area – including investment in technology-based solutions that reduce the labour cost attached to this function. The result is that Luxembourg now leads Europe in KYC/AML processing. This has provided another quality label for Luxembourg, a badge of excellence regarding how this financial centre services investment funds.
Looking back five years, KYC was typically part of a generic transfer agency offer and there was little value attached to this service by the customer. Today, customers are attaching greater importance to high standards of KYC processing, recognising the significant risk this presents to their business.
Dowling – The standards that Luxembourg sets in this area are well respected across Europe. Transfer agency is one of the most visible services to our clients and getting it wrong can have a major impact on a firm’s reputation. We are developing technology-based solutions, but the people side of the business is vital here. We are introducing a sophisticated investor on-boarding experience using our Matrix technology developments and, notably, the concept of ‘global investor’. Whether it is on-boarding an investor, working with a distribution company or directly with a management company that is seeking granular data on its investor base, the ability to engage with each of the stakeholders across the fund distribution value chain is enormously important.
Claus – This is particularly the case for clients that may be working across multiple domiciles, where regulatory application may differ slightly from one jurisdiction to another. It is important to support the client in managing any lack of harmonisation that exists in data requirements and reporting standards.
Funds Europe – Several initiatives in Luxembourg have highlighted the possibility of mutualising parts of this KYC obligation. Is there potential for managing data collection and storage through a centralised KYC utility?
Albrecht – A number of mutualised KYC and AML initiatives have emerged, but these each have their shortcomings – whether they do not fully meet users’ requirements, they do not take any liability in providing the service, or perhaps there is a delay in updating their databases.
Our vision is to digitise the AML and KYC functions as fully as possible, drawing information from public sources and only seeking information from the transacting party when this is otherwise unavailable. Typically, there has been a mentality of collecting paper when doing AML and KYC validation, collecting data from every available source. This is not an efficient process. This demands a change of mindset, where this key information can be consolidated in a centralised data repository.
Funds Europe – You can outsource the function, but you cannot outsource the responsibility. As service providers, you will remain responsible for the accuracy and integrity of mutualised data and any decisions you take utilising that information?
Lasch – As a global universal bank, we already confront the challenge of centralising KYC and AML data across the group, enabling us to maintain a single validated data record for a customer at group level, rather than maintaining decentralised KYC/AML data in each product area or location. There are challenges to negotiate, but we believe there is value in a mutualised service or utility collating KYC and AML data that we can access as a service provider. It will then be our responsibility to screen and validate that data.
Claus – For KYC, BNY Mellon maintains a centralised function for direct customers that are using global services within the group. For our TA business, however, we conduct our KYC validation at local level. As we noted, there can be differences in how KYC data requirements and reporting obligations are applied from one jurisdiction to another – and, given the volumes that we process through the Luxembourg market, it makes sense to localise these responsibilities within our Luxembourg TA operation.
Funds Europe – What are your priorities, in terms of technology investment and refinements to your data architecture, to support your asset servicing activities?
Albrecht – This centres on helping our clients to utilise data in more creative ways. I referred to construction of a data lake, investment in data visualisation tools and enabling clients to access their data using APIs. Data visualisation has been part of our product stable for some time, but we have customised dashboard and visualisation tools to enable asset manager clients to evaluate their share class hedging activity, for example, enabling them to customise their analytics and their oversight tools according to their specific requirements.
More broadly, robotic process automation has enabled RBC I&TS to extend straight-through processing rates across a number of functions within the custody and TA areas, using robotics to replicate repetitive tasks and to strip out manual intervention. We have an ongoing research project to assess where AI applications can be used more widely to enhance processing efficiency.
Maurier – Changing approaches to data storage, with increasing use of data lakes, are moving financial services into a new world. Activities which used to be complicated and disruptive – for example, a transition from legacy architecture on to a new technology platform – are becoming easier to manage as we review our approaches to data engineering and data management. Use of API-based architectures and application of data-as-a-service is enabling us to bring a new universe of solutions to our clients.
In meeting our fiducial duty as a depository for our clients’ data, we are able to demonstrate the same high standards of safekeeping that we have delivered for many years as custodian of clients’ financial assets. This is providing reassurance to clients that their data is secure and in expert hands.
Funds Europe – Are clients confident about having their data held in cloud-based storage?
Claus – Luxembourg’s financial regulator, Commission de Surveillance du Secteur Financier (CSSF), has issued a circular on cloud computing (CSSF Circular 17/654) which defines the regulatory framework for using a cloud computing infrastructure supplied by an external service provider.
From our experience, client concerns around cloud computing and data-as-a-service reside principally in whether their proprietary and confidential data may be used for commercial purposes. Some clients have installed clauses in their contracts to ensure that the service provider does not use this data to enhance our services without their authorisation. Their concern, therefore, lies particularly around the IP rights attached to the data usage, rather than in explicit fears about the provider’s failure to protect the integrity of this data.
Lasch – As a fund depositary, our clients recognise that we apply high standards and have strict internal processes to protect against exactly this sort of risk. That is something that we have traditionally done as fund depositary and custodian of our clients’ assets and data. However, ownership of data is a central point of discussion and clients are defining clearly in their service contracts how their data may be used.
Dowling – As noted earlier in the discussion, Matrix is our response to a rapidly changing environment. The transfer agency development will lay the foundation for a broader integration of this event-driven architecture which will digitise, automate and deliver value across custody, middle-office solutions, fund accounting and transfer agency.
Our discussion has highlighted the challenge of supporting clients active in multiple domiciles, where KYC and on-boarding requirements may differ slightly from jurisdiction to jurisdiction. Within our development programme we have embraced a ‘global investor’ concept, where KYC information will be hosted centrally – effectively in an in-house KYC repository. If the investor has already been on-boarded to a fund in one jurisdiction, we may have 80% of the KYC data that we require to on-board this investor in a different location. Consequently, once the repository is live, we would only need to approach the investor for the missing information. Throughout this process, the investor would receive real-time status updates (on their smartphone, for example) charting progress and indicating which documents are still required.
Lasch – BNPPSS will soon announce the release of a new fund depository offer, which has been in development for the past two-and-a-half years. To accelerate our efforts, we have acquired a stake in a fintech company called Fortia, which will deliver important advances in depositary technology. The new platform uses embedded artificial intelligence for reading documentation and natural language processing (NLP) to identify rules and data points in scanned documentation and, finally, machine learning for improving the selection of the correct rules. This, combined with improvements in workflow technology, enables staff in the depositary area to allocate work across our service teams globally, making the depositary entirely digital and highly efficient.
Claus – Use of robotic automation and machine learning is allowing us to deliver efficiency gains across our securities operations. For example, we recently improved corporate actions deadlines significantly through use of robotics. These are perceived to be relatively vanilla operations, but customers really do notice this improvement in their corporate actions workflow.
Albrecht – In private markets, it is essential to have the right people to support the asset class. However, we also see a shift in what technology can deliver in this sector. Private capital asset managers are increasingly looking for best-in-class technology and want to discuss what kinds of solutions we can offer to them. Three or four years ago, a service provider might support much of this activity on Excel spreadsheets. Now the technology capability represents an important component of the RFP.
Maurier – When supporting larger private market clients, our banking capability is also fundamental to the service package. The requirements of this client group align closely with the skills we bring as a universal bank, including credit extension, bridge financing, the ability to manage bank accounts on special purpose vehicles (SPVs) and the benefits of the originate-to-distribute model we offer through the investment bank. It is in these areas that SGSS can differentiate itself from niche administrators that do not have the same expertise and balance sheet strength as a banking organisation.
Lasch – Luxembourg’s private markets sector have been transformed over the past three years. Previously, investment flows were driven by asset owners creating private capital funds for a single portfolio or two. Subsequently, specialist fund managers have brought a much wider range of products to market, through private debt SMAs [separately managed accounts], special limited partnerships and other structures. Currently, the market is growing dynamically through the activities of a relatively small number of private markets specialists that have become very large, in terms of AuM [assets under management], and have established their European headquarters in Luxembourg.
In the private equity area, several large private equity managers are acquiring insurance companies to deliver a larger pool of assets to their portfolios. As an asset servicing provider, it has been important to understand this evolution in business strategy. Again, it is typically the people that make a difference – having specialists within our private markets team that have detailed knowledge of how an insurance company’s balance sheet operates – because that is where we need to position our offer.
Funds Europe – What implications does Brexit have for your Luxembourg asset servicing strategy? And, beyond this, what are the key messages we should draw from our discussion?
Lasch – With the UK’s exit from the European Union in January 2020, it has been important to ensure we support service provision for the UK via our London entities, and for the EU via our EU27 entity.
Like others around this table, BNY Mellon has been taking steps to make sure it is Brexit-proof. Inevitably having a contracting entity for all relevant products within the EU27 has been fundamental to these preparations.
Dowling – Northern Trust launched a programme shortly after the Brexit referendum in 2017 to prepare for the UK’s exit. In March 2019, we established a new European bank in Luxembourg, after redomiciling our EU bank from the UK to ensure continuity of Northern Trust’s products and services. Clients have welcomed the opportunity to connect with our new banking headquarters on the EU continent, while offering linkage to our branch in the UK and other locations. In combination with our acquisition in 2017, this has helped to create an active pipeline of new business which last year resulted in the addition of nine new client relationships, including alternative funds.
Albrecht – Similarly, RBC I&TS has had an EU bank in Luxembourg for the past three years, supporting product and service delivery within the EU and complementing our UK-based functions managed out of London.
Drawing wider conclusions from the roundtable, we believe these are times of great opportunity for Luxembourg’s asset servicing community and for its customers. Technology is allowing us to rethink how we service the client and how we develop product solutions. We have also discussed areas where the industry needs to improve – its ability to process AML and KYC information more efficiently being an obvious example. I am confident that we can cooperate to address these inefficiencies.
Claus – Innovation has always been a fundamental component of the Luxembourg ecosystem. Luxembourg’s regulators have been creative in establishing Reserved Alternative Investment Funds (Raifs), Special Limited Partnerships and a range of other investment vehicles to provide flexibility options to domestic and international fund promoters. But that is an integral part of the Luxembourg DNA, what makes the market successful. The market understands that if we all work together and grow the cake, we all benefit. This is a key element that makes Luxembourg different and successful – and a culture that, in significant part, we have inherited from the previous generation.
It is key for us to cherish and transmit this culture, and while we can speculate what the next creative innovations will be, we will find this collectively by listening to our clients. That is the beauty of this ecosystem and how we make it work.
Maurier – The key element is transformation. We will continue to adapt our business, transforming ourselves organically and capitalising on the flexibility offered by Luxembourg’s financial ecosystem.
Our focus is on transforming the way that we deliver services to customers, through data-as-a-service, for example, and transforming the way we approach partnership arrangements. We are seeking new ways of working, not simply through SGSS as a standalone company, but through creative partnerships and collaboration with other service partners.
Claus – That is an important point. We do not believe the future lies in trying to own the whole value chain. Opportunities to interconnect and collaborate with third parties are central to our strategy.
Lasch – Two words stand out: transformation and purpose. Transformation will centre on data, digitalisation and in developing data-as-a-service. It will also reflect our approach to servicing the fast-expanding private capital market and how we deploy technology, platforms and people to that area. ‘Purpose’ centres on providing a sense of ambition both to our employees and our clients. In particular, this demands clear objectives, training and skills provision, and a commitment to digital innovation.
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