In many cases investment banks have brought their custody and capital markets businesses closer together. But is this a good mix? Nick Fitzpatrick talks to a number of custody heads about the implications.
When Citi appointed Chris Cox as securities services head in Europe, Middle East and Africa in the summer, one of the top three priorities set for him in an internal notice of his appointment was to “grow profitability”. This includes for the custody business.
It is no secret that custody banks have struggled with profitability in the last few years. A custodian’s income is sensitive to interest rates, which are historically low. At the same time some banking groups have sought closer integration between their custody (and related investor services businesses) on one hand, and their capital markets divisions on the other. Cox is from a capital markets background.
But does bringing custody clients closer to capital markets activity amount to throwing meat to the lions?
Banks will say a closer relationship between the two franchises is good for clients because it reduces “touch points”. This is undoubtedly helpful for investors when dealing with sprawling organisations in global markets.
But it also raises questions about Chinese walls between the two franchises – particularly when trust in the banks is at an historically low level. There is also a cultural issue, with custody banks fostering long-term relationships with clients, while capital markets units keep a minute-by-minute eye on profits with theirs.
At Sibos, a banking technology conference, earlier this year, Funds Europe spoke to senior asset servicing heads about this trend.
Four years ago, HSBC Securities Services moved into HSBC group’s global banking and markets division.
“Operating within a universal bank gives you the ability to offer different services,” says Cian Burke, head of HSBC Securities Services.
But he adds: “When we put this together we had to be very clear about what we were going to offer and what we weren’t.”
Burke acknowledges that there is a significant contrast between how a bank’s capital markets division works compared with its custody business.
“Some organisations have merged their sales and business development teams, but there’s a cultural difference between them,” he says.
“Markets activity is more transactional – trades are being executed every minute. They do not have time to think about long-term mandates that might take months to negotiate, and we are not asking them to.”
To manage this, he says that HSBC’s securities services business has kept its sales and business development and account management teams separate to the capital markets sales force. If clients want trade execution then the relationship management team will coordinate with capital markets.
A year ago, Societe Generale, the French bank, integrated its securities services business into its global banking and investor solutions division. Bruno Prigent, head of Societe Generale Securities Services (SGSS), says this means clients benefit from an integrated chain of services, including clearing through Newedge, the bank’s prime services division.
“When we look at regulation, and in particular OTC clearing, having Newedge and SGSS in the same division is extremely relevant.”
This is particularly important for providing collateral management, he says, and adds that asset-liability management is better with this structure. However, not all providers see integration as attractive.
Caceis is partly owned by Credit Agricole and Natixis and has around €2.3 trillion of assets under custody. François Marion, chief executive at Caceis, says: “Over the past two years [in the custody industry] there has been more integration with investment banking activities as custodians adopt a global transaction banking model. Our group has made the decision not to internalise its custody activities inside a wider investment banking department.”
Marion says that, in his view, it is better to keep investor services providers away from capital markets divisions.
“Is it better to be part of an investment bank or independent? From my point of view it’s better to be independent.”
He adds: “Generally, the regulatory trend is to push towards transparent pricing and Chinese walls between the various business lines of large banking groups. Strangely enough, this is not currently happening. It is a fact that more transparency would imply less revenues and would restrict the investment bank in grabbing the liquidity provided by the custody business.”
In November, BNP Paribas announced a new governance structure and changed the name of its corporate and investment banking division to ‘corporate and institutional banking’ (CIB). BNP Paribas Securities Services (BNPPSS) falls within this division, but with a separate legal identity.
This new CIB aims to “promote dialogue between institutional and corporate clients, thanks to a more collaborative and efficient structure, which will facilitate the implementation of the Group’s business development plan”, a statement says.
Alain Pochet, head of clearing, custody and corporate trust services, at BNPPSS, says: “Banks that do not want to share platforms will not be able to serve clients. But [sharing a platform] is different from saying you are fully integrated.”
“If you want to serve clients with the full scope of the business, you would need sometimes to share platforms and to do some things with your colleagues from capital markets.”
When an asset servicer has a large piece of a client’s operations, such as custody and clearing, then it may be beneficial to them to use another internal service such as trade execution, he says.
Making the case further, Pochet says: “Ten years ago a client would use a different provider for each part of their business. But today, settlement cycles are moving from T+3 to T+1 and everything needs collateral. This makes the optimisation process very, very important.”
Pochet says Chinese walls are in place and stresses that investor services contracts are signed with the securities services legal entity.
Margaret Harwood-Jones, head of investors and intermediaries, transaction banking, at Standard Chartered Bank, says the bank’s securities services franchise is integrated with the broader bank.
“We are part of the transaction bank within Standard Chartered. Within this business unit we service investors, intermediaries and corporates. We are strongly integrated across the bank,” she says.
Alan Naughton, head of securities and corporate agency & trust, transaction banking also at Standard Chartered, adds: “Chinese walls are in place and it is not permitted for the trading arm to have sight of custody records.”
What has perhaps so far been missed is the view from a bank’s group level. In an era that calls for a Financial Stability Board to exist, and as regulators want tighter controls on risk management, the ultimate rationale for closer links between custodians and capital markets may be less about profit, and more about governance. Perhaps Pochet and Prigent indicate this by emphasising the driver of collateral management and tighter clearing rules.
It may just be the case that, as regulators require so much more information about systemically risky institutions nowadays, banks are sensible to integrate their sprawling activities more than ever before.
©2014 funds europe