ROUNDTABLE: Gelb, Meager, Derobert, Ebenston, Briol and Biggs talk with Funds Europe.
Nick Fitzpatrick, editor, Funds Europe (chair)
Custody banks, in many ways the bedrock of the asset management sector, are facing probably the greatest challenge to their businesses that many will ever see.In some respects the financial crisis has affected custody banks more deeply than it has their fund manager clients. Yet in this discussion, custodians warn that the challenges set for them – most notably stemming from the proposed increased responsibility for lost assets – are also challenges of which fund managers need to take a good grip. It is not the case that custody banks will bear the brunt of these regulatory changes alone, they say, but many on our panel feel this is a point that fund management firms have failed to understand. However, they also say that investment managers are involving asset servicers much earlier in the product development process than previously. If this is the case, then custodians will no doubt hope to play an even bigger leadership role in fund management in future.
Funds Europe: How has product development in fund management changed post-crisis in terms of complexity and speed to market, and have the difficulties faced by asset service providers reduced or increased as a result?
Susan Ebenston, JP Morgan: There is a bifurcation between very simple and very complicated products. There is an appetite for creating very simple products as asset manages like the transparency these give their clients. Yet there is still an appetite to create very complicated products with either long-only strategies, multiple investment strategies or with tiered strategies in the pursuit of something that provides a little bit more than just basic beta.
Marc Briol, Pictet: Yes, there is increasingly a blurring frontier between complex and simple products, and that’s probably driven by the fact that although fund managers are considering more onshore jurisdictions, like Luxembourg or Ireland, for their more complex products they have to encapsulate them into Ucits-type structures. From that perspective, the asset servicing providers must be able to accommodate more diversified and complex products.
Penelope Biggs, Northern Trust: As asset servicers this is good for us because we become less like vendors and play more of an integral role in fund set-up and the distribution process. The relative importance of how we can guide fund providers in their fund creation makes a big difference to their output.
Eric Derobert, Caceis: Indeed, the post-crisis environment generated many regulatory initiatives that are creating uncertainty in the market, and service providers’ extensive knowledge of the differences between jurisdictions can benefit clients in this area.
Andrew Gelb, Citi: I agree, but there is a dichotomy between simple and complex products and, even more fundamentally, there is a blurring between traditional managers and alternative managers. We see a lot of traditional managers moving to offer much more alternative-type products – either truly alternative products or products that blend alternative characteristics with traditional ones. Hedge fund managers, on the other hand, are moving to launch more traditional structures. Whether this trend could be called a convergence or a blurring, I see it as a fairly fundamental shift affecting many managers.
Derobert: In either case, there is certainly a demand for increased transparency, and this implies greater administrative burdens, certainly more obligations, and ultimately enhanced support services from service providers.
Funds Europe: Are you surprised by the continuation of complexity?
Joanna Meager, RBC Dexia: Product development continues to evolve and there certainly is a dichotomy between simple products and complex products. But I think the difference now is that, as a partner, we are consulted earlier in the process, and by being consulted earlier this sometimes means that there are parts of those products that will not succeed in getting to market. Together with clients it might be decided not to take certain things forward, whereas historically when we were consulted later in the process, those decisions had already been made by the asset manager. It’s better for the industry as a whole to have the partnership start earlier and have the consulting process to start earlier, because the risks can then be identified earlier too.
Gelb: The trend towards complexity is partly to earn incremental alpha. Products themselves demand complexity. But I think it’s a trend that is, in a way, helpful for asset servicing providers because, as Joanna said, with increased complexity comes more of a desire to consult and work with the asset servicers. Secondly, it offers more opportunity for us to differentiate our provision of service – after all, providing a simple product is, relatively speaking, a commodity service, whereas providing a complex solution that you work on together with the asset manager is where you really differentiate yourself as a provider.
Biggs: People attribute value to us when a provider can demonstrate that they can aid fund distribution or provide a better structure with better tax transparency. But there is a very important point regarding complexity of funds, and that is to not make something that is complex look simple just because it fits into a nice regulated wrapper. Some of these vehicles are still complex.
Derobert: Yes, but I think that today there is more awareness across the entire fund chain about this complexity and its inherent difficulties and costs. This concept has been grasped better by fund managers, and they understand the need to address these issues together with the service providers.
Funds Europe: Does the panel feel that there is a greater mutual respect now between fund managers and asset service providers following the financial crisis?
Briol: Far more consideration is given to the advice of asset service providers today and we have a truly equal relationship with asset managers. Partnerships between asset servicers and clients are important in all this because to get exposure to certain asset classes fund managers need to access them via different means, either directly or through funds, or through funds of funds. The asset servicer is really there to give a consolidated view of all these exposures. Clients did not require us to do this so much before the crisis, but now they want us to carry out more cross checks, cross balances, validations and controls generally with regards to confirmations and counterparties.
Biggs: I think asset managers realise that we have a valuable role to play. How much emphasis any individual asset manager chooses to put on that may be different, but where we’re allowed to, I think we add huge value and it’s recognised.
Briol: I believe clients recognise that there are mutual benefits to leverage on each other’s competencies. For example, fund managers
can benefit from our experience with other asset managers.
Meager: With a growing awareness of operational risk, if a manager has outsourced operations and custody then the place to go for advice on operational risk has to be to us, and operational risk is getting more and more airtight across the industry.
Funds Europe: Can we expect asset service providers to seek greater portions of clients’ back and middle offices in order to manage risks better and increase economies of scale? And are you more discerning now about your choice of client?
Briol: There is more focus on profitability, risk and cost income. I believe the industry should look more at trying to establish mutually profitable relationships – and that probably comes with a stricter view about the business we take on. As an industry this is something we’re not really used to; we need to be stricter about the quality of the business we are ready to take on, we need to understand it properly. The industry as a whole will become stronger as a result.
Biggs: It does seem to be increasingly important to pick our clients more carefully, just as they would when selecting us.
Ebenston: Culture is figuring more in decision making, particularly when there is a level playing field created by simpler products. Where we can work closely with the client, and the client feels they have a level of trust in us, these things are more important in selection criteria than they ever were before.
Meager: If you are a trusted partner in whatever part of a client’s business you’ve started with, that client is more likely to move up the value chain because it is easier for them to outsource more of what they do to a trusted partner than it is to find another provider of such a service. So at the early stages of building a relationship both provider and client have to have an eye on what the future could look like.
Gelb: I agree, but I also see some clients saying that concentration is an important consideration when selecting a service provider. While certainly some asset managers have given more business to their existing suppliers, other asset managers feel they need to spread out across multiple providers. I don’t think one model is predominant.
Biggs: But what is consistent, is that more asset managers are doing at least something. So whether they centralise their business with one organisation, or spread it around, at least it feels like people attribute a value to asset servicing. We all spend millions on technology and individually or collectively we are going to spend more than the average asset manager on a back office system.
Meager: Some asset managers that want a single point of service will vertically integrate; those that want to split services will horizontally integrate, and providers have to be flexible enough to be able to support this.
Gelb: Operationally it has meant that providers need to work more between each other. Citi has been doing this far more than we have in the past, and I see this trend continuing.
Derobert: I agree. We are definitely seeing more opportunities to expand our service offer and deliver greater efficiency in the industry. But this should not be to the extent that it blurs responsibilities and liabilities. Another point worth mentioning is service fees. Customers are benefiting both from economies of scale that we make available and from our expertise. These benefits should be adequately distributed along the chain.
Funds Europe: Does the panel feel that levels of reward are adequate? It is well known that the new environment for asset service providers is putting upward pressure on fees.
Biggs: People ask for transparency but they also want the cheapest fees in every category. I hope that it becomes more acceptable that some things will cost more and some things less. As an industry I think we have got to get to grips with that, but it’s not an easy adjustment to make – for our clients either – and these conversations have to be held early on.
Derobert: In the past, and to some extent still today, there is a difficulty in understanding how services are distributed along the value chain, which makes the costs of services less easily understandable.
Meager: We need to be paid for risk and value of service, and this calls for transparency so that the cost of support is appropriately spread along the supply chain according to the level of risk and service provided.
Biggs: If we are expected as organisations to take more responsibility, it will cost much more. But what appetite is there for that to be passed on to the fund manager or the investor?
Briol: Well, I think there’s a growing awareness among clients that certain depressed fee levels are not sustainable. They are more aware of the value we add by reducing systemic risk and I think people are increasingly ready to pay a bit more for this ability of ours.
Gelb: Regulatory changes may also impact the fee structure. Some of the legislation being considered currently will put a whole new array of responsibilities on asset servicers, and assuming this legislation is passed, I think changes to fees and pricing models are inevitable.
Derobert: Yes, assuming the responsibilities are clear, understandable and practical. It is likely that we will be subject to additional obligations and we expect that these obligations will be adequately compensated.
Meager: And remember that we are not talking small increments in costs to us; we’re talking huge increments in costs.
Derobert: And possibly a significant increase in terms of liabilities.
Ebenston: It might be easier to actually effect the change, not on an incremental scale, but by more of a step change across the industry that would be sparked by some trigger event, like legislation. So it won’t be the case that one of us stands firm followed by others; there will be some trigger event that will shift everything.
Biggs: And if it does so in the shape and form that people are talking about, our industry will look nothing like it does today. I would say it would be unrecognisable.
Funds Europe: Do you mean because
Ebenston: Consolidation might be the consequence of it, but it’ll come down to cost, risk, appetite, balance sheets and partnerships. Legislation will apply equally to fund managers as it will to service providers.
Gelb: I think balance sheet, network risk and risk appetites will be very important. For example, an independent valuer will be required, and that valuer could take on a great deal more risk compared to what they’re taking on today, so I agree that change could be
Biggs: And finding clients who are willing to pay for the services under this new banner is an issue. Maybe asset managers will take all their business back in house again.
Derobert: Again I think it is a matter of clarity. We need clarity in what the new landscape will look like, otherwise we could end up with blurred responsibilities and blurred types of products.
Funds Europe: What is the potential for more consolidation in the industry and what shape may that take?
Gelb: The securities services industry has been consolidating for many years, so I don’t think this has fundamentally changed. Consolidation has continued, particularly in Europe, where we have seen a lot of the local or national players move away from the business. I see this trend continuing. Some of the legislation could accelerate the trend, but we’ll have to wait and see exactly how it shakes out. However, from a client perspective, we are seeing the desire to move away from the concentration that consolidation brings. As I previously said, some clients want to spread their business between multiple providers, so I don’t see the industry ultimately consolidating to an extremely small number of players. But I do see consolidation continuing to a degree and there will be a number of players left that have the scale and size to invest in the business.
Biggs: The shape of the market and the environment is changing, it will cost a huge amount for all of us to remain in business, so you either have to be very large or very focused and be able to get scale in a different way. You can’t afford to be in a no man’s land in the middle.
Ebenston: The middle ground has been vacated, absolutely.
Biggs: Yes, because the middle ground providers don’t have the money for the necessary systems and cannot attract the people.
Meager: When it comes to focus, although the industry always talks about large global players, not all clients need a large global player or even want one, so sometimes when you look country by country, you see a different picture.
Ebenston: Yes, there is the large global end of the market, and then there are small niche providers at the other end. The question for the small niche end is whether they are going to have the balance sheet and the risk appetite in future, depending on how legislation goes down. While there’s always room for the large and the small, it’s the middle ground that may have to look at its models.
Derobert: I see an ongoing trend for concentration. I would say that our clients, whether large or small, are expecting that at least ‘commodity’ services will be offered at the lowest possible prices, and this will push the industry towards concentration, one way or another.
Ebenston: There is consolidation at the distribution end as well. Asset managers that used to do their own back office and distribution now don’t do either of these. Distribution is now being consolidated through fund platforms like transfer agents or the banks that have set up manager-of-manager structures, as well as through service providers like ourselves, so there’s consolidation in all parts of the value chain. Asset managers have had to decide what their core business is, and it’s not proven to be distribution or asset servicing. It’s actually the manufacturing of alpha or beta.
Biggs: It’s also very important for our clients, particularly in certain markets, that they have choice. Choice is a wonderful thing, especially if you’re a Middle Eastern sovereign wealth fund. They do not want one single provider to know absolutely everything about them.
Meager: And also, if we look at sub-custody, we all have very interesting relationships. We can be competitors one day, clients and providers the next day, and we want to choose the best provider in the best location.
Biggs: Yes, so again you need that choice.
Derobert: I think we are far from having reached a stage where monopolies could shape the industry, there is still room for competition.
Gelb: There’s probably also an element of a geographical component to consolidation. You could argue for a variety of reasons, perhaps starting with the Depositary Trust & Clearing Corporation in the US, which is the most consolidated market, that as you go out across the world you have various levels of consolidation depending on the local market dynamics you’re dealing with. Even in the US there are still many active players. So again, while I see a consolidation trend continuing, I do think you'll still see lots of players offering different types of services.
Funds Europe: So providers are not necessarily keen to bundle their services together in greater quantities for risk and revenue reasons?
Meager: It’s not the division that’s the issue, it’s how it’s divided from an operational risk perspective. Certain services go together. It’s also about the risk that you’re taking on for these services, versus the reward.
Funds Europe: Which services go together the best?
Meager: I think it depends on the type of asset manager that you’re talking about and how their processes work, but when we go through the due diligence process we’re very clear what the hand-off points are and, if there are multiple providers, being very clear about what one party is providing and what the other party is providing, and where their responsibilities end and start.
Biggs: So if a sovereign wealth fund wants to divide up a third of its assets between three providers that’s one thing, but from our perspective we wouldn’t just want to do the operational outsourcing alone in the same way another provider might not want to do just the fund administration. Obtaining custody as well could be the best thing, but the point is that something has to work in terms of the packaging.
Fund Europe: If asset service providers are becoming more discerning about fund managers, what does a fund manager have to do to be appealing as a client?
Biggs: When you start working with a fund manager, it is important to be able to have a longer-term perspective about where business is going. So it’s nice as a provider to know that you’ve got custody and back- and middle-office outsourcing on day one, but you also want to know whether there is a plan to do other projects that we can work with the client on too. For example, in our case with one of our clients, it was cross-border pooling. The client also wanted to lend their securities out and so there was a longer-term perspective of the business that they gave us. For us that’s what makes a meaningful client relationship.
Meager: Yes. It has to be a partnership, and different client relationships start in different places, but we have to understand what the longer-term goal is. Clients don’t all have to start from the same place, but equally it needs to be a relationship that we think is sustainable, built on trust, built on a cultural fit, which is becoming more important. On average our client relationships are something like 17 years, so you need to like each other for those 17 years.
Derobert: I fully agree. Trust comes with a common understanding – this is more true today than in the past – about what the liabilities and risks are.
Briol: The relationship has to be mutually profitable, so we need to obtain clarity about views of business plans and how the client wants to develop the relationship. We cannot ask clients to be fully captive, so we need to give them the flexibility to shop around for certain services, but there must be a minimum service, a minimum understanding of what each other will benefit from in order to start a relationship on a healthy basis.
Funds Europe: Have the procedures used by fund managers and pension schemes to appoint asset servicing partners changed? Are consultants still favoured or heavily used? And are there any alternatives?
Derobert: Most of our customers use consultants and we continue to get RFPs [requests for proposals] from customers.
Briol: Yes, consultants are still very present, but we’ve also seen an increasing interest from clients to come on site and visit us, to meet our people and to understand the processes. There is still an intermediation role played by consultants, but increasingly the client wants to get direct exposure to their potential future provider, which is a good thing, to establish a true partnership.
Meager: I think there is an appreciation that the due diligence process is something where the ultimate provider and the client have to be very close. If a consultant is used in the selection process, then it tends to be that the consultants step away during the due diligence process.
Ebenston: There definitely is an appetite for identifying a partner, I think, rather than just a provider, so there has been a slight shift from the intermediary playing a role the whole way through the selection process, particularly as it gets towards the end. The decision about which parties are the best partners can only be made by the two parties in question, the ones that are actually going to continue their relationship beyond the involvement of the consultant.
Biggs: And that point about continuing the relationship – where it can go very well or not so well – is if you’re asked to make service commitments in an RFP and where your service penalties apply. It’s very hard to do that on a piece of paper without a discussion. If you are building these things into contractual agreements, then it is a good idea to hold workshops or some other type of dialogue.
Funds Europe: Do you feel that consultants have too much say in the appointment of an asset service provider?
Biggs: Consultants have a role to play, but the best provider should be selected on the basis of what is best for the client, not by how much you can save them in terms of fees. So there should be a quality assessment as well as a number assessment, and in fact I think transparency of the consultant remuneration structure for reviews is something we should all welcome.
Funds Europe: What is the greatest problem for the asset servicing industry posed by the Alternative Investment Fund Managers’ (AIFM) Directive – and should fund managers also be concerned?
Gelb: The main concern of the industry, and I really feel it’s an industry-wide concern, is about the depository liability question in the AIFM Directive. For some reason, the question of depository liability has not really hit the mainstream press. Many fund managers, I believe, are unaware of the issue, and as an industry we feel this is very serious. Simply put, what is being contemplated is making depository banks strictly liable for essentially anything that could go wrong in a transaction, and while there’s no question that asset servicing providers are willing to take on the risk for when they make mistakes, I think there is concern about having to take on liability for incidents, errors, conditions, etc, that are not of their own making. Yet that’s what’s being contemplated by the legislators right now.
Meager: Yes. There is no doubt we all agree that it is our responsibility to make sure that we have the right procedures and supervisory rules in place, and have very high standards of care – but that’s not what we’re discussing here. We’re discussing the taking of responsibility beyond this by extending liability even if no error has been made and the custodian has done a good job. This is a serious issue.
Derobert: We all agree that the depository role is an important one in the value chain. However, in terms of how we try to react by organising ourselves as institutions with regard to this directive, the first thing to note is that we are still a moving target. We know that we need some exemptions from this liability, and that’s where all of us are very active in the relevant debates, making sure that we have indisputable cases of exemption for events that are beyond our control. We should be held responsible for events that are under our control, of course, because we are experts and service providers. But there are obviously some instances and circumstances for which we should not be liable and any exemptions should be made clear to the end investor. I fully agree with Andrew. It seems that this major issue has been hidden behind the curtains and it could create unintended circumstances, and major ones at that.
Biggs: And even more than just unintended results for us as asset servicers, it could create them for our clients too, because if our clients need us as part of their set-up, and if we cannot support them because it isn’t a viable business model owing to inappropriate legislation, it creates a problem a long way down the line.
Briol: Yes, as an industry if the insurance coverage is expanding, we need to somehow increase the premium. Somehow prices would need to rise in light of the depositary liability. We will accept responsibility if we are fully liable for negligence or gross negligence – that’s absolutely right – but to guarantee full restitution of assets, that’s a big step, and that has to come at a cost.
Ebenston: And according to proposed legislation, the restitution has to be instant, as well.
Derobert: One positive thing is that at least the rules concerning depositary liability are laid down and explained in writing, which has never been the case previously. Again it’s not in the public space yet, but I think that there is a better understanding, at least in some parts, of the legislation – maybe not in the European Parliament, but much more so in the Commission. Yet we don’t have much time. There is still a light at the end of the tunnel if we can devise something that is practical and understandable in the marketplace.
Funds Europe: Is it possible that fund managers are aware of the implications but do not care because they do not feel it affects them, but affects only you, the custody banks?
Gelb: I’ve had discussions with many fund managers and I think there are differing degrees of awareness, as you would have with any legislation or big issue. I’ve heard everything from a fund manager’s perspective: from deep concern and a recognition that this will change the dynamics of the investment management business, to ‘isn’t it good that all the liability’s going to be shifted to the debt programme’.
Ebenston: Yes, ‘shifted from me as the investment manager, to you my service provider’. A number of people even say that they thought legislation already did this.
Biggs: And it’s like anything else in life, everybody in their own sphere has enough to worry about. For the average manager, they are worried about the implications of forthcoming legislation; it’s just that all of us have very different concerns depending on who we are.
Meager: The consequences of the legislation haven’t been thought through and this needs to be studied all along the value chain; nobody can do that in isolation.
Gelb: An interesting point to follow up in that comment is, in my view, one of the great strengths of the Ucits framework, which has obviously been such an effective proposition throughout Europe and indeed the world, has been the consultative process behind it – the fact that Ucits has been developed through consultation and developed incrementally. The Alternative Investment Fund Managers (AIFM) Directive has been a very different process, and when you remove consultation, sometimes it may have unintended consequences.
Derobert: Yes, it’s really got to be looked at along every part of the value chain, and I really mean the whole chain including from the investor’s point of view.
Funds Europe: How exactly does the depositary liability affect a fund manager’s business?
Briol: Some of the possible impacts could be restrictions about investment decisions. If a depot bank is strictly liable and the asset manager is going to invest in a highly risky market or risky asset type, then you could see depot banks imposing restrictions. I think there could be interim restrictions on counterparties, such as in OTC derivative contracts. This is all hypothetical of course because we don’t know what the legislation will look like, but you could see almost a dual investment regime where the investment manager looks to make investments and then the depot bank almost has to certify that those investments are compliant with the depot bank’s standards or ability to handle risk.
Biggs: At the very least the sub-custody model could change. Because of the liability concern, consolidation could see us with a handful of ‘super sub-custodians’. And in some markets it may become impossible to offer a viable service. Less choice and a restrictive environment can’t be good for any one, not least the client.
Meager: What we want are markets that people can operate in within sensible constraints. We don’t want to stop asset managers or asset servicers from being able to operate in a prudent and sensible way. But if some of these proposals work their way through the legislation there will be markets that are off bounds and there will be investments that can’t be made.
Biggs: Investors and managers will come to realise that, all of a sudden, they can’t diversify their investments like they could before. They are restricted to markets like the UK and the US.
Funds Europe: Eric, do you think the decision by a Parisian court to force custodians into immediate restitution of assets for certain asset managers that suffered in the Lehman crash, is the shape of things to come for the rest of Europe?
Derobert: In France our liability regime is obviously very different from others. What’s become clear is that there is a need for harmonisation of the liability regime across Europe, and my understanding is that the French regulator is open to more harmonisation and that they are aware that the future landscape will be something different to what we have got today in France.
Ebenston: While it achieved their ends, it could have been more precise.
Funds Europe: Following greater calls for market supervision by the likes of the FSA in the UK and authorities elsewhere, have any notable measures yet been put in place?
Biggs: There are functions that we probably all added in terms of behind-the-scenes activities that look at systemic risk, operational risk and counterparty risk. So it was more a case of building out tools and processes to protect you and your clients going forward. For example, a counterparty can take 20, even 30, different guises; so understanding that and being able to monitor exposure is important.
Funds Europe: As well as reporting to clients, what about ringing an alarm bell at the regulator, at the government, the supervisory authorities? Is there any kind of mechanism there?
Ebenston: The regulators themselves are far more diligent today. When they come and visit us they are much more inquiring, they are much more knowledgeable, in my view, than they’ve ever been. They’ve been building up a knowledge base, they dig much deeper, and they want to see more clearly how you run your business, how you maintain it, how you control your risks, rather than looking only at the output.
Meager: That’s very true, and I think they are much more forward looking. Historically it had been a point-in-time review. Now it is still the point-in-time data they look at, but they are much more forward looking around corporate governance and how decisions are made in an organisation. This means that when the regulator leaves, they have comfort about the ongoing sustainability of your business, and I think that’s a good thing.
Briol: I feel they are looking at how quickly our organisations could react and how we would behave in stressed situations.
Biggs: We also have to be able to actually demonstrate things to them rather than just talk them through things. So when we’re looking at our boards of non-executive directors, their primary role is to challenge the decisions we make to help us each time to move forward as an industry.
Funds Europe: How have regulatory developments affected fund managers’ choice of fund domiciles? Which domiciles, if any, are benefiting? And which are under threat?
Meager: One of our Canadian clients has launched the first Canadian Ucits and we have Latin American clients that are also launching Ucits. This implies to me that the reach of Luxembourg or Dublin is extending rather than other domiciles springing up to serve these regions.
Derobert: A lot of our customers do question today the choice of offshore domiciles. We notice that Malta, for instance, is eager to take its place in the market, so it could be that over time specialisations may be built up in certain domiciles, such as funds of funds in Ireland, and Asia in Luxembourg.
Biggs: But Ucits IV just makes it easier though, in the sense that if you’re an asset manager you can set up a master feeder and worry less about domicile.
Derobert: I fully agree, as it is mainly distribution driven. Thanks to Ucits IV and the forthcoming legislation, the choice in fund domiciles should be increased and that should benefit domiciles with a strong distribution base. Obviously Ireland and Luxembourg will compete to protect and expand their franchises.
Gelb: I would describe it as a steady trend, I wouldn’t necessarily describe it as a wave. I think some managers are waiting to see exactly how the legislation shapes up, but other managers I think are trying to anticipate what might emerge from the legislation and transition out of some of the smaller offshore locations.
Derobert: It’s not only managers. Fund managers react to their investors’ needs and demands and in some markets for some kinds of investor, a Cayman Islands-domiciled fund could be more appropriate today.
Funds Europe: Marc, what about Switzerland?
Briol: There are a lot of discussions going on between Switzerland and Europe and I think a lot will be driven by how we are going to be able to provide cross-border services out of Switzerland to Europe, and out of Europe into Switzerland. As far as Pictet is concerned we obviously took the view that we needed a European platform, and for many years we have had a bank in Luxembourg. This is because we are convinced that with the cross-border services, there is huge potential in the European fund passport, the single management company, and the master-feeder structure. That is the key to the success of our fund distribution.
Meager: Switzerland has been very interesting over the last 18 months in terms of the number of deals coming to the market. There has been a lot of interest in Swiss asset managers who have moved to outsource more functions.
Derobert: Yes. What we have seen as well is a steady trend of alternative hedge fund managers moving from London to Switzerland.
Funds Europe: The financial crisis was expected to increase the trend for hedge fund managers to custodise assets with custodians rather than with their prime brokers. Have there been any discernible moves to do this?
Biggs: I do think this trend is occurring because we have four prime brokers now who have done exactly that: established separate pools for their hedge fund assets with a dedicated custodian.
Meager: It is about risk diversification. It depends on the client, how they want to diversify their risk, and some of them may want to choose not to hold all of their assets with their prime broker. Some may choose to go down a multiple prime broker route; some may choose to have an administrator as an aggregator. It really does depend on how they want to diversify their risk. There is a very high demand for collateral management.
Funds Europe: What does the panel see as the most significant developments affecting the asset servicing industry over the next two years?
Ebenston: Regulation. There’s so much pending regulation, without clarity, that I don’t think I could even hazard a guess.
Briol: Under current proposals, regulation will be a squeeze on margins, definitely, and there will be a greater need for providers to differentiate themselves with true added-value services. Consolidation is the key.
Derobert: The issue that remains to be addressed is how to get a better cost-to-income ratio under the coming regulatory regime while maintaining the attractiveness of regulated European funds.
Biggs: Apart from the very valid points about regulation, there is also the issue of distribution, about how we can help our clients with distribution in the most organised and disciplined and controlled manner. They need to get their products to market and they rely on us for the infrastructure and the intellect to help them do it.
Gelb: In addition to regulation are some of the other trends we’ve talked about: increasing complexity which I think will impact the industry; the trend towards outsourcing; and globality, which we haven’t spoken about, but I think we’ll see some asset managers really try to leverage their global scale to a degree they haven’t before. But certainly the big challenge is regulatory change.
Meager: The wave of regulation is something that we are all challenged by. I also think there is the ongoing task of being able to support our clients’ business growth and their ambitions.
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