The Goldilocks Agent

Agent banks/sub-custodians in Europe are undoubtedly facing new challenges in the wake of the economic crisis.

Not least among these is a trend increasingly being singled out by market commentators whereby investors are choosing the big global custodian banks to deal with their regional investments rather than selecting their own local agents in a given territory. This emerging trend towards the global one-stop-shop, such as it is, is not universally being recognised across Europe.

This has a lot to do with the developmental and infrastructure lag between the developed and mature markets; at least that’s the considered opinion of Lilla Juranyi, global head of custody at ING’s Securities Services, which won this year’s IFCA award for regional sub-custodian in Eastern Europe. “I don’t think that this is the trend in Central and Eastern Europe today,” she says. “In our region, the legal background and local infrastructure is not yet at that developed level.”

Trending topicsThat’s not to say this trend for using global custodians as agents in local markets might not soon affect the central and Eastern European markets and Juranyi is keen to qualify her position.

“This trend might be in the Western European market,” she says, adding that while it might refer to settlement and custody; “it’s not clear whether this applies to value-added services such as corporate actions and local tax expertise”.

Nor would it appear that this trend is having any great impact on the Nordic markets. Ulf Noren, SEB’s global head of sub-custody client relations saw little evidence on his patch. SEB was the judges’ choice for this year’s Regional Sub-custodian of the year in the Nordic Region at the ICFA European Awards.

But that could be because players in the Nordic region have more pressing issues to consider. The tendency on sub-custody is not, and will not yet for at least until the introduction of T2S, to use global banks,” says Noren.

The southern European markets are also aware of this trend, but Dimitri Vassiliou, who is head of sales and relationship management at Eurobank EFG and based in Athens – and with an operational presence in six Southern European countries including Turkey – sees it as a doubled-edged sword: “There are many institutions which have adopted a strategy of reducing and consolidating the number of agents that they use worldwide,” he says. “On the other hand, many institutions have realised that the expertise of each bank and each agent in every market is not exactly the same, so many foreign institutional investors tend not to always use the same provider in each country because expertise is different,” he explains.

But Vassiliou adds, “This trend is definitely happening for small institutional investors who have a small volume; they don’t have the capacity to run a very extensive network of agents so for them it makes sense to consolidate to a small number of agents.”

Certainly from the German perspective,

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Is big better or is small beautiful? Or indeed, when it comes to agent banks and regional sub-custodians, are investors actually looking for Goldilocks in a bear market? Not too big to be out of touch and not too small to handle the business but just right to get the perfect mix of market knowledge and high-end support services. SeÁN FlyNN and PeTeR McCReADy report

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global head of sales at BHF Asset Servicing, Moritz Ostwald is probably better placed than most to address this issue. “We do see that trend for choosing global players,” he says. As yet however, it would still appear only to be an emerging trend even in a mature market like Germany’s. “The global custodians do try to be active in the local markets but not all of the multi-national providers are actually in Germany so clients use local agent banks like us,” says Ostwald.

Making alliancesA clearer, more established trend however is that of global custodians making judicious alliances with established providers. “In the past five years, we’ve seen more of the multi-national banks making alliances with local providers,” according to Ostwald.

SEB’s Noren also underlined this: “The trend to use regional providers have been very positive for us and has been accentuated by the fact that SEB is the only bank in the area that has a full blown on the ground presence in all seven Nordic-Baltic markets,” says Noren.

This, it would appear, is the key strength of European agent banks like BHF Asset Servicing and SEB and one that will stand them in good stead going forward. “Clients are aware of the strengths of a local, flexible and specialist provider, especially when they have large German portfolios. Therefore, we still see quite an interesting position for local sub-custodians,” says Ostwald.

Ask any European agent bank or regional sub-custodian what it is that differentiates them from the bigger global players and the response is a chorus in unison: local knowledge.

Speaking specifically about the southern region, Vassiliou says: “The thing is that clients in these countries where we operate need to have a strong local presence from whoever they appoint, this is crucial.”

“This is for a number of reasons,” he explains. “In many of these countries, the client doesn’t have the same size as the pension funds in Western Europe for example so individually, they don’t represent a very big client win for global custodians.”

Ostwald is even more emphatic on local knowledge a strong selling point for an agent bank. “The first thing is culture,” he says. “We’ve been in the market for 30-35 years doing sub-custody and that is direct sub-custody, not through any other agents. With that of course comes the flexibility, the individuality and of course the local market knowledge,” he adds.

An inevitable corollary of this emerging trend for for using global custodians as agents in local markets has been a significant broadening of the services being offered by agent banks and regional sub-custodians.

ICFA spoke to a number of banks and all offered broad ranges of services and in some cases, the choice of unbundling packages to offer a kind of ‘pay as you go’ approach to services outside their core offerings.

An agent like ING in Eastern Europe would for example offer basic services and settlement of custody services across all its operational markets. Juranyi emphasises that coverage will inevitably vary from country to country and this variation is generally connected with market infrastructure and practices. But it is this ability to offer the broader range of services in a wider geographical spread that really adds value to a regional provider according to Juranyi.

Even within the domestic German market, this move towards a wider service offering on the part of local agents is manifest. Ostwald explains: “As a sub-custodian, we do the full service chain. This is divided into three different categories; core complementary and additional services.”

At BHF Asset Servicing, core services comprises OTC settlement, securities safekeeping, all the different kinds of corporate actions, the income services, and of course SWIFT reporting. “The second category is complementary services where we have the general meetings, the settlement of exchange trades, tax reclaims and sec-lending as well as all kinds of market information,” says Ostwald. “Most of our clients use all the complementary services as well. But if it comes down to cost, then with our unbundling, when our clients don’t need all the services, they don’t pay for what they don’t need.”

The third category of so-called additional services is where BHF Groups the brokerage, money market, FX and electronic banking products.

SEB offers sub-custody services in 10 markets in Europe (Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Norway, Russia, Sweden and Ukraine). “This service,” says Noren, “comprises absolutely all elements within sub-custody, from fairly standardised settlements and safe keeping missions to state-of-the-art asset

The global custodians try to be active in local markets but not all of the multi-national providers are

in Germany so clients use local agent banks Moritz Ostwald, BHF Asset Servicing

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servicing and reporting missions. The service is offered to all client segments: broker dealers, investment banks, global custodians, universal banks, asset managers, ICSD’s and even a number of corporates. Global custody and fund administration is offered on local basis in each of the markets through a network of agent banks managed and appointed by SEB.”

It is no different in Southern Europe. Vassiliou says that Eurobank EFG’s strategy is to “offer custody and clearing services to any type of client, either domestic or foreign.”

Another interesting aspect of this service broadening philosophy generally has been a more pro-active role on the part of agent banks in trying to shape the regulatory policy within their spheres of operation and influence.

ING in Eastern Europe attaches great relevance and importance to lobbying. “It’s become increasingly important that these local banks show proactive proposals to the local authorities,” says Juranyi. “In some countries, lobbying and approaching the authorities by individual agent banks is a normal way of market development,” she explains. She however is not sure of the merits of such a partisan strategy. “Today

this is not always efficient,” she says. “In some of the countries where we operate, there are already good working groups aimed at developing best market practice, where competitors can work together in connection with general market difficulties.”

Putting into practiceThe kind of insight gleaned from these working groups is then put to good use. According to Juranyi, “We jointly approach the authorities with proposals on how to overcome shortfalls in market performance.”

Juranyi cites Ukraine as a good example of this kind of practice. “There are four or five banks covering the whole custody offering and they are working closely together, this is something we like to support and it also something we would like to introduce in other markets as well,” she adds.

According to Noren at SEB this is “crucially important”. Noren notes with some satisfaction “that our influencing power is increasing the more we continue to grow an already massive Nordic-Baltic market share”.

This new emphasis on shaping regulatory policy is summed up by Ostwald: “It’s getting more important for large banks and other custody clients to have agents who not only take care about client requirements but who also lobby the market in one direction or another on behalf of clients’ interests. And this being Germany, the market itself carries quite a lot of weight. The top three players are the ones who do most to shape the market.”

A bank like BHF is not shy about highlighting its influence: “When we started to actively market sub-custody again about five years ago, our goal was to offer unparalleled high-quality securities services in the German market but also to

have a strong market voice. What we mean by this is that we lobby on behalf of our clients and they expect us to have a strong influence in the market, for example with regard to upcoming regulations. Although BHF Group is far smaller than say Commerzbank or Deutsche, our custody market voice isn’t at all,” says Ostwald.

So what does the future hold for agent banks in Europe? The outlook was generally bullish.

“Germany’s one of the most competitive markets in Europe,” says Ostwald. “Currently, there are about six major participants in the German market with regard to agent banks. Ostwald then goes on to highlight a big area of potential growth in his region. “I expect further consolidation will probably be seen in the German markets, especially when you consider the growth in private pension schemes. This is an area with a lot of potential for growth similar to that seen in recent years in the UK and elsewhere. The German market therefore should still be of interest for foreign market participants and probably more so than other European countries.”

Juranyi’s philosophy for future growth is in keeping with the increasingly client-led approach that is now thankfully gaining currency. “Value-added service is a more and more essential part of the service offering of a local agent bank and it should be done in a pro-active way, initiating as much support as possible to the foreign client who is considering the local agent in a remote market.”

Vassiliou offers a conclusionary note of caution: “Just because it is a growing market doesn’t mean anyone can step in. It’s about domestic connections and domestic players. These kind of relationships are very difficult for a global custodian or a foreign bank to replicate.” n

Value-added service is a more essential part of the offering of a local agent bank and it should be done in a pro-active way, initiating as much support as possible to the foreign client who is considering the local agent in a remote market Lilla Juranyi, ING Wholesale Banking Securities Services

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