Money Markets - Volume 9

MM MONEYMARKETS

1 | Money Markets

2 | Money Markets

Contents

“The increasing interdependence of the global economy is also of paramount importance for central banks as it possibly affects, among others,the formation of international good prices,the inflation process, the valuation of assets, the cross-border constellation of capital flows, and international financial stability.�

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Foreword

Custody

7 R estoring Confidence in the

24

2 009 International Custody Review

27

T he Next Chapter

32

S urvival of the Fittest

Global Financial System Jean-Claude Trichet

12

T he Financial Crisis and our Response so far Jean-Claude Trichet

20 I nterview with Jean-Claude Trichet, President of the ECB

Christian Hogrebe & Moritz Ostwald

Lilla Juranyi

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>>

Money Markets | 3

Contents 32

43 35

E xceeding Expectations

38

P utting the Client First

43

I nnovate to Thrive

Willem Holst

Fearghal Woods

Claude Michaux

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55 58

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T he Road Ahead

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T he Nordic–Baltic Value Proposition

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T he Value of Local Expertise

58

C lient Relationship Management – A Winning Formula

Anne-Lise Kristiansen

Goran Fors

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6 | Money Markets

Contents

62 62

T he Keys to Success Modernization and Growth

69

FirstBank of Nigeria

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A New Force in Sub-Custody

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P utting the Value in Value Added

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L ist of Contributors

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Money Markets | 7

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8 | Money Markets

30/3/07 10:57:32 AM

Foreword

•••

Restoring confidence

in the global financial system »Jean-Claude Trichet, President of the ECB

Globalisation is certainly one of the most analysed and discussed economic phenomenon of our time. The notion of “globalisation” subsumes the concepts of cross-border market integration, country and policy interdependence, and fundamental historical change. Economists classically think of globalisation as a process of market integration that leads to price convergence across markets for goods, labour and services worldwide as well as to growing trade and financial flows.

to asset price changes. It reached a point where it seemed that the financial system no longer existed primarily to hedge existing economic risks, but, increasingly, to create and propagate new risks on its own.

I will explain the ECB’s response to the financial crisis. I will also note, en passant, how our policy compares with those of other major central banks. In my view, differences in crisis management approaches between major central banks reflect differences in economic structures rather than conflicting views on fundamental principles. The ECB’s guiding principles are very simple and very clear. In the medium term, the ECB’s policy is geared towards preserving price stability in line with our objective and in so doing, creating the conditions for enduring financial stability. This policy is essential to revive a resource that has become much too scarce over recent months: confidence in the future.

The credit boom was exacerbated by three factors. First, ill-designed compensation schemes for loan managers reinforced the shortening of lenders’ horizons. In the eyes of many loan managers, the short-run gains from an expansion of credit outweighed the need to consider the potential losses that their institutions could incur over the longer term.

Financial excesses at the root of the financial crisis

Third, international macroeconomic imbalances reflected a chronic shortage of savings in some of the world’s advanced economies, made possible by a glut of savings in other parts of the world. These imbalances resulted from unbalanced international macroeconomic policies pursuing an inconsistent set of goals. These imbalances also contributed to the augmentation of global liquidity, further fuelling credit and debt accumulation. In the period before the start of the crisis, the oil and commodity price boom further fuelled the international savings glut and aggravated major imbalances.

In the last ten years finance has seen a dramatic shift of focus away from facilitating trade and real investment to unfettered speculation and financial gambling. The assumption and hedging of genuine economic risk – the risk that companies face when engaged in product and process innovation – gradually ceased to be the main concern of international finance. Over time, the creation and assumption of financial risk became the core activity of the financial industry. This is the risk posed by arbitrage and deliberate exposure

In the past two decades financial innovation and liberalisation have made important contributions to the overall productivity of our economies. But, as the demand for finance increased throughout the 1990s, intermediaries had growing incentives to develop innovative funding techniques. The securitisation of assets, for example – the transformation of bilateral loans into tradable credit instruments – had tremendous ability to facilitate the diversification and efficient management of risk. As such, it was a powerful and useful tool.

But securitisation also meant that banks and non-banks were able to sell loans – or place them off-balance sheet – immediately after they had been extended. This alchemy enabled lenders to expand the volume of their operations and conserve on capital. Fatally, the same mechanism weakened lenders’ incentives for prudent screening and constant monitoring. The resulting decline in underwriting standards and lending oversight was one of the main reasons for the excessive credit growth.

Second, the complex structures of securitised products made it difficult for holders to assess the quality of the underlying investments. This perpetuated the boom, as it took time for investors to discover and assess the underlying risks.

Money Markets | 9

The global response to the financial crisis

The interplay of the forces and the facilitating factors that I have described so far went into reverse in the middle of 2007. This reversal was sudden, but not unexpected. When the asset cycle turned, and many of the missing links in the financial chain were finally exposed, investors lost confidence. After years of high profits and exceptional risk tolerance, markets became extremely discriminating with regard to financial risks.

Funding costs for borrowers increased. The spreads on the debt of financial companies – seen as being clogged with assets of dubious value – widened considerably. Uncertainty over the extent of credit write-offs and the future earnings capacity of financial institutions took a heavy toll on the valuation of many revered names.

Central banks around the globe had to spring into action in the summer of 2007 when there were signs of what appeared at the time to be a liquidity crisis. You might remember that the ECB was the first central bank to embark on exceptional decisions as early as 9 August 2007.

The collapse of a major, highly interconnected financial player in midSeptember 2008 eventually turned a very large-scale financial market’s correction into a financial panic. Throughout the difficult months that followed, central banks and governments around the globe took unprecedented and bold steps. These steps were aimed at restoring financial market functioning and the flow of credit, and at ensuring that our banks have the capital and the liquidity necessary to discharge their critical function even in an acute economic downturn.

Before going into detail, allow me to say that the crisis has brought out the best in terms of international cooperation. Leading central banks around the globe, including the Bank of Japan and the ECB, have cooperated intimately to alleviate financing strains in interbank markets. Governor Shirakawa and I had numerous useful exchanges of views on the sidelines of our regular meetings at the G-7, G-20 levels and, more importantly, in the occasion of the global economy meeting of central bank governors which takes place every two months in Basel. In the language of game theory, one could say that major central banks are closely cooperating to deliver the best possible outcome for the global economy.

Similarly, the outcome of the G-20 meeting a fortnight ago has confirmed that governments can agree on a future course for policy that is based on unity of purpose and shared principles of action. Decisive and immediate action is still required. In my view, progress on three fronts will be critical to restore confidence. Two are geared to the medium term; one is geared to the short term.

First, we need a quantum leap in the breadth and authority of international financial supervision and regulation. Any viable and effective solution will necessarily require broadening the focus and overcoming the fragmentation of domestic oversight arrangements. Second, lasting confidence can only be restored if the commitment to near-term fiscal and monetary stimulus is backed by an equally strong and credible commitment to fiscal sustainability and price stability. The importance of this point cannot be overstated. Third, governments need to swiftly implement the far-reaching set of measures, designed to support the financial system. With fellow governors, Governor Shirakawa has convincingly argued that resolute action to put commercial banks in a healthy situation was absolutely indispensable in the experience of Japan at the beginning of the millennium. In the absence of such action, there is a risk that fiscal stimulus packages will simply trickle away, leaving us burdened with the full load of outsized fiscal liabilities and with no prospect of a sustained economic recovery.

How far has Europe advanced on these issues? With regard to financial supervision and regulation, the European Union is currently preparing 10 | Money Markets

important decisions along the lines recommended by the De Larosière report. Among other things, this report proposes a new system for macro-prudential supervision in which the General Council of the ECB would play an important role. There was certainly no lack of warnings – from many quarters – before the crisis. But no mechanism or institution existed to ensure that admonitions were followed by decisive and swift action. The new European system would assign the task of pre-emptive analysis and grant the necessary authority to put risk mitigation measures into practice.

With regard to the appropriate balance between near-term stimulus and medium-term stability, the euro area clearly benefits from its mediumterm stability-oriented framework. It is an invaluable anchor for private sector expectations, regarding both fiscal sustainability and price stability.

Having proved its value in times of crisis, this framework has emerged even stronger than before. With regard to the overall support to the financial sector, I have been deeply impressed by the action plan drawn up by euro area governments and the European Commission within a short period of time. This action plan and its swift implementation has confounded the sceptics who had questioned the ability of euro area governments to act in a timely fashion in the event of a major economic crisis. Nevertheless, more action is urgently needed to entirely resolve the toxic asset problem.

The ECB’s response to the financial crisis

Let me now turn in more detail to the ECB’s management of the financial crisis. When the first signs of liquidity hoarding by banks appeared in August 2007, the ECB took several measures to protect against a disorderly correction in credit. Banks were not only concerned about the volume of liquidity that they could secure at present, but also about the horizon at which liquidity was expected to remain available to them. So the first thing we did was to provide banks with an insurance against future liquidity shortfalls. We lengthened the liquidity horizon for banks by expanding the share of refinancing that was granted at maturities longer than two weeks. This “insurance scheme” encouraged banks to maintain those lending relations with their clients that are central to Europe’s financial architecture. At the same time, it helped bolster public confidence that banks would remain solvent.

The financial panic that developed in mid-September 2008 marked a dramatic turning point. Interbank trading in the euro area and elsewhere came to a virtual halt. As cash-rich banks were unwilling or unable to lend to cash-deficient institutions, the ECB had to substitute for the missing interbank trading. We started to provide credit well above the levels that banks had absorbed to fulfil their reserve requirements in normal times.

Since October, against a background of a drastic deterioration in global conditions, falling commodity prices and rapidly receding inflationary pressures, the ECB has stepped up its crisis resolution measures in an extraordinary effort to protect the functioning of our financial system and the stability of our economies.

Again, our primary concern was to preserve the availability of credit for households and companies at accessible rates. Under our new “fixed-rate full allotment” tender procedure, banks have been granted access to essentially unlimited liquidity at our policy interest rate. To fully appreciate what this means, one should note that in normal times we auction a given amount of central bank credit and let competition among bidders determine the interest rate at which that credit will become available to the banking system as a whole. But, as the demand for liquidity by individual institutions has expended abnormally and markets have ceased to perform their allocative function, we have turned

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Money Markets | 11

that practice around. We now determine the lending rate and we stand ready to fill any shortage of liquidity that might occur at that interest rate. We currently surrogate the market in both its allocative and price discovery functions.

We have also considerably lengthened the list of eligible assets that banks can pledge as collateral, so as to ease banks’ balance sheet constraints and facilitate the liquefaction of bank assets for which markets could find no price. The intention was to encourage banks to extend new credit or continue rolling over maturing loans.

Traditionally, the number of counterparties that are eligible to take part in our refinancing operations – both ordinary and long-term – has been the largest among the major central banks that are most directly comparable to the Eurosystem. This structural feature of our operational framework has been instrumental in the first stages of the crisis in ensuring that all relevant intermediaries could be granted easy access to liquidity. The recent changes to our operational framework have expanded the number further. Between July 2007 and March 2009, counterparties have increased from 1676 to 2136.

We have granted unlimited access to central bank credit at a decreasing cost. Our key policy rate has been reduced by 300 basis points since the exacerbation of the crisis in the autumn of last year. As I speak, the Eurosystem provides refinancing to all commercial banks that present eligible collateral at a rate of 1.25%. Sound and creditworthy banks can secure overnight credit at an interest rate that is significantly lower, today 0.8%, something never seen before in the entire post-war history of European monetary affairs. Being able to borrow at such low costs, banks can grant credit to other banks and to non-bank borrowers at conditions that are very favourable by historical and international standards. For example, the 6-month and 12-month euro interbank offered rate – benchmarks that euro area banks widely use to reset floating-rate loans to households and firms – have reached levels that are lower than the corresponding rates for contracts denominated in dollar and British pounds. This underscores that in current circumstances international comparisons of policy rates alone do not provide all the pertinent information about the effective credit conditions prevailing in single markets.

Our measures to support credit have resulted in a sharp expansion of the Eurosystem’s balance sheet. As banks’ usage of central bank credit soared at the height of the crisis late last year, the value of our operations grew quickly. Between June 2007 and March 2009 the size of our balance sheet increased by close to €600 billion. Since the end of September 2008 the growth in the overall size of our operations has been 40%. These measures have likely prevented the whole credit market from seizing up. Since then, the volume has declined somewhat, as banks have been more conservative in bidding for central bank credit and strains in the money market have eased to a certain extent.

The ECB has so far concentrated its non-standard measures on commercial banks’ refinancing, mainly because of the nature of the euro area financial structures. As compared to the United States, which have primarily a market-based financial system, the euro area is very largely bank-centred. Accordingly, in a euro area context, guaranteeing firms and households steady access to credit largely means preserving the functioning of the banking system. In our economy, banks play such a dominant role that non-standard measures need to be implemented – first and foremost – through the intervention and with the active participation of banks. This is why I have sometimes referred to our non-standard measures as those of enhanced credit support. They aim 12 | Money Markets

at supporting banks in providing credit to firms and households on an ongoing basis.

This goes a long way towards explaining events in the past. As regards the possible further additional non-standard measures, I have been very clear. On behalf of the Governing Council, during my last press conference in Frankfurt: We will decide in our next monetary policy decision Governing Council meeting on 7 May. And it is on 7 May that I will make public the decision of the Governing Council. At this stage, as a porte-parole of the Governing Council, I think it is important not to create or encourage expectations. Be sure that what we will decide will fully take into account the financing structure of the euro area economy and will be fully in line with our medium term strategy.

When taking all our decisions, we are inspired by our remit to provide a solid nominal anchor for the economic system. As you know, the ECB’s quantitative definition of price stability is a key element of its monetary policy strategy. We define price stability as a year-on-year increase in consumer prices of below 2% over the medium term. In 2003 the ECB’s Governing Council clarified that, within its definition, it aims to keep the inflation rate close to 2% over the medium term. This clarification was aimed at confirming the robust anchor for long-term inflation expectations that the ECB had provided since the setting up of the euro.

In the first ten years since the introduction of the euro, the ECB’s quantitative definition of price stability has proved to be an invaluable asset, guarding against undesirably high inflation and against deflation. Long-term inflation expectations in the euro area, whether based on surveys or extracted from financial indicators, have been and continue to be firmly anchored at levels consistent with our definition of price stability.

Conclusions

More than ever, in the present very demanding circumstances, confidence is key. The global economy was hit in mid-September 2008 by an unprecedented sudden loss of confidence. It was perhaps the first time in economic history that a single adverse event was able, in just a few days, to have a simultaneous adverse effect on all private economic agents in every economy, industrialised and emerging. We are in uncharted waters, and the risk of the sudden emergence of economic and financial phenomena and unprecedented behaviour on the part of economic agents remains.

Public authorities, executive branches, and central banks must do all they can to restore, preserve and foster confidence among households and corporations in order to pave the way for sustainable prosperity.

This calls for a measured response to changing conditions. We must maintain the appropriate balance between the need to take immediate action that is commensurate with the gravity of today’s situation, and the equally essential obligation to return to a path that is sustainable in the medium to long term. Confidence today relies equally upon the audacity of our immediate decision and upon the soundness and credibility of our exit strategies. Any ambiguity in our medium term policy direction would delay the return of sustainable prosperity, because they would undermine confidence, which is the most precious ingredient in the present circumstances. We will continue serve our 329 million fellow citizens as a solid anchor of stability and confidence.

Speech by Jean-Claude Trichet, President of the ECB, at the annual meeting of the Research Institute of Japan, Tokyo, 17 April 2009 Source- European Central Bank

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Foreword •••

The financial crisis

and our response so far »Jean-Claude Trichet, President of the ECB

Policy-makers around the globe are facing formidable challenges as the crisis, which originated within a few blocks from here, has swept across the globe. Restoring confidence in the global financial system is of paramount importance.

The G7 and IMFC meetings last weekend, as well as the G20 meeting four weeks ago, confirmed in my view a strong signal of reform that can provide the basis for a more resilient global economy in the future. In my remarks, I would like to focus mainly on the ECB’s response to the crisis. I will also note, en passant, how our policy compares with those of other major central banks. Clearly, there are differences in central banks’ approaches to managing the crisis. In my view, these reflect profound differences in the economic structures within which central banks operate. But they do not reflect conflicting views on fundamental principles. Central banks around the world are united in purpose.

The ECB’s guiding principles are very simple and very clear. Our policy is geared towards preserving price stability over the medium term and, in so doing, supporting the conditions for enduring financial and economic stability. The crisis has not changed this objective. Where we have made changes is in our operational framework and the implementation of an exceptional set of policy tools that is very broad and very deep, as I will explain. This set of policy tools, in combination with the bold action taken by euro area governments over recent months, is essential to revive a resource that has become much too scarce in recent months: confidence in the future.

12 | Money Markets

The origins of the financial crisis

To set the scene, let me recall the origins of the current crisis. Over the past ten years, we have witnessed a dramatic shift of focus in the financial sector – away from facilitating trade and real investment towards unfettered speculation and financial gambling. Managing genuine economic risk gradually ceased to be the main concern of international finance. Instead, the creation and assumption of financial risk – the risk involved in arbitrage and deliberate exposure to asset price changes – became the core activity of the financial industry. A point was reached where the

main role of the financial system was no longer to hedge existing economic risks and assist trade within and between countries, but increasingly to create and propagate new risks.

To be clear, I do not deny that financial liberalisation and financial innovation over the past two decades have made important contributions to the overall productivity of our economies. For example, the securitisation of assets – the transformation of bilateral loans into tradable credit instruments – had tremendous potential for the diversification and efficient management of economic risk.

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Money Markets | 13

The collapse in mid-September last year of a major financial player, which was “directly involved in about 30 large payment and settlement systems worldwide and disposed of a balance sheet of $600 billion, turned a large-scale crisis of confidence into a global financial panic. As the intensity of the crisis became evident, financial intermediaries restored liquidity buffers.

”

But securitisation also meant that banks and non-banks were able to sell loans – or place them off-balance sheet – immediately after they had been extended. This weakened lenders’ incentives to conduct prudent screening and constant monitoring. The resulting decline in underwriting standards and lending oversight fuelled excessive credit growth starting in the second half of the 1990s. At the same time, it created the conditions for its reversal.

The credit boom was exacerbated by three multipliers. First, incentives: ill-designed compensation schemes for loan managers and traders reinforced the shortening of their time horizons. Second, complexity: increasingly complicated and opaque financial instruments made it difficult for holders of securities to assess the quality of the underlying investments. And third, global macroeconomic imbalances: a chronic shortage of savings in some industrialised economies was made possible by an excess of savings in other parts of the world, a multiplier that was exacerbated during the years immediately preceding the crisis by the sharply rising prices of oil and other commodities.

From financial turmoil to financial panic

In mid-2007, suddenly though not unexpectedly, the interactions of perverse incentives, excessive complexity and global imbalances threw the credit boom into reverse. The asset cycle turned, and many of the missing links in the financial chain were exposed. Investors suddenly lost confidence.

After years of high profits and exceptional risk tolerance, markets became extremely discriminating about financial risk. Funding costs for borrowers increased. The spreads on the debt of financial institutions – seen as being clogged with assets of dubious value – widened considerably. Uncertainty about the extent of credit write-offs and the future earnings capacity of financial institutions took a heavy toll on the valuation of many revered names.

14 | Money Markets

The collapse in mid-September last year of a major financial player, which was directly involved in about 30 large payment and settlement systems worldwide and disposed of a balance sheet of $600 billion, turned a largescale crisis of confidence into a global financial panic. As the intensity of the crisis became evident, financial intermediaries restored liquidity buffers. While intermediaries were scrambling to economise on capital and to scale down their balance sheets, assets were sold and lending conditions tightened. Banks and other financial institutions dramatically reduced their exposure to the risks that they had imprudently accumulated during the phase of financial euphoria. They reduced illiquid claims and sought refuge in cash-like instruments, such as reserves or short-term government paper. Collectively, they engaged in a large-scale process of “deleveraging”.

Banks’ intermediation was reduced in the aggregate, and loans to companies were curtailed. The credit squeeze and the toll on the real economy set in.

Financial/economic structures and monetary policy

So much for the backdrop of events against which our policy actions have been implemented. We at the ECB have moved pre-emptively and forcefully to counter the adverse consequences of the financial crisis.

At all times our response has been carefully calibrated to the structure of the euro area economy.

Allow me to elaborate a little on this structure, which differs significantly from the structure of the US economy in several important respects, relating to both the financial system and the real economy.

First, there are profound differences in the financial structures of the euro area and the United States. The United States has a primarily market-based financial system; in contrast, the financial system of the euro area is largely bank-centred. A few numbers illustrate these differences. At the end of 2007, the stock

of outstanding bank loans to the private sector amounted to around 145% of GDP in the euro area. The corresponding proportion of bank loans to GDP in the United States is only 63%. This means that the banking sector is more than twice as important in the euro area as it is in the United States. It also means that to be effective, ECB policy must focus first and foremost on the banking sector.

Similarly, direct debt securities account for 81% of GDP in the euro area. The corresponding proportion in the United States is 168%. This means that market-based financing plays a much smaller role in the euro area and is only half as relevant as in the United States.

Therefore, the structures of private credit outstanding in the euro area and the United States are almost mirror images: recourse to banks on our side of the Atlantic makes up two-thirds of non-equity external finance.

On this side, the equivalent proportion is only around 30%. Against this background, it is natural that the Federal Reserve’s “credit easing” policies mainly target markets for debt securities, whereas our policies of “enhanced credit support” focus on banks.

There are also many profound differences in our respective economic structures, which of course are also reflected in financial structures.

For the sake of brevity, I will single out three characteristics of the euro area economy that our policies have to take into account in order to be effective.

The first characteristic is the very important role that small and medium-sized enterprises (SMEs) play for the euro area economy. These SMEs in general cannot tap credit markets directly. Guaranteeing continued access to bank credit is vital for SMEs to be able to finance their activities.

The second characteristic is the role of the housing market in the crisis. In the United States, the housing market is at the epicentre of the crisis. This is not true for the euro area.

Foreword

•••

Nevertheless, the euro area is indirectly affected as banks there hold toxic assets partly backed by mortgage loans originated in the United States. Forcefully addressing the toxic asset problem is a precondition for reviving credit on both sides of the Atlantic. I should add that addressing this problem clearly falls into the realm of fiscal policy, not monetary policy.

The third characteristic is the flexibility of the economy. Goods and services prices and wages are more sluggish in the euro area than in the United States. This sluggishness, on the one hand, has drawbacks as it slows down the adjustment of the euro area economy to adverse shocks. At the same time it offers

some protection against very bad outcomes, provided that the policy framework provides a solid anchor for private sector expectations.

In the euro area, the institutional framework provides such an anchor through the medium-term stability orientation of fiscal policies and monetary policy geared towards fiscal sustainability and price stability. In this environment, overly activist policies risk destabilising expectations and, thus, being counterproductive.

In technical terms, I would say that acknowledging the existence of structural differences between the euro area and the United States is crucial for understanding the

mechanisms behind the policy models and concepts that we use in our decision-making processes. Structural differences imply that the policy response has to be calibrated to the structure of the economy.

The financial and economic structures I have just described provide the background for our policies. These policies are guided by our monetary policy strategy, a key element of which is the quantitative definition of price stability. We aim at an inflation rate of below, but close to, 2% over the medium term. The precise quantification of our policy objective has proved an invaluable asset, a fail-safe mechanism against excessive swings in inflation Money Markets | 15

expectations, downwards as much as upwards.

Long-term inflation expectations in the euro area, whether based on surveys or extracted from financial indicators, have thus far been exceptionally resistant to sudden short-term price changes. We will ensure that inflation expectations remain impervious to short-term changes in inflation, even in the face of sharply falling inflation.

The ECB’s response to the financial crisis

Against the background of the economic and financial structures I have just described, you will see that the ECB’s responses to the financial crisis are in line both with these structures and with our medium-term objective. Our actions have been different from those taken by other central banks, reflecting differences in economic and financial structures. Indeed, given the different economic structures, they need to be different to achieve the same objective.

Interest rates Before explaining in detail the core elements of 16 | Money Markets

ECB policy since August 2007 and in particular since last September, I would like to talk briefly about interest rates – the conventional indicators of monetary policy. Some observers tend to reduce monetary policy to the level of the key policy rate. Monetary policy is the more effective in response to a downturn, the argument goes, the lower the policy rate. This view is too simplistic. Comparing only the levels of policy rates without consideration of the resulting market rates and other economic variables is looking at just one part of a far broader canvas.

Let me give you a concrete example. At 1.25% at the moment, our rate on refinancing operations is higher than the federal funds rate target range of 0-0.25%. But owing in particular to the very low rate on our deposit facility of 0.25%, this difference in policy rates does not translate into equivalent differences in money market rates.

In the euro area, six-month and twelve-month euro interbank offered rates are important benchmarks, which are widely used by banks

to set floating rate loans to households and companies, for example, for setting mortgage rates in countries such as Spain. These sixand twelve-month rates are actually slightly lower in euros than the corresponding rates for contracts denominated in US dollars.

In a similar vein, the benchmark ten-year government bond yield in the euro area – the German bund yield – is broadly comparable to the yield on the ten-year Treasury note.

This shows that in the current circumstances, international comparisons of policy rates provide limited information about the effective credit conditions prevailing in individual markets. One key reason for lower market rates is the fact that spreads are lower in the euro area, a positive interpretation of which would point to somewhat lower credit and liquidity risk premia.

Non-standard measures Let me now turn to the exceptional policy actions that we have taken in response to the crisis – the so-called “non-standard” measures.

As you will recall, when the very significant stress in interbank markets first manifested

Foreword

•••

itself in August 2007, the ECB immediately stepped into the breach and accommodated the temporarily elevated liquidity demand from the banks through a fixed rate operation with full allotment, providing €95 billion to the market within a few hours. Overnight lending of the same kind continued to be provided albeit with lower volumes during the following three days. So we can say that the ECB was the first central bank in the turmoil to engage in non-standard measures.

When in mid-September 2008 interbank trading came to a virtual halt, the ECB had to engage in a new mode of liquidity provision.

We started to provide refinancing well above

a one-week maturity, and let competition among bidders determine the interest rate at which that credit will become available to the banking system as a whole. This means that the liquidity injection is restrained by a policy decision. Last autumn, we changed that. As the demand for liquidity by individual institutions expanded abnormally and markets dramatically ceased to allocate liquidity, we have turned that practice around. We have been determining the lending rate – at a very low level – and we stand ready to fill any shortage of liquidity that might occur at that interest rate for maturities of up to six months. This means that we currently act as a surrogate for the

eligibility of collateral has dramatically eased banks’ liquidity constraints during the crisis and, ultimately, it has encouraged them to extend new credit or continue rolling over maturing loans.

3) The first two building blocks offer unlimited refinancing against a very wide range of collateral. But they can only reach the financial system if they are coupled with the third building block, namely the very large number of counterparties that have always been able to take part in our refinancing operations.

Even before the crisis, 1,700 counterparties fulfilled all relevant criteria. This number was higher at the time than for the other major

does the ECB’s non-standard policy compare with the approaches taken “by How other central banks also grappling with the turmoil in financial markets? Since mid-September 2008, the Federal Reserve has embarked on a policy of direct “credit easing”. This policy involves, first, the provision of liquidity directly to borrowers and investors in key credit markets and, second, the purchase of debt instruments such as commercial paper or asset-backed securities. These measures are targeted at directly addressing instability or declining credit availability in critical non-bank channels of intermediation.

”

the levels that banks had absorbed to fulfil their reserve requirements in normal times.

market in terms of both liquidity allocation and price-setting.

Let me explain to you how and why we did this. There are three main building blocks to our new approach.

2) The second building block of our new approach is our large list of assets that we take as collateral. This list was already very large before the crisis, but we have enlarged it even further and now accept an even wider range of securities as collateral.

Government securities account for only 44% of the nominal value of securities on the list.

The rest are private securities. In contrast to many other central banks, the ECB already intermediated private paper before the crisis and we have even strengthened this aspect in the crisis by accepting an even wider range of private paper.

1) Our primary concern was to maintain the availability of credit for households and companies at accessible rates. We significantly adapted our regular operations in the crisis. Since then, we have followed a new “fixed rate full allotment” tender procedure and we have significantly expanded the maturity of our operations.

This means that banks have been granted access to essentially unlimited liquidity at our policy interest rate at maturities of up to six months. To appreciate fully what this means, let us step back for a moment and look at what we do in normal times. In normal times, we auction a given amount of central bank credit, mainly in refinancing operations with

The total value of these securities, which are 45,000 in number, is currently €12.2 trillion. This amounts to 86% of all debt securities issued in euros and to 130% of GDP in the euro area. This very ample

central banks. Following the changes to our operational framework in October 2008, this number rose further. Currently 2,200 credit institutions in the euro area have the opportunity to refinance themselves with us, and for most of the remaining 4,300 credit institutions it would not be a problematic to become eligible. For example, in March 2009, 750 counterparties actually made use of this opportunity, compared with 450 in July 2007.

This structural feature of our operational framework has been instrumental since the first stages of the crisis in ensuring widespread confidence that all relevant intermediaries can access liquidity. It may be useful, by way of comparison, to note that whereas we had about 450 active counterparties before the crisis, the Federal Reserve had about 20. These facts may demonstrate to you the dimension of our outreach to the financial system in the euro area and its effectiveness in insuring against a systemic liquidity threat.

Money Markets | 17

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Foreword

•••

Our measures to safeguard the banking system’s access to liquidity have resulted in a considerable expansion of the Eurosystem’s balance sheet,which reached a peak of 19% of GDP at the height of the crisis around the turn of the year. Since then, we have seen liquidity flows moving back from our balance sheet to the money market. This is a sign of improving confidence and more favourable conditions. We therefore see some indication that the functioning of the money market is improving.

How does the ECB’s non-standard policy compare with the approaches taken by other central banks also grappling with the turmoil in financial markets? Since mid-September 2008, the Federal Reserve has embarked on a policy of direct “credit easing”. This policy involves, first, the provision of liquidity directly to borrowers and investors in key credit markets and, second, the purchase of debt instruments such as commercial paper or asset-backed securities. These measures are targeted at directly addressing instability or declining credit availability in critical nonbank channels of intermediation.

Clearly, while sharing a common purpose, the ECB and the Federal Reserve have relied on different channels of transmission. And as I explained earlier, this is justified by the profound differences in the financial and economic structures of the euro area and the United States.

In the context of the euro area, guaranteeing steady access to credit for households and companies largely means preserving the viability of the banking system. Banks play such a dominant role in our economy that it was appropriate until now for our nonstandard measures to be implemented through the intervention in and with the active participation of the banks.

As for possible additional non-standard measures in the future, I will stick to what I said at my last press conference: the Governing Council will take any new decision on 7 May. At this stage we have agreed not to give any further indications but will, on that day, provide all the necessary information on anything that is decided.

Conclusions

I have spoken about differences in the approaches to crisis management of major central banks, which are related to differences in the structure of their economies. But let me reiterate that we are all united in purpose.

The overarching aim is to restore confidence, to take measures that will solidly anchor the expectations of households and companies, and to lay the groundwork for a return to sustainable prosperity.

I have also strongly stressed that the scarcest resource we have right now is confidence in the future. That is why in the present, very demanding, circumstances our primary goal should be to strengthen confidence at all levels. The global economy was hit in midSeptember 2008 by an unprecedented and abrupt loss of confidence. It was perhaps the first time in economic history that a single event was able within just a few days to have a simultaneously negative effect on all households and companies in both the industrialised and emerging economies. We are in uncharted waters, and there are still risks of a sudden emergence of unexpected financial turbulence.

My personal conclusion of the G7, the G20 and the IFMC meeting in Washington is that public authorities, executive branches and central banks must do everything they can to restore, preserve and foster confidence so as to pave the way for sustainable prosperity.

This calls for a bold yet solidly anchored response. We must maintain the appropriate balance between the need to take immediate action commensurate with the gravity of today’s situation, and the equally undeniable obligation to return to a path that is sustainable in the medium term.

Confidence also calls for ensuring a global level playing field. It is essential that all economies of the world apply the same rules, respect the same principles as regards financial regulation, and display the results of their corporate businesses along the same accounting rules.

Regulatory arbitrage across countries and across continents would be a recipe for catastrophes.

Confidence calls for resolutely combating protectionism and particularly financial protectionism which could delay the recovery and considerably dampen the future growth of the global economy.

Confidence calls now for an effective, efficient, convincing, as well as a quick implementation of the decisions which have been recommended by the Financial Stability Board, the IMF and the World Bank and approved by the G20. In crisis periods time is of the essence. At this stage we do not need new decisions from executive branches, but resolute and rapid implementation.

The ECB for its part will do all that is necessary to continue to be a very solid and reliable anchor of stability and confidence in these challenging times.

Keynote address by Jean-Claude Trichet, President of the ECB, at the Chatham House Global Financial Forum New York, 27 April 2009 Source- European Central Bank

Money Markets | 19

Interview with

Jean-Claude Trichet, President of the ECB

You’ve shown a bit of optimism recently, saying we could see a moderate recovery in 2010. Where will recovery come from? I

have not been alone in mentioning that in Europe 2009 will be a very, very difficult year. As regards 2010, I always mentioned not only our own diagnosis, but the fact that an overwhelming majority of observers, economists and international institutions would say that in the course of next year there will be a progressive gradual recovery. It’s neither an optimistic vision nor a pessimistic vision. It’s the present, realistic vision.

Federal Reserve Chairman Ben Bernanke spoke recently about “green shoots” in the U.S. economy. Do you see similar green shoots in the euro-zone economy? Again, we have to accept that in

Europe as in the world 2009 is a difficult year and you have, in the present situation, elements that you could see as very negative. You have some that are a little bit reassuring on both sides of the Atlantic. But all taken into account, we are still in a situation where the trend is downward.

What will turn the downward trend around? I see four main possible

factors behind a progressive gradual recovery in 2010: first the expansionary effect of the fall in the price of oil and commodities; second the activation of the economies through discretionary fiscal policies and automatic stabilizers which are very substantial; third the extraordinary measures that have been taken to put the financial sector back on its feet: on this side of the Atlantic the commitments of the executive branches in the form of recapitalization, guarantees and other options represent around 23 % of the GDP; fourth the policies of the central banks: as an example for the ECB and the Eurosystem the size of the balance sheet represents now 16 % of the GDP when it was 10 % before the crisis, namely an increase of 600 billon euros (approximately 800 billon dollars).

A number of other factors are also very important in the perspective of a medium-term recovery: the continued surge of technology, the considerable growth potential of the emerging economies. But as regards a relatively prompt recovery what is decisive is the confidence factor.

What we are experiencing is a very sharp and abrupt disappearance of confidence. So it depends very much on us that 2010 could be, or not, a year of progressive gradual recovery. It depends on the capacity of authorities and private sector together, to re-inject in the economy of the world these elements of confidence that have disappeared mid September 2008.

Do you think the criticism that European governments have not done enough, in terms of fiscal stimulus, is justified? I think it’s

not. After the recent meeting of ministers and governors of the GROUP OF 20 in London, I had the conviction that both sides of the Atlantic 20 | Money Markets

To be efficient in rebuilding “confidence, you have to demonstrate

that you are doing, immediately and audaciously, what is necessary today.

But at the same time, you have also to reassure your own people that you have an exit strategy, to reassure households that we are not putting in jeopardy the situation of the children, and to reassure businesses that what is done today is not done to the detriment of their own taxation in the years to come.

”

had understood much better each others’ situations. There is a mutual understanding that when you take all into account, you see that on both sides of the Atlantic, what has been done on the fiscal side corresponds to the gravity of the situation.

To speak more directly of the euro area, you must take into account the combination of discretionary decisions that have been taken by all governments, plus the automatic stabilizers that are much more important on this side of the Atlantic; the level of public spending as a proportion of GDP, which is much higher on this side of the Atlantic; and the room for maneuver for each particular economy that existed before the crisis and exists today.

To be efficient in rebuilding confidence, you have to demonstrate that you are doing, immediately and audaciously, what is necessary today.

But at the same time, you have also to reassure your own people that you have an exit strategy, to reassure households that we are not putting in jeopardy the situation of the children, and to reassure businesses that what is done today is not done to the detriment of their own taxation in the years to come. Activation of the economy depends crucially on confidence. And confidence today needs that we can prove to our own people that we have the right balance between the short-term and the medium- and long-term perspective.

What do you think are the most urgent requirements for enacting global policy now? There are a number of measures that have been announced and not enacted. Are you, for example, concerned at

Foreword

•••

the pace at which the U.S. financial restructuring is going? What

I would recommend for us as for the US is to, now, as efficiently and rapidly as possible, do what has been decided. Nothing will really work until the financial sector is back on track and ready to lend on a sustainable basis. I would say exactly the same with the budget. Decisions have been taken; they are very important. Let’s do it! Quick implementation, quick disbursement is what is needed. Not embarking on useless and counterproductive quarrels which fortunately are over now.

If recovery does not take hold gradually in 2010, does the Stability and Growth Pact give European governments room to do more?

The Stability and Growth Pact has been revised to cope with exceptional circumstances. It is our way to maintain appropriate cohesion in a single market with a single currency and with no single federal budget.

Respect of the procedures and provisions of the Stability and Growth Pact is of the essence.

Ireland expects an 6.5% decline in GDP this year. Their deficit is projected to be 10% of GDP and they’ll soon introduce a budget that will raise taxes. Is that really the appropriate response in the teeth of a deep recession? I am not speaking of one country in par-

ticular. In each case you have to see what your own room for maneuvering is. If the additional deficits are costing you both, a strong increase of the cost of your own refinancing and a loss of confidence of your people, you’re not better off! If your people have the sentiment that they will be

not better off in an endless spiraling of deficits, they will not spend any money that you give them today!

There are a number of countries that, absent the euro zone, would have made an adjustment in real wages through devaluation. How do you see adjustments in real wages now being made in the euro zone’s less-competitive economies? Isn’t the inevitable consequence in certain countries falls in real wages and deflation, even if that doesn’t occur in the euro zone as a whole? The euro zone is

a single market with a single currency and the various countries have to be considered exactly as the various States of the U.S.A. It goes without saying that the situation of the various States in the U.S.A. is not all alike. In a small number of euro-zone cases – this has nothing to do with the present crisis – there is a necessity to progressively catch up with a level of competitiveness which had been deteriorating over the past years. Germany is a good example of such adjustments: it entered the euro area with a level of relative competitiveness which was insufficient. It regained, in a very efficient fashion, competitiveness to offset its insufficient level in the entry.

A number of other central banks, in words and in deeds, have suggested the risk of deflation is rising. You have maintained the risk of deflation in the euro zone overall is low. Why would the euro zone be different than other major developed economies of the world? All the international institutions that are looking at the situ-

Money Markets | 21

ation say there is no substantiation of a significant deflationary risk in the euro area at the moment. That being said, we have to be alert and look at the risks permanently. We are certainly helped by our very clear definition of price stability, which is annual inflation at less than 2%, but close to 2%.

Surveys of medium-term euro-zone inflation expectations have oscillated between 1.7% and 2%. When you look at what has been extracted from financial markets and compare with the U.S., you see we are benefiting from more solid anchoring of inflation expectations. I have also to take into account a number of figures that are till now, significantly over the zero level: for instance compensation per employee over 12 months is + 3 %, negotiated wages + 3.5 %, M3 + 5.9 %, M1 + 5.2 %.

But as I said, we remain permanently alert.

If you saw the risk of deflation rising, would you still see difficulties with a policy rate near zero? There are a number of drawbacks

associated with policy rates deliberately put at a zero level by the decision of the central banks. That’s the reason we do not think it would be appropriate. But what counts are the interest rates that are in the market and that the public gets. I will surprise you! Taking into account our unlimited supply of liquidity at our main policy rate and the fact that we have the deposit rate at 0.5%, we have, at the moment I am speaking, our six-month rates on the money market that are a little bit below U.S. six-month rates, and our one-year rates that are 13 basis points below the U.S. money market one-year rate.

You’ve highlighted recently the differences in the euro-zone financial system that underlie the differences between the non-standard steps the ECB has taken and those of other central banks.

Yes indeed. We have 70% of the financing of the euro area which goes through commercial banks and 30% through securities other than stocks.

And on the other side of the Atlantic, it’s exactly the contrary; it’s 30% or a little less for commercial bank financing and 70 percent for securities other than stocks. That is the reason why we have concentrated our bold non-standard measures – eligibility of collateral, unlimited supply of liquidity at fixed rates – on the commercial bank channel.

Would that difference guide any future non-standard steps you might take? We will certainly continue to do whatever we think op-

timizes our own situation. In the next decisions that we could take, it’s pretty possible that we would continue to be non-conventional through the channel of bank financing. This channel remains for us essential.

What is your assessment of the adequacy of bank lending in the euro-zone? I will continue to tell our banks that we expect them to

pass on to the real economy what we have been doing ourselves in terms of reduction of interest rates and of supply of liquidity. It’s up to them, being the main channel of financing of the European economy, to pass along the decisions we have been taking. If I am shipping this message, it is because we trust that this is not yet entirely done. We do not scapegoat at all our banks; we rely upon them. We are encouraging them as much as possible to do their job, and their job is to lend.

There’s been a concern in other economies about banks that are so weakened that they’re zombie institutions that exist but are unable or unwilling to lend. Is that a phenomenon reflected in Europe? No.

You have a large number of institutions in the euro area, which fortunately did not embark into massive toxic-assets investment, which were reasonably cautious and prudent and are continuing to be creditworthy without extraor-

22 | Money Markets

dinary help from authorities. We might have some quasi passive institutions, but it is not at all the generalized case. Again, in any case, putting the financial sector back on its feet and lending is the first priority.

There remains a sentiment among some that the ECB is not as willing as other central banks to be as responsive to the economic downturn with its policy rate. At times, I see some observes looking at

central banks as if they were participating in a race. Who is the first to do this or that? It is true that the ECB was the first central bank to act decisively at the start of the crisis on 9th of August 2007. We had our own good reasons, it was not a race! Today it is true that the size of the balance sheet (16 % of GDP) is bigger in proportion than the size of the FED balance sheet. It might change after last week decisions. But it is not a race! Today our six-month and one year money market interest rates are lower than in the dollar or sterling money market because of our lower risk premia and liquidity premia. But it is not a race! We are all doing what we judge optimal taking into account the different characteristics of our economies and our common will to solidly anchor inflationary expectations and, in so doing, improve confidence. As regards the future rate of our main refinancing operations, presently at 1.5 %, I said clearly that we could decrease it again. I also said that at 0.5 % our deposit facility interest rate was already at a very, very low level.

Are there any obstacles to the ECB purchasing government assets, which is now a policy of central banks including the Fed and the Bank of England? Two remarks: As regards the private papers, our

collateral framework has been very supportive since the beginning of the crisis: I have also noted that our corporate securities markets behaved properly in terms of volume since January. As regards possible outright purchases of securities in general I said that we are not pre-committed for any new decisions. One element which has to be taken into account is that the risks of the central banks and the risks of the governments are, in the euro area, clearly separated without combination of risks or blending of responsibilities.

Are you suggesting that by buying government assets, there would be a blurring of responsibility where there is so far a clear division, and that blurring would be undesirable? It is an element which has

to be taken into account.

There is also a debate about whether, with the house still burning down, as it were, longer-term questions about the new global financial architecture can wait. What is your view? Confidence is

of essence! If we want to succeed right now in this very grave crisis we have to take bold decisions now and be equally determined in reassuring our fellow citizens in the medium and long run. We have to fight against short-termism. We have to improve transparency. And we have to eliminate pro-cyclicality. Fluctuations are normal in a market economy. We have to accept fluctuations, otherwise we would have no market economy - we would be in the Soviet Union. On the other hand, it is extremely clumsy to amplify those booms and busts. We have to concentrate on augmenting the resilience of global finance. And finally we have also to improve surveillance of the macro policies of systemic economies in order to prevent the piling up of domestic and external imbalances. The Financial Stability Forum and the IMF have a decisive role to play in these respects.

Interview with Wall Street Journal Source- European Central Bank

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Custody Review

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South Africa Provider

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Computershare National Bank Innovation Award

Nedbank Standard Bank

West Africa Provider

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FirstBank of Nigeria

Innovation Award

First City Monument Bank

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Stanbic IBTC UBA

Best-in-Class

china Provider

Commendation

DBS HSBC Standard Chartered

Best-in-Class

Hong Kong Provider

Commendation

Citigroup GTS DBS

Most Improved

HSBC

Best-in-Class

Standard Chartered

Client Service

Innovation Awards

ICT (information and communications technology) forms the centerpiece of the 2009 Innovation Awards. This year’s Innovation Awards recognize those providers which continue to evolve their value propositions, creating, in the process, truly client-centric solutions and real value.

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Japan Provider

Citigroup GTS

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HSBC

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Mizuho SMBC Standard Chartered

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24 | Money Markets

Commendation

Bank of Tokyo Mitsubishi

Best-in-Class

Singapore Provider

Commendation

Citigroup GTS DBS

Innovation Award Client Service

HSBC Standard Chartered

Most Improved

Taiwan Provider

France Commendation

Provider

Commendation

Citigroup CTS

BNP Paribas Securities Services

HSBC

CACEIS

Central Trust of China

Innovation Award

JP Morgan

Citigroup

Standard Chartered

Deutsche Bank

Best-in-Class

Société Générale Securities Services

Most Improved

Pan Asia Commendation

Provider

Citigroup CTS Most Improved

DBS

Technology HSBC Best-in-Class

Standard Chartered

Germany Provider

Commendation

BHF Asset Servicing

Innovation Award

BNP Paribas Deutsche Bank TSS CACEIS Bank Deutschland

Most Improved

Greece Provider

Commendation

Alpha Bank

Innovation Award

BNP Paribas (SS) EFG Eurobank Ergasias Australia

HSBC

Provider

Commendation

National Bank of Greece

Best-in-Class

ANZ

Best-in-Class

Piraeus Bank

Client Service

Citigroup

Innovation Award

HSBC

Ireland

National Australia Bank

Provider

Commendation

Bank of Ireland (SS)

Innovation Award Client Service

Citigroup GTS HSBC Netherlands Cyprus

Provider

Commendation

Provider

Commendation

BNP Paribas

Marfin Popular Bank

Innovation Award

Citigroup GTS

Best-in-Class

Hellenic Bank

Fortis Bank

Most Improved

National Bank of Cyprus

KAS Bank Norway

Denmark Provider

Commendation

Danske Nordea

Most Improved

SEB

Best-in-Class

Svenska Handelsbanken

Provider

Commendation

DnB NOR Nordea

Innovation Award

SEB

Most Improved

Svenska Handelsbanken Sweden

Finland

Provider

Commendation

Provider

Commendation

DnB NOR

Nordea

Innovation Award

Nordea

Most Improved

SEB

Best-in-Class

SEB

Best-in-Class

Svenska Handelsbanken

Most Improved

Svenska Handelsbanken

Performance Award Money Markets | 25

Slovenia Commendation

Provider

NLB Innovation Award

RZB SKB Banka Unicredit Group

Most Improved

Switzerland Provider

Commendation

Bank Julius Baer

Performance Award

BNP Paribas Securities Services

Custody & Fund Administration Innovator of Q1. 2009 Provider

Citigroup Credit Suisse

Citco Bank

Most Improved

SIS SegaInterSettle AG UBS

Innovation Award

Central & Eastern Europe Provider

South America Provider

Commendation

Citigroup

Banco Bradesco

Innovation Award

Deutsche Bank

Commendation

Bank Itau

ING Securities Services

Banco Santander

Raiffeisen Bank

Citigroup GTS

36479_MnyMrkt

12/20/06

12:49 PM

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Innovation Award

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Custody

•••

The Next Chapter »Jonathan Calens talks to Christian Hogrebe and Moritz Ostwald

BHF Asset Servicing – The Next Chapter

Since re-entering the sub-custody market in 2004 you have been known as BHF-BANK. What prompted you to siphon off your depotbanking, custody and securities services?

Moritz Ostwald: Twin factors prompted the decision to spin off

our depot bank and custody business to form a new and uniquely focused bank in Germany. First, the creation of a vehicle geared to servicing our institutional clients and their individual requirements more effectively than heretofore and, secondly, the achievement of our goals by concentrating on our core competencies.

The new entity is BHF Asset Servicing GmbH, solely focused on custody and depot banking business. In these challenging times our clients demand a highly dedicated, financially stable provider who offers exceptionally high quality at a reasonable price. And we aim to meet those requirements.

Would I be correct in thinking that the depotbank has been built on the same foundations as BHF-BANK, i.e. systems, people, philosophy and culture?

In these challenging times our “clients demand a highly dedicated,

financially stable provider who offers exceptionally high quality at a reasonable price. And we aim to meet those requirements.

”

Christian Hogrebe: That assertion is correct. Some 250 employees,

previously with BHF-BANK, are now working for the new specialist institution, thus ensuring that the culture continues unchanged.

In order to ensure the smoothest possible transition from BHFBANK to BHF Asset Servicing, little if any change has been made to the systems, which is very important for us. For example, we are still using every single IT system that was installed at BHF-BANK. Notwithstanding, we are continually investing in further IT enhancement depending on what the legislators are giving us, in terms of homework, which is mandatory in any case but, more importantly, we want Money Markets | 27

It’s far too early to render any final judgments concerning fragmentation in the “market as a whole, especially taking into account the current financial crisis. ” to meet, and exceed, the expectations of our clients. One example is the focus on reporting links; to this end, we’ve developed comprehensive SWIFT reporting, which has been further enhanced over the last 12 months.

You have carved out an impressive niche for yourselves in Germany. However, given the formation of the aforementioned depotbank, do you have plans to enter new markets and will it make it easier for you to do so?

Moritz Ostwald: Undoubtedly. The new entity is able to act more independently and with greater flexibility, which makes it easier for us to adopt new strategies and act at shorter notice when changes in the market occur.

We are continuously investigating new opportunities to develop our services and expand our reach to other markets. In that connection, we may well focus on other German speaking countries, e.g. Luxembourg, Austria, Switzerland, in the future.

The new depotbank comprises the asset administration specialist, Frankfurter Service KAG (FSKAG). Was this move designed to broaden your existing value proposition?

Our aim is to continuously improve our service levels and satisfy the high demands of our clients.

In spite of market conditions, BHF Asset Servicing continues to meet and exceed the expectations of its clients. What is your secret?

Moritz Ostwald: If there’s a secret, then it is founded within our fundamental approach of placing the client into the center of all our activities, coupled with stable and up-to-date technology; this is what clients expect as a minimum service level.

But in order to exceed their expectations, one must go further.

The human factor now comes into play enabling us to find individual solutions at short notice. It is essential that our personnel fully understand both sides of the equation, i.e. the clients and our own business, speaking as it were a common language. Our highly committed and experienced staff are well trained to facilitate the accomplishment of these goals: nothing has really changed over the last couple of years from that perspective.

Feedback suggests that sub-custodians have significantly reduced face-to-face contact with clients.

Christian Hogrebe: FSKAG offers insourcing services for investment companies such as fund accounting, trading, reporting, risk controlling and fund set-up. A close relationship already exists from the past, especially in the area of servicing new clients or improving depot bank services. It is, therefore, the ideal partner when it comes to offering the full range of services requested by our investment clients. Actually, we are in an even better position than before, since FSKAG is now a subsidiary of BHF Asset Servicing, enabling us to combine those services even better than in the past.

Christian Hogrebe: We have been receiving feedback from clients

Are you at liberty to discuss the AuC of the depotbank?

On July 17, 2008, the Governing Council of the European Central Bank (ECB) decided to launch the TARGET2-Securities (T2S) project.

Christian Hogrebe: Assets under Administration total approximately EUR 270bn and the assets under Depotbanking approx.

EUR 84bn.

Service Levels

In your opinion, given the dramatic downturn in the markets, have service levels in the German market, and elsewhere, dropped?

Moritz Ostwald: In talking to various people in the industry whilst travelling, we notice that overall service levels have decreased slightly. To the contrary, service levels have actually increased with BHF Asset Servicing GmbH (BAS) according to the latest customer satisfaction surveys.

It’s quite simple, we are a niche provider and our goal is to be the best quality provider in the market: that’s why our clients remain loyal.

28 | Money Markets

that providers are meeting less frequently with them. This is not the case with us. We recognize the fact that human relationships may sometimes be the sole difference between providers. To this end, we meet every single client at least once per year, sometimes semiannually, and for large clients even more frequently.

We believe that regular face-to-face meetings are vital in order to promote an understanding of the clients needs; once you achieve this you can get things done without too much red tape.

TARGET2-Securities

According to the ECB, the aforementioned implementation was based upon the feedback it received from European central securities depositories (CSDs) in response to its invitation to join the T2S initiative.

The T2S initiative seeks to create a single securities settlement layer for Europe, removing a significant proportion of CSD business, thus forcing them to compete with each other – and with custodian banks – on cross-border settlement. With this in mind, is it reasonable to believe that there would be significant support from European CSDs for T2S? Moritz Ostwald: In our opinion, the CSDs will have no alternative

but to adapt to the new circumstances, as it is part of the removal of the ‘Giovannini barriers’. To remove the Giovannini barriers has since

Custody

•••

long been the target of the European Union, and T2S is a big piece of this puzzle. In order not to find themselves accused of blocking the idea of a pan-European settlement system and persisting with national monopolies, we believe that CSDs have to be part of the plan and be proactive in order to make the best of this situation.

already a non-starter. As regards the usage of the service, once it comes into operation, we believe most of the major Euro economies might take part right from the start.

Will T2S force CSDs to move into the custody arena?

First, is the Markets in Financial Instruments Directive (MiFID) working?

Moritz Ostwald: If this question was posed 10 years ago the answer would not differ much from my answer today, which is that the CSDs have been part of the custody arena for a very long time.

In fact, when Clearstream opened itself to foreign clients in the past, it was predicted that this would be the end of German sub-custody business: again, this happened some 10 years ago. In the event the German sub-custody business remains alive and well. It must be remembered that CSDs are large organizations dealing mainly with bulk transactions and this is where specialized niche players have their chance to offer individualized services, which can be adjusted to the client’s needs at short notice.

The ECB also claims that almost all euro area CSDs, which represent a significant share of settlement activity in the euro area, are prepared to enter into a legally binding contractual arrangement by the end of the first quarter of 2009 and intend to use the service once it is in operation. Is this realistic?

Moritz Ostwald: The ECB has not published the signing of any con-

tractual arrangements by end of March, so the first proposed date is

MiFID Update

Moritz Ostwald: From our perspective it is. BHF-BANK, our parent company, has taken all measures necessary to fulfil the conditions of the MiFID. We cannot speak for other European Banks as to whether they have fully implemented the MiFID obligations.

Would it be fair to say that the market misjudged the impact MiFID would have on fragmentation?

Moritz Ostwald: It’s far too early to render any final judgments concerning fragmentation in the market as a whole, especially taking into account the current financial crisis. It might take sometime to have a definitive answer. However, one of the most apparent effects concerns an increase in fragmentation in the area of multilateral trading platforms (MTFs). MiFID has brought more volume to the newly formed MTFs. Recent analysis of trading patterns in the post MiFID (PM) markets indicate that large volumes of trades are still being executed on venues which are not offering the best prices in the market. Why is this?

Money Markets | 29

Custody •••

Moritz Ostwald: Our parent company, BHF-BANK, has imple-

mented a dynamic, best-execution model, incorporating prices and fees for all German exchanges. This enables us to guarantee best-execution for all our clients. In our opinion there seems to be various reasons why orders are not executed at best prices. Static execution policies instead of the Smart order routing system coupled with mounting pressure from supervisory authorities are some of the reasons.

Provider Selection

What do you consider to be the most important considerations when choosing a custodian?

Moritz Ostwald: I think the game has changed dramatically in recent times. So, unlike in the past, where the only question from a network management perspective seemed to be whether quality or price ought to be the prevailing factor, we now need to consider many topics; credit risk, commitment, sound financial figures, which demonstrate a solid capital basis, giving rise to top level ratings – these are all at the top of the agenda in choosing a custodian.

I think that most clients want to build long-term relationships with their providers and vice versa. Therefore, should potential clients be wary of significant acquisition activity?

Moritz Ostwald: The short answer is, No. Every custodian involved

in acquisitions will be eager to process any transfer as smoothly as possible with as little impact as possible for the customer. This should also include the preservation of the existing client /custodian relationships.

Cheapest is not always best. How important is it to identify a provider that will not only meet your needs today, but in a year from now?

Moritz Ostwald: I can certainly agree that ‘cheapest is not always

best’. The commitment factor is of paramount importance. Should a custodian fail to meet any needs one year from now, another custodian transfer might become necessary, but each transfer means additional costs, including indirect costs, e.g. communication problems between different departments and so on. And naturally, it takes time to grow accustomed to a new provider, to know each other, and speak the same language as it were, so that the smooth processing of daily business, as well as special queries, can be guaranteed.

Given the current financial climate, this may be a difficult question to answer. However, where do you see BHF Asset Servicing’s subcustody business this time next year?

Christian Hogrebe: BAS is currently seeking an international partner to strengthen its national business and facilitate further expansion in the future. We assume this will happen in 2009. Nevertheless, and irrespective of the final outcome, whether on a stand alone basis or with an international partner, BAS will remain a sound provider of depot banking and custody services including a wide range of addon services for institutional investors, financial institutions and global custodians. We remain optimistic of a bright future underlining again the advantages arising from the formation of BAS last year.

30 | Money Markets

Biographies Christian Hogrebe Christian Hogrebe, member of the executive board, is responsible for relationship management and sales as well as marketing and public relations for BHF Asset Servicing. Prior to this, Christian was responsible for the Relationship Management Unit for BHF-BANK’s Depotbank clients, a post that he held from 2007. Before he joined BHF-BANK in 2005, Christian started his career at Deutsche Bank in 1997. In 1999, Christian began working in the product development section of Deutsche Bank’s Global Securities Services (GSS) division and was responsible for Depotbank projects. When State Street acquired the Deutsche Bank GSS business line in 2003, Christian joined State Street as Depotbank Project Manager.

Moritz Ostwald Moritz Ostwald is the Head of BHF Asset Servicing’s Sales Management Global department. Prior to this, Moritz was responsible for sales and relationship-management as well as the marketing activities of BHF-BANK’s custody division. Moritz holds a master’s degree in economics from AKAD Fachhochschule Pinneberg and a CAS-HSG diploma from University St. Gallen. Moritz started his career in custody in 2000 at Deutsche’s Global Securities Services division in Frankfurt. After working as a Project Manager in custody - where he was inter alia responsible for the development and implementation of Deutsche’s custody portal - Moritz was promoted to the position of Product Manager at State Street Bank GmbH in 2003. In June 2004, Moritz started working for BHF-BANK’s custody and derivatives services as a Sales & Relationship Manager for custody.

Eight CEE countries &JHIU DPNQMFY FOWJSPONFOUT 0OF FYQFSU JO UIF SFHJPO

Bottom line: For CEE – call ING &BDI DPVOUSZ IBT JUT PXO TQFDJʔD FDPOPNJD TJUVBUJPO "U */( XF VOEFSTUBOE BOE SFDPHOJTF UIJT 8F BDU BT ZPVS FZFT BOE FBST JO FJHIU MPDBM NBSLFUT BDSPTT $FOUSBM BOE &BTUFSO &VSPQF 'PDVTJOH PO ZPVS OFFET XF BSF IFMQJOH ZPV UP OBWJHBUF UIF DPNQMFY TFDVSJUJFT FOWJSPONFOU )BWJOH B TJOHMF QPJOU PG DPOUBDU BU B SFHJPOBM BOE MPDBM MFWFM NFBOT ZPV DBO UBQ JOUP UIF FYQFSUJTF PG B LOPXMFEHFBCMF QBSUOFS XJUI NBOZ ZFBST PG FYQFSJFODF JO UIF SFHJPO "T PVS DMJFOU ZPV DBO FOKPZ TNPPUIFS BDDFTT UP UIF NBSLFUT UIPVHI PVS SFDFOUMZ SPMMFE PVU DVUUJOH FEHF DVTUPEZ QMBUGPSN 0VS QFSGPSNBODF IBT CFFO SFDPHOJTFE BOE IBT XPO UIF .POFZ .BSLFUT *OOPWBUJPO "XBSE GPS $&& */( JT ZPVS QBSUOFS GPS MPDBM DVTUPEZ JO #VMHBSJB $[FDI 3FQVCMJD )VOHBSZ 1PMBOE 3PNBOJB 3VTTJB 4MPWBL 3FQVCMJD BOE 6LSBJOF

For more information contact Lilla Juranyi, Global Head Custody Services on + 31 20 797 94 35 or by email: Lilla.Juranyi@mail.ing.nl www.ingwholesalebanking.com

ING Wholesale Banking is the marketing name for the corporate and investment banking business of ING Bank N.V. ING Bank N.V. is registered by the Authority for the Financial Markets.

Copyright ING Wholesale Banking (2009).

Money Markets | 31

Survival of the fittest »Lilla Juranyi talks to Money Markets

ING Bank is one of the key providers of securities services in Central and Eastern Europe. We have built up our regional network gradually, country by country and, since the late 90s, have offered our services in all of the major markets.

In the beginning we had a multi-market approach, however, this has evolved into a regional offering. Clients investing in more countries enjoy great benefit from all of the improvements and innovations ING has introduced.

The regional approach has become a fundamental requirement. Unified organizational structure, harmonized service levels, and a single point of contact for global clients are the main elements. ING follows the client requirements and often proactively launches new ideas that will assist investors in this challenging region. The single point of contact in each country was offered from the very beginning. A very important step was taken later when ING introduced dedicated Global Relationship Management for our international clients. It is much easier for a client contacting the Global Relationship Manager (GRM) in Amsterdam who is fully aware of all the business requirements of a professional international client. The GRM is of great assistance to the Network Manager. It is their primary responsibility to manage any regional question, or general business issue, in providing a unified service. The GRM can act as the escalation point as well if there is an issue at local market level.

It’s not just the Global Relationship Manager who provides full responsibility over the re32 | Money Markets

gion. From a legal point of view as well a client will have one regional contact that arranges the documentation requirements and a single regional Master Custody Agreement. This latter agreement has greatly simplified the contractual needs as one agreement is used with specific country annexes.

Simplifying the Client Due Diligence procedure - this is a top issue for financial institutions these days. For global clients this procedure is managed on a central level, thus not burdening the client with unnecessary documentation, apart from when local regulations require specific documents.

ING listens to its clients. In these turbulent times careful risk assessment and asset protection is a key element. ING has developed a special guide for its clients in order to support them through the various risk elements of all specific markets. Protecting our clients’ investments is of the utmost importance to us. In addition to the Risk guide an important element of the enhanced service is the optional account structure offering in Central and Eastern Europe. This is an essential item in connection with securities services as opting for an omnibus structure or a segregated account structure can have a significant impact. It may influence the clients’ assets, including reporting obligations, or its participation in a corporate action.

Depending on the type of investor, this type of consideration may be very valuable. By providing our clients with a good overview of the different options available they can make an informed decision.

Innovation means that ING is continuously keeping an eye on the requirements its clients need. This is reflected in the bank’s strategic decision to move its securities services business onto a single platform, Converg-e. Our previous custody system was implemented in 1997.

However, after 10 years in consultation with our clients it was decided that we should move to the new state-of-the-art system. Covering the

Custody

•••

full CEE region with the same software, but adjusted on a country-by-country basis according to the special market requirements. Our customers now enjoy the advantages of flexible operational solutions that Converg-e offers.

Innovation quite often means market development initiations as well. ING is a leading partner in this respect. Based upon our deep securities services knowledge in Central and Eastern Europe, ING is taking the lead in several initiatives. Lobbying, participating in market development proposals and representing the interests of our foreign and local investors are a major part of ING’s services.

Knowledge Transfer

It is important to be aware of the differences between countries within the Central and Eastern European region. Every country has its own legal requirements, language, market infrastructure and taxation. As a result, we employ local staff that can keep on top of market developments and proactively follow regulatory changes.

We have also developed a cross border knowledge-transfer programme for our employees so that we can offer clients the best possible market advice. This en-

sures we not only understand local market requirements, but can also understand how our customers would expect a market to function. Our high ranking in the leading business surveys and direct feedback from our clients is clear evidence that they highly appreciate and value these additional services.

Biography Lilla Juranyi is the Director of Securities Services - Central and Eastern Europe - for ING Securities Services.

Money Markets | 33

34 | Money Markets

Custody & Fund Administration

•••

Exceeding

Expectations »Money Markets talks to Willem Holst

If you want to “be the number one

service provider in our industry then meeting and exceeding the expectations of your clients is a must, especially nowadays.

”

Citco’s Value Proposition in 2009 Citco’s custody services cover the entire trading, clearing, settlement and custody life-cycle. To what extent does the aforementioned one-stop-shop approach benefit your clients? By having the entire operational process,

from order placement to the final settlement of the transaction, under one roof we are able to significantly increase our clients efficiency and provide much needed transparency. We recognize that increasingly, clients are looking for an independent and experienced service provider that can help them to operate in an industry which is getting more and more complicated.

With respect to custody and fund trading you service tier-one financial institutions and Fund of Funds, do you have any plans to widen the net? Apart from servicing the

clients that you mentioned, the Citco Banks also service institutional investors, like Pension funds, Family offices and Endowments all over the world. There is a clear trend among professional investors with respect to outsourcing all fund business, alternative as well as traditional funds, to one service provider.

Are you at liberty to discuss your AuC? Before

the financial turmoil in the markets started our

AuC were around $350 billion. Right now our AuC are around $230-240 billion. Approximately one third of our assets were redeemed and the net asset values of remaining assets came down.

What do the aforesaid assets represent in terms of funds? The Citco Banks act as cus-

todian for fund shares only, so on behalf of our banking clients we hold shares in single manager funds and fund of funds in custody. For our Fund of Funds clients we hold their underlying fund holdings. So 100% of our AuC are funds.

Despite market conditions Citco continues to innovate. Is this the key to your success? Innovation is very important for

Citco; we constantly strive to offer our clients the best and most efficient services.

At times I think that we are in an information technology business, without technology we would not be able to deliver the required levels of service our clients expect.

In order to meet industry demands for increased transparency we are revisiting our operational platforms and investing in state-of-the-art technology in order to improve automation and facilitate complete transparency with respect to the entire operational process.

Q. One of your latest innovations, Trailer Fees Administration, automatically manages clients’ billing, collection and payment of trailer fees. How has this been received and has it made the life of your clients easier? Our Trailer Fees Adminis-

tration services, which basically can be split into two parts, i.e. Citco collecting trailer fees on behalf of its clients under our own distribution agreements (we call this the traditional service), or Citco collecting trailer fees on behalf of its clients under their distribution agreements (we call this white labeling), has been very well received by the market.

Money Markets | 35

are indeed pushing for more compliance and regulatory information “ Investors and the administrator is ideally positioned to supply such reporting. ” Nowadays financial institutions want to focus on their core business; consequently, collecting trailer fees doesn’t generally fall into this category. We have signed up several leading financial institutions to this unique service and are negotiating with many others.

Hot Button Issues Are we seeing retrenchment in the emerging market fund administration and custody market? We do indeed see a retrenchment

in emerging markets fund administration. The main focus is now on Commodity Trading Advisors (CTA’s), Future/Commodity funds and Long/Short equity funds.

Furthermore, in order to limit the risks, assets are being repatriated from the emerging markets back to the USA.

When there was significant institutional money flowing into the fund of hedge funds industry, fund managers and their service providers started to appreciate and recognize the need for, and the benefits of, greater automation and standardized messaging. Given the current economic climate, is this still a priority? Given the

current economic climate, the need for greater automation, standardized messaging and increased transparency has become an even bigger priority for our clients, hence Citco’s investments in state-of-the-art technology.

Client Service Levels In your opinion, given the dramatic downturn in the markets, have service levels in the custody and fund administration arena dropped? On the contrary,

the dramatic downturn in the markets has increased the need for better service levels. When you consider all of the funds in liquidation, suspended funds, gated funds etc. the markets have become a lot more complicated.

In spite of market conditions, Citco continues to meet and exceed the expectations of its clients. Is this the key to your success? If you want to be the number

one service provider in our industry then meeting and exceeding the expectations of your clients is a must, especially nowadays.

36 | Money Markets

How important is actual client contact when it comes to sustaining relationships with clients? It is all about sustaining relation-

ships with clients. In spite of the automation, face-to-face contact is very important and cannot be replaced by automation. Our Relationship Managers, based in our Dublin, Zurich, Luxembourg and Milan offices are in daily contact with their clients and meet with them at least once a quarter.

Hedge Fund Administration In line with global market conditions, the pace of consolidation in the hedge funds administration industry has decreased somewhat. However, moving forward, are there signs of further consolidation in the pipeline? Given the ever-increasing complexity

of the industry and the growing demand for transparency, smaller administrators will be handicapped by their inability to invest in new technology and people. At the same time assets under management have been shrinking, resulting in decreasing revenues for administrators. This has made the business of investment in core resources challenging for smaller administrators, which might force further consolidation in the industry.

Prime brokers and large tier-one banks have been aggressively expanding their offerings to include fund administration services. In the main, they have adopted a buy-and-grow strategy as opposed to retooling long-only fund administration systems or building from scratch. Will this continue? Most of the larger

financial institutions have been affected by the financial downturn, which has forced them to focus on core business. In some cases they have been compelled to sell off certain non-core activities, including fund administration.

I think it is fair to say that Prime Brokerage revenue streams funded a lot of these noncore activities.

Aside from the renewed interest in independent administration it will be interesting to see how Prime Brokers adapt to this new world.

Is investor interest in funds, which are not independently administered and audited, waning? With the industry calling for

improved operational governance standards the role of independent administrators will expand.

Consequently, the outsourcing of administration by hedge fund managers who currently perform these functions in-house will increase. Based on what we are hearing from investors, I think that most, if not all, hedge funds will be appointing an independent administrator.

Based on recent events in the financial industry, regulatory compliance reporting will naturally be pushed to the forefront. With this in mind, we can safely assume that investors will want more compliance and regulatory information from the fund. However, would it also be fair to say that investors are not looking for position transparency but a view of relative transparency, or the exposure to countries, currencies and industry sectors?

Investors are indeed pushing for more compliance and regulatory information and the administrator is ideally positioned to supply such reporting. As investors become more institutionalized, and because of recent events in the hedge fund industry, the nature of their due diligence is expanding beyond relative transparency. Attribution and asset existing reporting, and monitoring of adherence to investor guidelines are becoming the norm.

The Road Ahead Given the current financial climate, this may be a difficult question to answer.

However, where do you see Citco’s custody business this time next year? Current

market conditions present huge challenges and possibilities for service providers like Citco.

In 2009 we will open Citco Bank Canada in Toronto and a fully-fledged marketing office in Singapore.

Our clients want to be able to concentrate on their core-business, which means outsourcing the administration and custody of their fund business to an independent and professional service provider. Although this applies to mutual funds, it does not apply to hedge funds.

Given all of the aforementioned factors, we feel that Citco is ideally positioned to benefit from the current economic climate.

Biography Willem Holst is the Managing Director of Citco Banks.

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Money Markets | 37

Putting The

Client First »Fearghal Woods talks to Jonathan Calens

opinion this is possibly the worst time to “let Inyourmyservice levels fall, but I have to believe that

people who are cutting back on further investment, and particularly in the area of human capital, will find this action detrimental to standards of service for clients.

”

BOISS Update

Whilst many providers have looked for ways in which to limit expenditure, your investment in technology, service provision and human capital remains. Has this been the key to client retention for the Bank? It certainly has been one of the keys

to client retention for the Bank.

Nowadays everyone is under pressure to reduce the cost base; but we have concluded that cutbacks on matters that are client related would be entirely the wrong decision, it would ultimately prove to be to the detriment of both our clients and ourselves in the long-term.

Consequently we have opted for continued investment into our business with a view to maintaining the level of service at current levels. And likewise with people: until very recently we were still taking on people for new business and that’s probably a different approach when compared to a number of our competitors in the market.

In essence, we are constantly striving to add value from a client perspective; therefore, from 38 | Money Markets

our point of view, we must have the people and systems in place to achieve the goal.

Despite market conditions, BOISS continues to innovate. What role does this play, in terms of the Bank’s success? Here again

we see ourselves as being somewhat different from other global providers. The innovation that we have demonstrated in relation to our client service structure is certainly a key, differentiating factor in our business.

We are not the biggest, nor do we aspire to be the biggest fund administrator custodian.

However, our vision is to exceed our clients’ expectations in service terms. Consequently, the key for us is to continually innovate; so we look at the way we take on business, and the way we service that business. We also look at new business and the way we service that.

Our product department’s mandate is to look at the products our clients want, or are proposing, as opposed to merely looking at new products per se.

In summary, we are striving for continual innovation, continual anticipation of where the market is going, where our clients’ business is going, in order to be in line rather

than one step behind, ideally maintaining pace or, best case scenario, outpace the client and be there before they are ready to launch the product.

Are you at liberty to discuss your AuC? In the current market environment our assets under custody have declined somewhat. In the middle of last year, assets under custody were just short of $200bn but have decreased to approximately $150bn. Notwithstanding, in looking at where the markets are today, we have done well by comparison.

Custody & Fund Administration

•••

Our different lines of business have been the accommodating factor. A large proportion of our business is traditional - for the long only managers - so the balance has been very good in terms of the business mix; and on the other side, some 25% of our overall book is in ETF structures.

Fund Administration

Given the state of the credit markets and the Madoff scandal, would it be fair to say that hedge fund administration outsourcing has increased significantly this year?

I wouldn’t say significantly but, yes, it has increased. There appears to be a gradual shift towards admin functions being totally independent and I believe this to be more client driven than investor or manager driven.

The European market is quite different from the US market, particularly for this type of activity. The US market is much more self administered and self managed; because of the way it has evolved over the years, there has been much more independence in the admin functions. In places like Sweden, traditionally,

they would always have insisted upon an independent administrator. So, I think going forward, new products will certainly be managed on an independent basis.

Is it an over exaggeration to say that investors are asking for an independent fund administrator for every hedge fund they make an investment in? I am not sure

they are looking for an independent administrator for every single investment they make in a hedge fund: I think investors are quite happy to have certain levels of exposure, and / Money Markets | 39

or risk, but clearly they are not going to invest in a number of underlying funds all of which do not have independence or use independent administrators, as this approach just increases the risk profile for them. There could well be a level at which people feel comfortable, what that is will be dependent upon the individual investor, but I think the vast majority will look for some independence, either around pricing or auditing of the portfolio – that crucial element that provides an independent verification of the valuation itself.

In line with global market conditions, the pace of consolidation in the hedge funds administration industry has decreased somewhat.

However, moving forward, are there signs of further consolidation in the pipeline? I expect

there will be some consolidation but right now it’s difficult to predict the source. Presently there are not many people with the firepower to follow the acquisition trail. The result of decreasing asset levels and fees have taken a toll, and business models have suffered commensurately, however, I still think there will be some consolidation moving forward. There are probably too many players with a lot of similar products and service offerings out there anyway. In simple terms, those who provide strong client satisfaction will survive, and those that don’t, wont.

There has been a big play on costs over the last few years: those entering the market and providing services at the lowest cost are probably under the greatest pressure now. Not to say that those who added value from a client perspective are not under pressure, but less so, I would venture to say. I expect they will have a satisfied cli40 | Money Markets

ent base clearly looking to grow their own business over time, and I think will still do well.

Securities Lending

With respect to securities lending, certain consultants have advised their clients that the risk reward trade off around this activity has changed and that, in some instances, it may no longer be worthwhile. What do you say to this? This is interesting for us

as it’s an area in which we have been heavily involved over the last 10 years or so. Generally speaking I think that for most there have been areas of misunderstanding either with regard to their programme, or the associated risks.

exposed to from a day-to-day perspective. I think if people get a better understanding of the programmes from the outset, and adopt a more hands on approach in understanding the collateral and the collateral reinvestment side and the risk side of it, managers would be quite happy to go back into securities lending and be happier to be more proactively engaged in the securities lending process.

In the case of pension funds, providing they ensure that the collateral agreed for their lending programme is in line with their risk tolerances and it is of a high quality, should there be further cause for concern? The short

Our own programme is quite specific as it’s generally in line with our overall service model, which is to tailor solutions for individual clients whereas, in terms of our global competitors, a lot of their programmes are just global programmes: you put assets in and they get lent out, maybe even on a pro rata basis. Our programs do not work like that; they are specifically aimed towards maximizing the usage of clients’ assets in line with the programme we agree with them.

answer should be no: once they understand the risk, and once they are comfortable with the risk profile of the collateral, I think people should be able to find their comfort level. Funds that receive revenue from securities lending should not only be looking at the return, they should also be looking at the correlation of quality and collateral vs. the return. They should also be looking at things like counter party credit worthiness in addition to legal documentation that supports the loan, the underlying drivers behind the revenue generation.

It would appear a number of people went in very blindly, perhaps with advice, yet not clearly understanding the programme or the associated risks since the majority of the issues have arisen post Lehman default. There has been a lack of clarity over e.g. legal documents, investment and reinvestment of collaterals, certainly in big issues. When people saw the outcome of the Lehman collapse they only then began to understand some of the risks they were

Going back to an earlier point, I think people just saw a revenue stream without clearly understanding all of the other associated risks. I think once people understand all of those areas and put in place an appropriate plan with appropriate monitoring and oversight of the programme, a number of the concerns that exist at the moment should be alleviated. A large number of people are fearful of re-engaging in securities lending but, ironically, if they engage

Custody & Fund Administration

•••

in a particular type of programme it may not even have the associated risks that they fear most. It’s definitely an education as much as anything else, of course the risks will still be there but a lot of those can be mitigated by the manner in which the programme is managed.

In the News

Given the turmoil that hedge funds have experienced over the last few months, what impact will this have on the technology and infrastructure supporting the industry? This sort of turmoil occurs in the market

periodically, it happened in the 90’s: you get a lot of rapid development of the industry making it difficult for a provider of services to this industry to keep pace. Probably at this point

service providers started to appreciate and recognize the need for, and the benefits of, greater automation and standardized messaging. Given the current economic climate, is this still a priority? I actually think it is. I

think a lot of managers are looking to be at the front end or cutting edge of technology and have the best available information at their fingertips. I do think there will be a drive for one more automation, leading to easier access from a manager’s perspective. The economic climate may well impact the time frame in which this takes place, but I do think the aspiration is there and people who can invest in their business now will potentially deliver a lot more for managers than someone doing cutbacks - whatever they may be - that will make it difficult to deliver on expectations from a client perspective.

if there are underlying changes to his operation we are aware of them in advance. This way we can deliver new servicing environments or make changes to an existing environment. For us, this is something that’s continually evolving, it’s something we continue to invest in and we believe the model is specifically designed to capture that. We don’t just want to meet minimum expectations, we want to exceed them and that’s why we continue to invest.

The Road Ahead

Given the current financial climate, this may be a difficult question to answer.

However, where do you see BOISS’s custody business this time next year? We see

a very positive road ahead of us. We know our

expect there will be some consolidation but right now it’s difficult to predict “theIsource.

Presently there are not many people with the firepower to follow the

acquisition trail. The result of decreasing asset levels and fees have taken a toll, and business models have suffered commensurately, however, I still think there will be some consolidation moving forward.

”

now there is a period of reflection and the risk appetite of investors has lessened, so as a corollary, development slows down. If there is an up-side, it gives people an opportunity to take stock of where they are and understand where the client business is moving and then make sure they’re in a position to handle all of the client’s requirements.

The majority of new business is more in the passive area. We are still seeing some active business being launched, but in terms of the active to passive ratio, it’s probably more heavily weighted on the passive side so, by its very nature, there is less activity; the support infrastructure is of course a great deal more straightforward as well. I do believe that situation will maintain over the next year to 18 months.

Customer Relationship Management

In your opinion, given the dramatic downturn in the markets, are service levels in decline? Looking at it from our perspective,

we have continued to invest in both technology and people in order to ensure that service levels do not decline in any way. In my opinion this is possibly the worst time to let your service levels fall, but I have to believe that people who are cutting back on further investment, and particularly in the area of human capital, will find this action detrimental to standards of service for clients.

In spite of market conditions, BOISS continues to meet and exceed the expectations of its clients. What is your secret? That is our

natural as well, given the situation where business and activity levels in addition to fee levels are well down from where there were18/24 months ago. These factors would lead to natural retrenchment in any case.

business model and I would like to say we have differentiated ourselves by the level of service that we deliver to clients. We try to automate as much as possible, we invest in both people and technology for clients at the beginning of a relationship, but we do that with a view to making sure that we clearly understand and can deliver specifically, on an on-going basis, an environment that meets clients expectations.

When there was significant institutional money flowing into the fund of hedge funds industry, fund managers and their

In structuring our business and client service teams, part of the agenda is to understand where the client’s business is ultimately moving so that

Are we seeing retrenchment in the emerging market fund administration and custody market? I think so but, I also think that’s

model is a good one in relation to the support of customer business, and it’s what they are looking for, i.e. a specific, tailored service as opposed to a very commoditized service that just delivers something in a particular way at a particular cost.

On specifics, we are looking at certain developments in the market and have taken on one or two significant clients. In the last three months we’ve also launched a very important ETF platform with clients in the UK that will be distributing throughout Europe.

We see that type of initiative growing significantly over the next year or two. We will offer similar products in different regions; we see good growth in the market in fairly specific areas at the moment. Even though there are not as many active products being launched we certainly see a lot of activity on the new business side that would lead us to believe that things will be pretty strong over the next 12 /24 months. Our view is very positive in respect of that time frame.

Biography Fearghal Woods is a Director and the Head of Business Development for Bank of Ireland Securities Services.

Money Markets | 41

ject management o r p full s r our service offering? ffe f o o t t par tha s r h o w a ’ e s s t d s h e only provi e nds u Gu ices f for th ew serv e launch of n

Wordʼs Getting Around…

For more information on our services please contact: Fearghal Woods (Dublin) at +353 1 670 0300 or visit www.boiss.ie Bank of Ireland Securities Services Limited is authorised by the Financial Regulator under the Investment Intermediaries Act 1995

42 | Money Markets

Custody & Fund Administration

•••

Innovate to thrive » Jonathan Calens talks to Claude Michaux

The major asset management “support functions, such as custody,

fund accounting and TA are gradually becoming commodity businesses.

High volumes and low margins mean that, although they play a vital part in asset servicing, they generate little in the way of profit.

”

Getting to Know CACEIS It has been widely reported that Credit Agricole has been in talks with Natixis with respect to the acquisition of a 35 percent stake in CACEIS for 595 million euros ($758.2 million), which would give Agricole an 85 percent majority stake in the company. Should the aforementioned acquisition come to fruition, what impact will this have on CACEIS and its custody and fund administration businesses, if any? If the operation comes to frui-

tion, Crédit Agricole will take effective control of CACEIS. Decision making concerning CACEIS will of course be facilitated. However, I would like to point out that Crédit Agricole S.A and Natixis, which both have a 50% share, have always been able to agree on the strategy and development of CACEIS.

The conditions of the sale will contain a commitment to maintain the business portfolio, currently administered for Natixis by CACEIS, for a definite period (a priori 10 years). Clients, brought to CACEIS by the Caisse d’Epargne group during CACEIS’s mid-2005 creation and by the Banque Populaire group from 2008, have become part of our business portfolio. It is up to CACEIS to hold on to this business by continuing to deliver at the highest level through service provision and relationship building.

Furthermore, there is no reason our AA- S&P rating should change given that Crédit Agricole S.A. is already independent of the operation in progress.

With respect to the provision of custody and depository/trustee services, you currently focus on France, Luxembourg, Ireland and Germany. Do you have any plans to widen the net? CA-

CEIS’s goals, in terms of strategic development, are achieved principally through partnerships and acquisitions. We have always actively sought to acquire business or parts of businesses that are a close strategic fit to existing operations. In terms of custody and depositary/trustee services, we plan to increase our presence in Europe by focusing our efforts on finding a suitable partner or acquisition in the UK and Italy.

Are you at liberty to discuss your AuC and funds under administration? Our assets under administration as of 31 December 2008

are €950 billion. Our assets under custody as of 31 December 2008 are €2.2 trillion.

Despite market conditions, CACEIS continues to innovate. Is this the key to your success? Innovation is key to success and is a core

company value, which appears in our “Solid and Innovative” slogan. We have a history of innovating, being the first company to service futures funds in Luxembourg and the creator of the asset cloning technique designed to facilitate the management of multi-jurisdictional fund ranges.

We invest heavily in the research and development of new products and their related IT infrastructures as innovation gives us and our clients a Money Markets | 43

risk measurement, so it is technology which is the key differentiator, enabling CACEIS to provide a full asset-servicing offer.

competitive edge. Our extensive support to cross-border fund distribution capabilities and our comprehensive middle office services are important examples of recent innovative product developments, which is something our clients have come to expect from us.

Hedge Fund Administration

You took over the securities processing and custodial services of HypoVereinsbank (HVB) at the end of 2007. What impact has this had on your custody business? For CACEIS, the acquisition of

You acquired fund administrator Olympia Capital International and its affiliates in 2007. What prompted the aforesaid acquisition? The acquisition of Olympia Capital International tied in neatly

HVB securities and their custodial activities was part of our targeted, international, acquisition growth strategy. The operation was an excellent opportunity for us, given that HVB had a reputation as a solid actor in the German securities business with a significant market share.

For CACEIS it represented a major step in realizing the international expansion of our custody business and was the first step towards providing a comprehensive asset servicing value proposition in Germany.

The acquisition also added €400bn of assets to CACEIS’s assets under custody. Furthermore, it gives us approximately 15% of the German custody market and a footprint in one of Europe’s largest asset services markets.

with our goal of strengthening our service offering to the alternative investment funds industry and was a key part of CACEIS’s wider strategy of targeted international growth. Through the acquisition of the well-respected fund administration specialist, we not only gained a large, high-calibre client base but also inherited a significant number of quality personnel that understand the needs of the aforementioned clients. In addition, it also gave us the opportunity to export our servicing expertise, offering clients more comprehensive services, in terms of both geographic scope and product range.

The German market is highly competitive and given the relatively short period of time CACEIS Bank Deutschland GmbH has been operating, do you feel that you have been able to penetrate the market effectively? Our presence was the result of an acquisition, so

Through the acquisition, we gained a number of well-respected alternative clients and significantly increased our alternative assets under administration in one fell swoop. Furthermore, the operation permitted us to broaden the jurisdictional coverage we are able to offer clients, with new operational centres in Canada, the US and Bermuda. By retaining the management and staff, we also inherited the expertise in administering vehicles from the new jurisdictions, putting us in a position to service clients operating out of the world’s major fund centres for alternative investments - Luxembourg, Dublin, Bermuda and the US.

from the outset we had a significant 15% share of the German custody market. Since the acquisition we have been focused on the smooth transfer of HVB’s business, now called CACEIS Bank Deutschland, onto the CACEIS platform, disentangling the HVB business from its parent. Not a simple integration, but it is proceeding well and planned for completion on 6 June 2009. Following this, we will be in a position to actively seek new client mandates and extend our current custody and clearing offer with new services, such as a dealing room and fund administration activities, in order to create a full service bank for clients operating on the German market.

Technology Over the years, CACEIS has invested heavily in technology. Will this trend continue? Yes, we will continue to invest heavily in tech-

nology as it is a crucial part of our business. Companies unwilling or unable to keep up IT spending will suffer and become less competitive.

However, by combining IT investment with a strategy of rolling out systems across our network, we ensure budgets are utilized effectively.

Automation not only speeds up operations, but also serves to reduce costs and, more importantly, error rates. By selecting best-in-class IT platforms and customising them and performing rigorous testing, we ensure that our powerful and flexible systems are both stable and reliable.

To what extent do you consider technology to be a key differentiator with respect to service provision? Most requests for proposal

contain detailed questions on our IT systems, their capabilities and back-up plans, which is an indicator of reliable IT’s importance to clients. However, clients require more than just accurate and timely NAV calculations via straight through processing. A host of related services are dependent on IT, from cross-border fund distribution support to detailed report generation, from clearing services to performance and 44 | Money Markets

To what extent has the acquisition enhanced your exposure to the alternative investment funds industry and new markets?

In line with global market conditions, the pace of consolidation in the hedge funds administration industry has decreased somewhat. However, moving forward, are there signs of further consolidation in the pipeline? The pace of consolidation may pick

up as mid-sized players start to experience difficulty in keeping up with technology spend due to lower revenues from reduced assets under administration. Polarisation will continue, with boutique administrators occupying a viable niche at one end and larger players able to stomach the IT costs at the other. Mid-sized players will be slowly acquired and absorbed, or may seek to emulate the boutique model and downsize operations.

When there was significant institutional money flowing into the fund of hedge funds industry, fund managers and their service providers started to appreciate and recognize the need for, and the benefits of, greater automation and standardized messaging.

Given the current economic climate, is this still a priority? Today,

managers and investors are keeping a very close eye on costs and the constant downward pressure on administrator fees and the demands for more frequent and detailed report production. Automation requires significant IT expenditure on behalf of asset servicing providers, but brings enormous benefits to the industry as a whole in terms of reduced costs, increased transparency, shorter cut-off times and lower error rates.

The automation drive will remain a priority at CACEIS and we have been actively participating in SWIFT’s Sharpe initiative to create a new set of autonomous messages, specifically designed to serve the fund of hedge fund industry.

Custody & Fund Administration

•••

Service providers, which have specialised “ in alternative assets, will encounter volume

difficulties as alternative managers start to look to UCITS to break into the mainstream.

”

Market Trends & Drivers How important are the major asset management support functions, such as depositary and custody work, fund administration and transfer agency services, to the long-term success of the investment fund sector? Large service providers are able to reap the

benefits of massive economies of scale on the major asset management support functions, which investment management companies are unable to match in-house. Over the years we have seen the costs associated with these services decrease significantly, which in turn allows investment managers to reduce their total expense ratio, increase the competitiveness of their funds, whilst improving the quality and scope of services they offer their clients. Investment managers are increasingly realising that outsourcing non-core functions to a specialist provider not only reduces costs, but also allows greater focus on the core activity of asset management.

The growing convergence of traditional and alternative asset management styles is creating a new range of challenges and opportunities for the investment and asset servicing industries.

What steps have you taken in order to prepare for the challenges ahead? As a full service provider, CACEIS is well prepared to handle

the convergence of traditional and alternative management styles. We are experienced in managing both styles and are able to handle the volumes associated with traditional retail funds and the complexities associated with the alternative side. Service providers, which have specialised in alternative assets, will encounter volume difficulties as alternative managers start to look to UCITS to break into the mainstream. And as traditional managers look to more complex instruments, like OTC derivatives in order to boost the performance of their portfolios, providers lacking the experience in pricing sophisticated products will suffer.

In your opinion, is asset servicing slowly moving away from being a commodity business? The major asset management support

functions, such as custody, fund accounting and TA are gradually becoming commodity businesses. High volumes and low margins mean that, although they play a vital part in asset servicing, they generate little in the way of profit. However, where asset-servicing companies can really add value to their customers’ businesses and increase their revenues is in related services, such as risk management, middle office services and fund distribution support. These are the services that are helping to draw asset servicing away from being a commodity business.

The Future Given the current financial climate, this may be a difficult question to answer. However, where do you see CACEIS’s custody business this time next year? CACEIS is a bank that is fully dedi-

cated to asset servicing. Custody, in particular, is a core part of our business. We are the leading player in France, the domestic market of our shareholders which are committed to the custody and wider asset servicing business. However, we are always open to discussing partnerships with groups who share our servicing philosophy and are constantly looking for acquisitions that are a close strategic fit for our operations.

It is clearly difficult to know whether our custody business will change by next year, however, whatever the case, decisions are always taken with the best interests of our clients at heart.

Biography Claude Michaux is the Head of Marketing & Communications for CACEIS Bank Luxembourg.

Money Markets | 45

... and climbing.

www.munier-bbn.com

A global player in asset servicing...

Offering leading value in investor services demands constant evolution. At CACEIS, our strategy of sustained growth is helping customers meet competitive challenges on a global scale. Find out how our highly adapted investor services can keep you a leap ahead.

CACEIS, your comprehensive securities servicing partner.

Custody-Depositary / Trustee Fund Administration Corporate Trust CACEIS benefits from an S&P AA- rating www.caceis.com

46 | Money Markets Caceis adv climb EN 8,375x10,875H.indd 1

18/03/09 14:17:12

Custody

•••

The road

ahead »Jonathan Calens talks to Anne-Lise Kristiansen

Service Levels

The inception of central counter “party clearing, the new Nordic MTF, Burgundy - offering trading in large, medium and small cap Nordic equities - and NASDAQ OMX’s use of INET technology are just some of the key drivers that will affect change.

”

In your opinion, given the dramatic downturn in the markets, have service levels in the Nordic territory, and elsewhere, dropped? I

am able to state categorically that our own service levels have not dropped. In this regard it may be difficult to estimate the performance of other providers in the marketplace. That said, we are operating in a highly competitive arena.

Nordea is rated second in Europe based upon total shareholder return and our credit rating is AA. I believe the importance of the aforementioned rating will increase as we move forward.

In spite of market conditions, Nordea continues to meet and exceed the expectations of its clients. What is your secret? If there

is a secret, it stems from the fact that we have an organization which is very customer oriented. That’s our culture, and it reflects the way Money Markets | 47

If there is a secret, it stems “from the fact that we have an

organization which is very customer oriented. That’s our culture, and it reflects the way we act throughout the organization.

In the main it’s about customer focus, adding value and creating a positive customer experience.

”

we act throughout the organization. In the main it’s about customer focus, adding value and creating a positive customer experience.

Feedback suggests that sub-custodians in the Nordics have significantly reduced face-to-face contact with clients.

What is Nordea’s position on this? We concentrate on building

long-term relationships and face-to-face contact is a vital part of the equation. Face-to-face is not only valuable in terms of building relationships, but also in building trust. Our credo is “to be out in the market not only when the sun is shining but also on rainy days”.

NASDAQ OMX

NASDAQ OMX has suggested that it wants to increase market liquidity and strengthen its ability to compete in the new European trading landscape. Given current market conditions, can this be achieved in the short to mid term? Of course it’s possible. However,

given current market conditions and the competition between MTFs and stock exchanges, we believe that this time-scale is not realistic. I

48 | Money Markets

anticipate that we will see a fragmentation of liquidity in the short to mid term before there will be a marked consolidation in the market.

There has also been talk of reduced latency and transaction costs, straightforward cross-border trading, and a cost and risk-efficient clearing model. Are the aforementioned objectives being realized?

Not yet. However, from a market perspective, we anticipate that during 2009 and 2010 there will be some major changes that will drive the aforesaid development; the inception of central counterparty clearing, the new Nordic MTF, Burgundy - offering trading in large, medium and small cap Nordic equities - and NASDAQ OMX’s use of INET technology are just some of the key drivers that will affect change.

It will also be interesting to see how the different CSDs react to these changes when lots of transactions are being netted.

The NASDAQ OMX Group, together with the Securities Dealers Associations in Denmark and Sweden and the Federation of Finnish Financial Services recently announced a joint timetable for

Custody

•••

Over the years we’ve witnessed a certain amount consolidation in the region, “which has led to fewer sub custodians, a trend that has accelerated over the past three years, and one that we feel will continue. However, Nordea is committed, ready and able to adapt effectively to the changing face of the market.

”

the implementation of the Central Counterparty (CCP) on the NASDAQ OMX exchanges in Copenhagen, Helsinki and Stockholm with an interim voluntary CCP from February 2009 and a full CCP from October 9, 2009. Is this realistic? Very few brokers

seem intent on joining the interim voluntary solution, or even evincing the possibility of joining: it may actually create more problems than benefits in the short term for both brokers and custodians. It appears as though most brokers are focused on the full CCP and not the intermediate solution. Consequently, the time-line to the full CCP solution is very tight. In relation to remote brokers, the challenge is not as great given that most of them are already connected or have joined CCPs already. Accordingly, local brokers will be most affected by the change.

Previous attempts to establish a Nordic CCP have failed. Is renewed focus on counterparty risk the catalyst responsible for the current CCP initiative? The changing conditions are proving the

business case. With respect to the Exchanges, we have seen significant growth in the number of transactions. Remote brokers have increased their preference and market share in the Nordics, which has led to a commensurate increase in trading volumes for remote trading. If you consider the volumes that were being generated a few years ago against what we are doing today, there is a tremendous difference. This further underlines the business case.

Given that most European markets are centrally cleared would it be fair to say that the implementation of the CCP is overdue? The

Nordics are very small vis-à-vis the European markets, which is why the business case has not made sense until now.

The NCSD Acquisition

Euroclear’s acquisition of the NCSD and its subsidiaries, APK and VPC, the Finnish and Swedish CSDs, respectively, now know as Euroclear Finland Oy and Euroclear Sweden AB, became effective on the 31st of October last year.

The migration of the Finnish and Swedish transaction-processing activities to Euroclear’s Single Platform is scheduled immediately after completion of the new platform, planned for 2011. Again, is this realistic? The Finnish and Swedish advisory committees have

just been formed and are now beginning to assess the implementation plan in detail. However, there are no other large infrastructural initiatives ongoing at the same time.

Of course the current economic climate affects the appetite of market participants with respect to investment in new technology; I do think it’s very important to ensure that all of the projects and changes made over the course of 2009 are made in the right order. They should also be geared towards the future operating model of the CCP, Single Platform and TARGET2-Securities.

Euroclear anticipate that as a result of platform consolidation and market-practice harmonisation, clients of the combined organisation can expect to save more than EUR 350 million per year in back-office and operational costs. Do you concur with these figures? Given the

plethora of initiatives currently ongoing, including the different CCP initiatives, I think it’s difficult to assess which one affords the biggest saving.

I think that increased competition at every level is needed; only by maintaining a high level of competition in the Nordic region can we ensure that we benefit from the estimated savings.

Provider Selection

What do you consider to be the most important considerations when choosing a custodian? One needs to choose a long-term provider with

the right level of service. I think the market is becoming increasingly aware of the differences between providers in the Nordic region. Consequently, preference is being given to providers that can stay the course.

Should asset safety and commitment to the business be at the top of the shopping list? Yes, asset safety and commitment should be

given high priority. Over the years we’ve witnessed a certain amount consolidation in the region, which has led to fewer sub custodians, a trend that has accelerated over the past three years, and one that we feel will continue. However, Nordea is committed, ready and able to adapt effectively to the changing face of the market.

Whilst safety and commitment should be high on the list when choosing a sub-custodian, I think the importance of the aforementioned has been heightened as a result of the downturn.

I think that most clients want to build long-term relationships with their providers and vice versa. Therefore, should potential clients be wary of significant acquisition activity?Yes, in relation to

the Nordics, I think it’s very important for clients to build long-term relationships given that fewer providers have critical mass and the resources necessary to deal with the challenges ahead.

The Road Ahead

Given the current financial climate, this may be a difficult question to answer. However, where do you see Nordea’s sub-custody business this time next year? We will continue to strengthen our

position overall. No successful business can stand still, so our aim is to keep growing and to increase our market share.

Biography Anne-Lise Kristiansen is the Head of Sub-Custody and Clearing for Nordea Bank.

Money Markets | 49

Nordea Bank AB (publ)

Spot-on custody services.

Do you need custody services in the Nordic region?

voting, securities lending and borrowing services,

Or are you looking to take advantage of market

issuer services and market information covering the

conditions in Denmark, Finland, Sweden or Norway

whole region. We also offer a single point of entry to

individually? Then it pays to talk to Nordea.

the Nordic region through a dedicated relationship

We are the leading financial services group in these countries and provide you with in-depth knowledge

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entire region.

capitalise on our experience, please contact

Our comprehensive services include extensive reporting, corporate actions services and proxy

Ms. Anne-Lise Kristiansen tel +47 2248 6238, email: anne-lise.kristiansen@nordea.com

Making it possible

50 | Money Markets

Custody

•••

The Nordic–Baltic

Value Proposition »Goran Fors talks to Money Markets

The Next Chapter When we last spoke, your AuC totaled some €500bn. Has this figure changed? It

has come down slightly, in line with the market shift. I think it was actually a little over €500bn last year, but it has come down around 10% mainly due to the market.

Some of your peers like to emphasize their pan-Nordic capabilities. However, you seem to place the emphasis on your Nordic/Baltic offering. How much of an advantage does this give you over the competition? To some extent, it gives us quite a big

advantage. The four Nordic markets are our main focus; the Baltic market, both volume and business-wise, is not a substantial part of our business, rather the opposite.

However, for most of our clients, it makes sense for them to have somebody providing services in those markets as well. So our presence in the Baltics is very much about adding extra value. This is also the reason why we expanded into the Ukraine, and we are continuing that expansion with Russia, where we should be operating shortly.

We see the need to be operational in more countries.

You began rolling out your Baltic offering in 1999. Subsequently, a number of providers have followed your lead. Would it be fair to say that SEB has been somewhat of a pioneer in this region? Yes, I think you could say

we have been a pioneer, if you consider that we are still the only provider to have an offering in both the Nordics and the Baltics.

There are several providers in the Nordic countries, and there are other providers in the Baltics, but there is no one else offering services in both regions at the moment.

I think most custody providers today have “realized that they need to be in more and more

markets. We see a regionalisation trend in general – with European players, Asian players, and so on – and I think we will continue to see further demand for expanding geographic coverage.

”

Money Markets | 51

Can you discuss the benefits you hope to accrue by adding Russia to the list of countries you currently service? I think most

custody providers today have realized that they need to be in more and more markets. We see a regionalisation trend in general – with European players, Asian players, and so on – and I think we will continue to see further demand for expanding geographic coverage.

Russia is going to be an extremely important market for us and for our clients. However there are still a lot of issues in the Russian market with respect to infrastructure and the entire set-up of the financial market, especially with the regulatory and legal infrastructure, that need to be resolved.

How close are you to galvanizing your service offering in this territory? We plan to

move some of our own assets there in the autumn, and then we will be operational towards the end of the year.

The Competition Were you surprised to learn that Nordea had sold its institutional global custody portfolio – March 2008 – to JPM? All of us

from time to time evaluate the future strategy of our business. We have done so in the past, but we have decided to continue investing in our business.

Therefore, I was not really surprised that Nordea looked into this and eventually decided to take action. At the end of last summer the word was out in the market that Nordea was going to do this. So when it came to the press release in March, I wasn’t surprised. I was maybe more surprised by who bought Nordea eventually.

What impact, if any, has the aforementioned acquisition had on SEB’s global and sub-custody businesses? So far it hasn’t really had any

effect on us. I think, obviously, JP Morgan Chase is a much stronger competitor within the region with an even stronger offering. This is due, in part, to local presence and the aforementioned acquisition. By the same token we feel that significant benefits can be derived by approaching Nordea’s client base. It will not be easy for JP Morgan to acquire all of Nordea’s clients.

We touched upon the growing influence of US providers in our last interview. How do you compete with the global scalability and volume insensitivity of these providers? To some extent, the big US global cus-

todians, such as JP Morgan, Citi, State Street

52 | Money Markets

and Northern Trust target a different client base, for example, the tier-1 pension funds – in Sweden, these would be the AP Funds, and the pension funds such as Storebrand in Norway and ATP in Denmark. If we are talking about Sweden, this type of client has worked with global custodians for many years. We deal with the next segment, mutual fund clients, and so far we have been able to compete very successfully with the large American institutions.

Of course we cannot compete with their extraordinary technology, but we can offer local presence and knowledge. We also offer a broader product base, which includes investment banking and cash management.

Integration Do you feel that NASDAQ’s takeover of OMX will facilitate further integration amongst the exchanges? The Nordic exchanges were already

reasonably integrated – they were already owned

by OMX, except for the Norwegian exchange, and were all using the same systems. We had a good cross-over within the exchange environment. However, even though we established joint listing and so on, it wasn’t that successful because of the number of currencies.

I’m not 100% positive about the NASDAQ takeover of OMX. I don’t think it is going to be positive for the Nordic capital markets in the long run. I think that gradually we will see trading volumes go elsewhere, but, of course, I hope I am wrong. With the introduction of a number of new MTFs, I think we will see competition growing as well.

Naturally, the aforesaid takeover will continue to heighten the Nordic sector’s profile.

However, what impact will this have on investor interest in the region? Over the last five

or ten years there has been a tremendous growth in the number of foreign investors investing in the Nordic markets. We have seen enormous growth in the number of remote players connecting to the exchanges. The interest of foreign investors in the region has been good, and hopefully it will stay that way for some time to come. The question is, will companies that are issued locally, such as Nokia, retain their main trading environment in a local exchange, and will foreign investors continue investing in the region? The answer to these questions is, yes, I believe so.

Alliances In order to strengthen their existing value propositions a number of providers have

formed alliances, e.g. Handelsbanken and Northern Trust, Swedbank and JPM. Given your strategic cash management alliance with ING, have you considered going down this path? We have considered the possibility

on a number of occasions over the years. We did the last evaluation about three years ago and decided that we would remain independent and continue investing in our products.

I think there are different routes you can take; for example, Nordea sold part of its business, Swedbank forged an alliance, which resulted in the outsourcing of its client operations, and Handelsbanken, through its joint venture with Northern Trust, entered into a co-operation agreement.

We have decided not to pursue any of these options at present; however, this is something that can always be evaluated again if the situation changes.

Some investors prefer to use a local bank as their global custodian. With this in mind, do alliances dilute the perception of truly local expertise and potential business? I

think to some extent, working with a global custodian is a difficult thing. There have been numerous examples on the global side of more loosely held together alliances, but I’m not sure that they have been that successful.

The more successful alliances are those that actually form joint companies, such as CIBC Mellon in Canada. Generally, the more loosely held together alliances have not been that successful, in my opinion.

With alliances come co-operation issues.

The question is, do you actually want to stay together, how do you work together, how do you create the products, who is getting the revenues, how do you split all the ancillary revenues that are created by the business, and so on.

So, maybe the best way to approach an alliance is to go into it with a clearly defined intention, like Nordea, who sold its business, and Deutsche, who did the same several years ago, and like the UK banks have done for many years.

Clearing and Settlement The European Commission claims to be increasing competition in the market, encouraging rationalisation and improving competition across the board in order to achieve parity with respect to the

Custody

•••

cost of cross-border Clearing & Settlement Mechanisms (CSMs). Is this happening? Over the years we have strongly

supported the possible consolidation of the Nordic infrastructure. The consolidation of the exchanges, as I have already mentioned, was very successful; the consolidation of the CSDs here has been a lot less successful. We had a merger between Finland and Sweden on the CSD side, but were unable to convince Norway or Denmark to join in order to create a Nordic consolidated infrastructure.

In order to make our marketplace more efficient, we considered consolidation to be the first step. I think the next step will be to go the European route. As you know, we have now decided to sell the NCSD to Euroclear.

The business case for actually building our own consolidated IT platform was not really there, so there was no alternative but to go European immediately.

has been pretty slow, but at the same time, you have to realize that there will be difficulties; we are talking about 25 different countries in Europe, all with different structures.

In your opinion, are Giovannini’s barriers a priority for the European Commission? I

would say that it is a priority, because I think that harmonisation within the public sector has been too slow.

I don’t think that they have actually emphasised the need to harmonise the legal and tax aspects of an infrastructure like this. I think that there has been a great deal of work done on barrier no. 1, and a lot of co-operation, especially by the CSDs and market participants, but there are still a number of aspects that need more work.

The Future What can we expect from SEB over the next twelve to eighteen months? We will contin-

I think that T2S has created – although I can’t say that I am 100% sure that it is the best way forward – more activity and placed more focus on the way that both the public and private sector is organised in Europe.

ue to develop our local presence together with our Nordic/Northern European business. As a bank, we will also be focusing on where we conduct our business, because it is difficult to do business without having a local presence.

We will have to wait and see whether T2S will be the best tool in the long run. The process

At the same time, as a domestic clearing agent or clearing bank, our custody business is going

to change substantially over the next five or six years. For example, we will see a lot of changes in the trading and clearing pattern. Whatever the outcome of T2S, it will result in changes to the infrastructure. We see our agent bank business being an important part of the infrastructure, and we need to be able to support both the end investor and broker/dealer community.

We will, of course, continue to offer global custody services to our local clients in the Nordic/ Baltic markets. I think our client base here will continue to grow. There is a large client base that will continuously need the services of a local provider, and one that understands the benefit of local expertise.

I think we will work together with other parts of the bank in developing new products and services; for example, prime brokerage.

Derivatives and reporting aspects will be further developed. The globalisation of client trading will also evolve, and we will have a number of funds opening up in new markets.

There will be a lot of new developments.

Biography Goran Fors is the Global Head of Custody Services for SEB.

Money Markets | 53

54 | Money Markets

Custody

•••

The Value of Local Expertise »Susan Gault talks to Luciana Pacor-Hygrell

Introduction

Kindly define your AuC? Handelsbanken has assets under custody of

approximately $250 bn.

The Nordic custodial market is incredibly competitive. What separates Handelsbanken from the competition? Over the last

couple of months the competition here has been changing. When it comes to custody, Handelsbanken is still one of only two regional providers. Nordea recently sold off its global custody business to JP Morgan, so they are no longer present in the market.

We believe that our regional presence is our strength and competitive advantage. We also have an extremely strong distribution network.

The Changing Face of Nordic Custody

Were you surprised to learn that Nordea had sold its institutional global custody portfolio - March 2008 - to JPM? Yes and

the last couple of months “theOver competition here has been

changing. When it comes to custody, Handelsbanken is still one of only two regional providers.

”

no. It was known in the market for quite a while that Nordea wanted to find a better solution for its offering, and a better way of doing business.

The selling off of its global custody product to JP Morgan, that came as a surprise to us.

To what extent have US providers changed the shape and form of Nordic custody? The US providers have been present in the Nordic

market for more than 10 years, targeting the Tier 1 market. The US providers’ enormous investment capabilities put a great deal of competitive pressure on our offering as a regional provider, but it is always good to Money Markets | 55

We see fragmentation in the market due to all of the MTFs that are “ currently being introduced. You can trade Nordic securities on many different locations now, so there is fragmentation more than integration. ” the NCSD will be bought by Euroclear, and there will probably be an agreement signed by the end of the year. So the NCSD will become part of Euroclear.

Euroclear aims to put a single settlement engine in place in all markets that are participating in Euroclear, which now includes the NCSD. To what extent has the Target2-Securities initiative impeded consolidation? It has been impeding consolidation for a number of

years, in particular for CSDs.

With Target2-Securities on the horizon we will need to see how things develop before deciding upon what action to take and what investment to make.

Where do you stand on NASDAQ’s takeover of OMX? Again, it

was something we had been following for a long time. There were some concerns at the beginning, however, the discussion has now moved away from the stock exchanges and on to Multi-lateral Trading Facilities (MTFs). Yesterday (24 June 2008) it was announced that there will be a Nordic MTF, which will be called Burgundy. What we are now seeing with the MTFs, such as Chi-Ex, Turquoise and now Burgundy, is that trading will be done outside of the stock exchanges more and more, and will be done on the MTFs instead.

have somebody pushing the market and pushing performance. So this is something that we welcome.

Is the Nordic market oversaturated? Actually, a number of inter-

national providers are investing in our market and establishing a local presence, not just JP Morgan. This of course makes it tough for the local providers, but the Nordics are still a very interesting market.

In 2003, Northern Trust appointed you as its regional sub-custodian. You in turn appointed Northern Trust as your global custodian earlier this year. What benefits have you derived from the aforementioned partnership? Our partnership with Northern Trust

is a strategic relationship. We are working together in order to find a third-party solution that will not only give us a lot of flexibility, but also the ability to deliver specialized products to our clients. We have a very successful relationship, and appreciate being able to work alongside such an important provider in the market, and this of course benefits our clients.

Integration Issues

Are we likely to see further consolidation amongst the Nordic CSDs in the near future? Surely the first step must be full integration of the NCSD? It was announced a couple of weeks ago that

56 | Money Markets

With regards to trading and liquidity, as I mentioned, the Nordic market has replied by creating Burgundy, the Nordic MTF. I think it will be located here in Stockholm in order to meet the competition for trading.

As a shareholder, our bank will of course be participating, together with Swedbank and SEB. So there is a great deal of activity, but mainly on the MTF side rather than the stock exchange side.

Will the aforementioned acquisition facilitate further integration amongst the exchanges? We see fragmentation in the market due to

all of the MTFs that are currently being introduced. You can trade Nordic securities on many different locations now, so there is fragmentation more than integration.

Drivers of Change

The Markets in Financial Instruments Directive, launched in November 2007, replaces and extends the coverage of the Investment Services Directive. Where does Handelsbanken stand on the aforesaid directive? MiFID has been implemented in all aspects,

and within all sectors of the bank. One outcome of MiFID, regarding the requirement for best execution, has been the development of MTFs such as Burgundy.

Our bank has been one of the main drivers behind the development of the Nordic MTF and is one of its shareholders. This enables us to meet the requirements of MiFID and deliver best execution to our clients.

Custody

•••

The European Commission claim to be increasing competition in the market, encouraging rationalisation and improving competition across the board in order to achieve parity with respect to the cost of cross-border Clearing & Settlement Mechanisms (CSMs).

Is this happening? Yes, it is happening, now that Euroclear has taken

over the NCSD. The drivers are really cost-cutting and competition.

We will see Euroclear and the NCSD moving up the value chain going forward. I think this was the Commission’s intention in order to cut costs.

In your opinion, are Giovannini’s barriers a priority for the European Commission? Yes, I see the Giovannini barriers, T2S initiative, and the

Burgundy MTF as a whole package, and they are definitely a priority.

The Future

Given the Bank’s expansion into Latvia and Lithuania, to what extent will the Baltic region factor into your custodial operations moving forward? We have our Nordic regional set-up and operations

in the Baltics; we are active remotely in the Estonian market, and we will also be active in Latvia and Lithuania. As the bank expands its operations in Latvia and Lithuania, we will also be expanding our custody business in these territories. Having said that, the Baltic markets are quite small and so are the transaction volumes. The aforementioned strategy has been designed to offer access to these markets and thus provide a comprehensive service to our mainly international clients who are looking for one provider who can cover the entire region.

What can new and existing clients expect from Handelsbanken, in terms of product innovation, over the next twelve to eighteen months? We are working on product innovation. Our strategic rela-

tionship with Northern Trust not only allows us to provide new products, but also upgrade our existing products. This is something we are continuously working on.

In the changing infrastructural landscape that we are now experiencing, with the MTFs, Euroclear, etc., it is extremely important to find the most efficient way of working in order to streamline your operations.

There will soon be enormous competition in the market. So, if we can develop, together with Northern Trust, or by ourselves, good products and efficient new systems and services for special clients, then I think we will be in a good position.

We have a very good trust service, which we have been developing over the last six years. It started out in co-operation with Northern Trust and is now one of our top products. The trust business, which is of significant importance to the fund market in this region, is something that we will be expanding.

Biography Luciana Pacor Hygrell is the Head of Nordic Custody Services for Handelsbanken Asset Management.

Flexibility on a solid ground Handelsbanken Nordic Custody Services is present in all the Nordic markets, and offer a wide product spectre to a diverse client base.

We pride ourselves on being the most flexible provder of custody and clearing services in the region and we are known for our willingness to develop new and creative solutions to support our clients.

We offer flexibilty on a solid ground.

Nordic Custody Services

www.handelsbanken.se/nordic_custody_services Tel. +46-8-701 2988 custodyservices@handelsbanken.se

Money Markets | 57

Client Relationship Management A Winning Formula »Money Markets talks to Elena Melanthiou You have been servicing global custodians in addition to local and foreign investors for some time. Given the current state of the market, has the profile of your clients changed?Marfin Popu-

lar Bank has always been extremely sensitive to both the needs of its clients’ and the state of the global markets.

Since the launch of our custody services offering in 1996, we have continuously expanded our custody department. In doing so we have been able to provide a wide range of custody services and effectively respond to market changes and the changing requirements of our client base.

These services are offered to Global Custodians who wish to appoint Marfin Popular Bank as their sub-custodian in the Cypriot market in addition to foreign and local investors wishing to invest in Cyprus or abroad. We also provide our services to Private ICIS Funds (International Collective Investment Schemes).

Over the last few months, and following the many changes and deterioration of the global markets, our clients have remained calm and consistent, albeit a bit more careful in their pickings.

You have always placed a great deal of emphasis upon client relationship management. Domestically speaking, is this what separates you from competition? Client service and relationship

management is, of course, one of the most important factors affecting the success of our business and, as a consequence, we place great deal of emphasis on continuously improving this service. One of our goals is to exceed the expectations of our clients.

Client service and relationship “ management is, of course, one of

the most important factors affecting the success of our business and, as a consequence, we place great deal of emphasis on continuously improving this service. One of our goals is to exceed the expectations of our clients.

”

In your opinion, given the dramatic downturn in the markets, have service levels in the local market and elsewhere dropped? On the

contrary. In my opinion, service levels in the local market and elsewhere have improved. The deterioration in the global markets has not affected service levels; it has initiated a global effort to put even more emphasis on providing the client with the highest levels of service quality. After all, on a global level, client needs can be satisfied by similar products offered by many of the local service providers. Our Bank recognises that. By consistently offering high levels of service and quality you can distinguish yourself from the competition, even in difficult times. Consequently, we place great deal of emphasis on maintaining the highest levels of service.

Many providers have reduced the amount of face-to-face contact they have with their clients. Is this something that we can expect to see from Marfin Popular Bank? Marfin Popular Bank

We maintain close relationships with our clients in order to understand and satisfy their needs and effectively respond to their requirements. We are continuously seeking constructive feedback from our clients, which is very important to us in order to improve our service quality. However, there are many other factors that separate Marfin Popular Bank Public Co Ltd from the competition, highly qualified personnel, flexibility, competitive pricing and its technologically advanced IT systems.

Public Co Ltd has always been a customer-orientated organisation.

Face-to-face contact with our clients is very important as it gives us the opportunity to better understand their needs and receive feedback from them. This helps us to take all of the necessary steps in order to satisfy those needs and improve our service. We will, therefore, try not to reduce the contact we have with our clients.

Technological innovations have enabled us to improve customer service, achieve operational efficiencies and cost reductions, which in turn facilitate low-cost operations and competitive pricing.

Our Bank has a dedicated team of IT experts. Our IT department continuously examines best practises and technology improvements and innovations in order to provide us internally with clear-cut and effective solutions. Our systems are continuously upgraded to meet our clients’ needs and the changing requirements of the market. This also helps us to provide better core and value added services to our clients.

Our clients have recognized that client relationship management is only part of the overall service they receive; however, it remains the core of our success.

58 | Money Markets

Do you consider technology to be a key service differentiator?

Custody

•••

Our Bank has a dedicated team of IT experts. Our IT department “ continuously examines best practises and technology improvements and

innovations in order to provide us internally with clear-cut and effective solutions. Our systems are continuously upgraded to meet our clients’ needs and the changing requirements of the market. This also helps us to provide better core and value added services to our clients.

”

Technology is a key service differentiator. However, we must take into consideration many other factors, such as experienced and well-trained personnel, highly competitive pricing and our unwavering focus on the client. These combined elements define our commitment to the business.

The growing convergence of traditional and alternative asset management styles in creating a new range of challenges and opportu-

nities for the investment and asset servicing industries. What steps have you taken in order to prepare for the challenges ahead? Sev-

eral years ago, when our department was set up, we were only involved in the settlement and safekeeping of securities. Institutional investors are now pursuing more sophisticated investment strategies. As a result, we have continued to improve and expand our service in order to deal with our clients’ more complex demands.

Money Markets | 59

Other steps we have taken include, the education and continuous training of personnel on a systematic basis, internally and externally, thus enabling them to obtain the requisite knowledge and expertise. At the same time, keeping up with technology and continuously upgrading is equally important.

Is there still a place for specialist custodians in securities services? Over the years, due to market expansion and the increasing

complexity of client needs, the role of the custodian has evolved and become even more important. Custodians offer a much wider spectrum of custody services than they did in the past.

Our custody department provides a wide range of services for local and global markets, such as settlement of transactions, safekeeping of securities (dematerialized and physical certificates), information and execution of corporate actions, proxy voting and specialised reporting.

At Marfin Popular Bank Public Co Ltd, custody services fall under the umbrella of Wealth Management services. Apart from our direct institutional clients and our external individual clients, private banking clients are offered the highest level of custody services in order to complement the range of exclusive investment advisory and high-level traditional banking services offered. The safekeeping of their invest60 | Money Markets

ments and the settlement of their investment transactions are carefully looked after by our custody team.

Moving forward, what can new and existing clients expect from Marfin Popular Bank over the next twelve to eighteen months, in terms of product innovation? Moving forward, in terms of

product innovation, we will continue to evolve our business to satisfy more complex investment vehicles and structures.

With regard to custody services, clients can expect the following: • • • •

Continuous commitment to the business and exceptional service quality Improvements in technology, thus anticipating changing needs and investment requirements Exposure and expansion of our services to cover additional markets Increasing volumes in Assets under Custody

Biography Elena Melanthiou is the Head of Custody for Marfin Popular Bank.

Money Markets | 61

The Keys to Success

Modernization and Growth »Money Markets talks to FirstBank of Nigeria

FirstBank of Nigeria Plc (established 1894) is the premier bank in West Africa and the leading financial services solutions provider in Nigeria.

recent establishment of a microfinance subsidiary (FBN Microfinance Bank Limited), the FirstBank Group is uniquely positioned to provide its full spectrum service across the economically active segments of the country.

In over a century of its establishment, the bank has continued to build relationships and alliances with key sectors of the economy that have been strategic to the well being and growth of the country. Aggressively leveraging its age, size, and expansive branch network, the bank has created one of Nigeria’s strongest banking franchises; and remains a market leader in the nation’s financial services industry. Consequently, it has consistently met growing market demand for financial services through a process of continuous re-invention.

The overall intent of the bank is to strengthen its position in current businesses and fully implement its multi-product, multi-business strategy by aggressively pursuing growth and modernization objectives as well as, developing new income streams. Ultimately, it is about creating an internationally competitive, world-class mega-brand.

The bank’s success over the years has been driven by its strategic focus on the two critical imperatives of modernization and growth. Predicated on a multi-product, multi-business model, FirstBank’s growth strategy has been built on emerging opportunities in its environment, while maximizing group synergy through establishing high-impact alliances.

In line with this strategic focus, the bank maintains one of the largest domestic sales networks in Nigeria with about 500 business offices across the length and breadth of the country. In addition, the bank has nine local subsidiaries, a commercial banking subsidiary in the United Kingdom (the first Nigerian bank to open a UK office, which, in 2002, became a full-fledged bank regulated by the FSA), as well as a representative office in South Africa. Operating across the full spectrum of the financial services products/services mix, these subsidiaries’ operations include investment banking, funds management, registrarship, pension custodianship, SME/venture capital management, trusteeship, insurance brokerage, mortgage banking, and soon, microfinance. In addition, the FirstBank Group only recently secured a passport into mainland Europe, with the London subsidiary opening its Paris branch. With the 62 | Money Markets

The bank is in the final stages of authorization to establish another footprint in Asia.

In repositioning the bank for both domestic and global competition, it had recourse to raising additional capital. It is worthy of note that the “Big One” hybrid offer set an unprecedented landmark with a subscription of over 750%. The bank’s epoch-making achievement was again reinforced as it made history on Monday, February 11, 2008, when at the close of business on the floor of the Nigerian Stock Exchange (NSE), its market capitalization closed at approximately N1.04 trillion, thus making it the first Nigerian company to achieve the feat of hitting the trillion naira mark and the clearest evidence of the market’s estimation of its worth. Several months down the line, and in spite of the downturn in the market, the bank remains the most capitalised stock on the floor of the NSE. FirstBank’s continuing commitment to corporate governance and improved disclosure levels in the reporting of its financials was reinforced on Thursday, November 13, 2008, when it won the NSE’s 2007 Quoted Company of the Year Award. The bank also emerged joint winner of the NSE’s 2007 President’s Merit Award for the banking sector “for the presentation, quality and depth of its annual report and accounts for the year 2007”.

Custody

•••

A pioneering supporter of best-fit corporate governance practice in the country, FirstBank’s corporate governance practice remains at the industry’s cutting-edge.

Despite the lull in the market, the bank remains the delight of investors, to whom it has consistently delivered value over the years, with its stable dividend payout rate and yearly scrip issue. This sterling performance has been achieved on the back of consistent financial results which, in terms of shareholder funds, saw FirstBank consolidate its leadership of the industry in the year ended March 2008, with a 325.2 percent growth in shareholders’ funds from N83.63 billion in the preceding year to N355.63 billion, the largest for any company in the country.

With its shareholders’ funds currently in excess of the combined value for the 89 banks pre-consolidation, FirstBank’s strategy is anchored on leveraging the windows of opportunity that have been opened by the ongoing reforms to the economy, all of which have allowed it to better position its operations to offer improved value propositions to its customers, while raising the industry’s competition stakes.

Undoubtedly, FirstBank will continue to exceed the expectations of its clients through strong brand equity, a huge capital base, strong balance sheet, strong customer/shareholders’ value, dedicated workforce, and the expansive branch network it posses. To further underline this point, the FirstBank brand, in a recent global banking research and ratings paper (February 2009), produced by The Banker Magazine (a subsidiary of The Financial Times of London), was rated BBB, at number 315 with a brand value of $162m and with total market capitalization of $4.932bn. By this current rating, FirstBank led four other Nigerian banks, reinforcing its unassailable leadership.

The future continues to be very bright for the bank, and for prospective investors wishing to explore the vast business opportunities that abound in Nigeria, FirstBank remains the most credible financial partner.

Corporate Profile FirstBank was listed on the Nigerian Stock Exchange (NSE) in March 1971 and has won the NSE President’s Merit Award eleven times for the best financial report in the banking sector.

Money Markets | 63

Custody

•••

A New Force in

Sub-Custody »Money Markets talks to Sanni Toyin

The Bank has the largest “ retail network in Nigeria and

West Africa. We currently have more than 1000 ATMs in Nigeria alone, and this figure will continue grow.

”

Introduction

What separates United Bank for Africa (UBA) from the competitors? UBA Plc is the largest

financial services company (according to balance sheet size, branch network, customer base and other financial metrics) in West Africa and one of the largest listed companies in Nigeria.

The Group has been recognized as the undisputed leader in the financial services industry in the region and a key contributor to the region’s economic development.

The Bank has the largest retail network in Nigeria and West Africa. We currently have more than 1000 ATMs in Nigeria alone, and this figure will continue grow. We also have a presence in 3 continents, North America, Europe and Africa.

With over 6 million customers, we have the largest client base in the West African banking industry. In order to provide the highest level of service, there are over 17,000 staff employed, which makes UBA the single largest employer of labour in Nigeria.

UBA was the first Nigerian bank to offer an IPO, following its listing on the Nigerian Stock Exchange in 1970, and we are still the only sub Saharan African bank (ex-RSA) with a branch in the USA (New York established since 1984) and London (2008).

Other firsts for the Bank include our cheque Guarantee scheme, known as UBACARD (1986), our GDR program (1998), a branded Nigerian Government Bond Index (2006), and our strategic relationship with the International Finance Corporation (IFC), to mention but a few.

UBA led the consolidation in the Nigerian banking industry with the merger of legacy UBA with Standard Trust Bank in 2005. Following the aforementioned merger, we became the first Nigerian Bank to surpass the N1 trillion balance sheet size in 2006.

Kindly define your AuC? Our assets under custody include listed and non-listed equities, commercial papers, fixed income securities, money market instruments and title documents.

Money Markets | 65

How involved are you in the evolution of market practices? UBA

is an active participant in market development initiatives and its key personnel continue to participate actively in the following committees: • • • • •

Vision 2020 Committee for Nigeria Bond Market Steering Committee West African Regional Capital Market rules Harmonization Committee Securities and Exchange Commission and CBN Roundtables on formulation of Custody Rules Various Professional Associations and Self Regulating Organisations, including the Associations of Stockbrokers, Issuing Houses, Trustees and Registrars.

Do you consider the Pension Reform Act of 2004 to be the turning point in Nigeria’s fortunes? It has certainly been a defining point and

has given a major boost to the Sovereign Bond and Mutual fund markets, raising close to a Trillion naira in pension assets since its inception.

It has also introduced a high level of transparency and accountability into the Nigerian Fund management industry with the introduction of independent Custody of Pension assets.

Given the newfound confidence in the political and economic stability of Nigeria, do you expect the business of custody to continue its meteoric rise? With respect to custody in Nigeria, our outlook is

You were the first Nigerian institution to issue a Global Depository Receipts Program in Nigeria. What can new and existing clients expect from UBA in terms of product innovation this year? UBA is

renowned for its innovation and market leading products and services.

Some of the new products and services that our new and existing clients can expect include: • • • •

• •

Introduction of securities lending and borrowing.

Tax reclaim process for qualified foreign investors Continued leadership in the electronic banking and payment solutions arena.

A multiple currency VISA card with concurrent access to our clients’ domestic Naira accounts, along with foreign currency directly from client domiciliary accounts.

A payment solution providing a common payment platform for Travel Agencies and airlines operating in Nigeria.

Derivative products.

UBA has also recently launched a multiple interface Registrar / Transfer Agency portal, accessible to stockbrokers, custodians, investors and issuers which allows personalized management of shareholding records in real-time.

You have been appointed by the Bank of New York Mellon as their sub-custodian in Nigeria. Do you feel other global custodians will now follow suit? Most definitely. We are at advanced stage of the due

diligence process with other prospective global custodian clients. Our clients and prospects are looking to us for service, not only in Nigeria but also in the francophone WAEMU Region and, we hope eventually, the rest of Africa.

66 | Money Markets

positive. Investors, both foreign and domestic, continue to insist upon the adoption of best practices in the holding and servicing of their assets, which is encouraging. Furthermore, foreign interest in Nigerian securities continues to grow. These expectations are naturally subject to the sustainability of the current political and economic climate.

Consolidation – The Aftermath

What impact has the wave of consolidation in the Nigerian banking industry had on the country’s custody market? The consolida-

tion of the nation’s banking industry has strengthened the Banks in terms of capital base, broader ownership structure, improved governance structures and ability to compete on a Regional level. We also

With respect to custody in “ Nigeria, our outlook is positive.

Investors, both foreign and domestic, continue to insist upon the adoption of best practices in the holding and servicing of their assets, which is encouraging. Furthermore, foreign interest in Nigerian securities continues to grow. These expectations are naturally subject to the sustainability of the current political and economic climate.

”

Custody

•••

believe that the banking industry is now better equipped to lend to sectors like agriculture, which had previously been starved of funding. The economy has grown in recent times at fairly impressive rates. This makes our banking stocks more attractive to foreign investors, thus building the custody business.

The consolidation has also attracted a significant volume of foreign portfolio investments into Nigeria. Increased participation by international institutional investors, and greater scrutiny by these parties, is expected to result in the adoption of better standards of accountability and transparency.

Now that Stanbic and IBTC have merged – 31 March 2008 – to form Stanbic IBTC Bank, how will this affect your business, if at all? The merged entity does have its strengths. However, we remain

confident of retaining our leadership in the retail sphere and consolidation of the significant strides achieved in Investment Banking by UBA Global Markets, our Investment Banking arm. We certainly see enough room for UBA to stamp its dominance in this market, given the aggressive and highly innovative entity that we are. We expect to continually increase our market share in every area of our business.

Nigeria is rapidly growing into a sophisticated financial market.

To what do you attribute this growth? We can attribute the growth

to the following: sustained economic growth, interest and participation of international investors, improved technology, significant economic reforms, impressive foreign reserves and attractive market returns.

Hot Button issues

In your opinion, is asset servicing slowly moving away from being a commodity business? There is still a lot of commonality

The consolidation has also “ attracted a significant volume

of foreign portfolio investments into Nigeria. Increased participation by international institutional investors, and greater scrutiny by these parties, is expected to result in the adoption of better standards of accountability and transparency.

”

in the market, which may be due to market education and orientation. The aggressive differentiation is not vibrant, which, therefore, means that you cannot develop at a faster rate than your market will allow.

However, we believe asset servicing is slowly moving away from being a commodity business with continued innovation, value addition, and emphasis on service quality.

The markets in financial instruments directive, launched in November 2007, replaces and extends the coverage of the Investment Services Directive. Where does UBA stand on the aforementioned directive? We are committed to best practices and, therefore,

have been implementing improvements designed to help us attain the highest standards of service quality, responsiveness, accountability and compliance in all markets in which we operate.

The growing convergence of traditional and alternative asset management styles is creating a new range of challenges and opportunities for the investment and asset servicing industries.

What steps have you taken in order to prepare for the challenges ahead? The entire UBA Capital group, which comprises UBA’s

Investment Banking, Asset Management and Investor Services Division is constantly reinventing itself and expanding its product range. We are spearheading market developments in the areas of alternative investment products and services whilst also expanding our regional and international reach. The Group constantly enlists the help of world-class personnel and consultants with exposure to cutting edge developments from the most dynamic markets.

Looking Ahead

What does the future hold for UBA? As a leading player in the Af-

rican financial services sector, and a key contributor to the economic growth of the region, our aspiration is to fly the flag for African excellence within the global community and to be a role model for other African businesses.

Biography Sanni Toyin is the Managing Director of UBA Trustees.

Money Markets | 67

68 | Money Markets

Custody

•••

Putting the Value in Value Added »Susan Gault talks to Louise Currie and Murray Stocks

We have been very successful in selling our custody services to the market “ and explaining our brand, which encompasses understanding the dynamics of the industry and the needs of the client, ensuring asset safety, risk management and transparency, and being a knowledgeable provider.

”

Introduction – Getting to Know Nedbank Kindly define your unique value proposition? We went out and actually asked the market, ‘how can we differentiate ourselves from our competition and what added value can we bring to the table’.

Through asking this question we realised that instead of settlement, our unique value proposition is actually client interaction, and offering unique solutions to our fund and asset managers.

We also changed the composition of our client base. We moved from predominantly non-client direct mandates with asset managers to direct custody arrangements with retirement funds accounts, which now accounts for 42% of our client base.

We have been very successful in selling our custody services to the market and explaining our brand, which encompasses understanding the dynamics of the industry and the needs of the client, en-

suring asset safety, risk management and transparency, and being a knowledgeable provider.

Your integrated, custodial delivery method utilizes cutting edge technology. Please outline the features and benefits attached to this application? We have three systems in place: our core custody system, our

securities lending solution, and our fund accounting and compliance system. We have also created a desktop publishing platform, which integrates the aforementioned solutions and, at the same time, assures our clients of the integrity of the data, whichever solution they choose. Additionally, we have introduced a process that we call ‘STEP’s’, straight through exception processing, which acknowledges exceptions and part resolutions around any transaction that is due to settle on behalf of the client.

We plan to go live in 2010 with a T+3 rolling settlement cycle. We are currently in the process of revisiting the blue print, looking at how to manage corporate actions and how to resolve any failed settlements within a two-day period.

Money Markets | 69

We all have similar back-end “ operating systems and the ability to

provide clients with cash reconciliation, etc. What differentiates us is our absolute focus on skills and retaining and nurturing client relationships.

”

Our aim is to achieve high levels of straight-through processing and to identify any exceptions as soon as possible. To facilitate STP, we support a number of mechanisms for submitting trading, settlement, clearing or information transactions, including SWIFT and proprietary connections. Our objective is to offer a flexible client interface. This enables clients to submit transactions in whichever way suits them. We then translate their submissions at the point of interface into a standard protocol for interfacing with our processing systems.

Nedbank has a significant institutional client base. How does this position you in the South African custody sector? We are

placed second in the market, with a 32% market share of dematerialised stock in South Africa. Standard Bank is in first place followed by Nedbank with ZAR 1.7 trillion, and then Absa and First National Bank..

Are you at liberty to discuss Nedbank’s third party assets under sub-custody? What percentage of this figure is comprised of local assets? Over the last 10

years our assets under custody have grown from ZAR 200 billion to ZAR 1.7 trillion - as of 31 May 2008.

International clients account for 15% of our custody business. The rest is made up of local asset managers, retirement funds, mutual funds or unit trusts, corporate clients and insurers.

To what extent do you invest in client relationship management? Client relationship

management (CRM) is how we differentiate ourselves from our competitors. Our strength in this area has allowed us to climb up the ratings over the last five years.

We all have similar back-end operating systems and the ability to provide clients with cash reconciliation, etc. What differentiates us is our absolute focus on skills and retaining and nurturing client relationships.

For us, CRM means being responsive to the client, flexible in meeting their needs and effective in resolving any issues which may arise.

70 | Money Markets

Being aware of what is going on in the market and any changes in the client environment is essential. We work with the client in order to come up with solutions that meet their needs.

Both our portfolio banking clients, who are multi-product users, and our single-product custody users benefit from this approach.

Sub-Saharan Custody As Africa continues to attract an ever-increasing number of fund managers, the multi-market custodial offering seems to be growing in popularity. Is this part of Nedbank’s strategy? Our custody

business is really driven by the retirement funds and their requirements, but we also support Namibian stock; for example, we support Mutual Namibian Asset Managers and their commissions in Swaziland, Namibia, or for that matter, wherever they may need a solution.

To what extent does cost factor into the multi-market provider equation? If, say, for example, a global custodian approaches us to pro-

vide a third-party solution via a custody provider in a particular country, we can do a joint feasibility study. However, this is not something that we need to drive or that requires us to cover initial set-up costs.

From a regional standpoint, would it be fair to say that clients want more consistency and fewer relationships? This differs

from client to client. Some global custodians prefer the direct route; they do not want to work via hubs; on the other hand, some custodians are more than happy to do so.

The performance of providers in the sub-Saharan custody market has been questionable. What has Nedbank done to address this issue? On the basis that you are happy with the risk attached to

the client you are servicing, it is easy to say, ‘yes, I can guarantee performance’, providing you have carried out the requisite due diligence. If you are not comfortable with the risk profile of the client or country you cannot underwrite the performance of the agent.

In comparison to South Africa, the volumes attached to the majority of regions under the sub-Saharan umbrella are relatively small.

Do you foresee this changing over the short to mid-term? Until the

situation in Zimbabwe has settled down, we understand that the international market will be weary of investing in Africa.

Local Partnerships What is the nature of your relationship with STRATE? Over the

last 18 months, STRATE has moved away from being a clearing agent and has become a service provider to the various settlement market participants. It has introduced what it calls, ‘client management’. We meet with STRATE on a monthly basis to discuss various issues and this has transformed our relationship.

Three years ago, the relationship between the CSDPs and the CSD was quite strained. This was during the implementation of the clearing and settlement process. STRATE was trying to work out the South African market’s next role and value proposition, but were unable to clearly map out the competitive and co-operative landscape for custodians and service providers.

We participate in various working committees and these meetings are now much more about collaborative effort.

Custody

•••

STRATE has been operating now for about six or seven years, but really only for the last four years at full capacity of dematerialisation. In the early days it incurred all of the upfront costs attached to the introduction of dematerialisation and naturally this had a significant impact on its revenue stream.

As such, it took longer than expected for STRATE to become profitable.

STRATE has paid two dividends to its shareholders over the last two years, it has recouped a great deal of initial seed capital, and shareholders are now prepared to balance return on direct investment in STRATE with the efficiency derived from clearing and settlement price reductions. We are certainly moving towards a more competitive pricing model for South African clearing and settlement.

With respect to future projects, STRATE has really engaged the industry; money market dematerialization would be a case in point.

How involved are you in the evolution of market practices?

We participate in all of the forums. We are involved in a communitybased approach to market practice whereby all of the CSDPs contribute equally, according to their specialist areas.

The South African set-up is quite different to the international environment. For example, we have real-time gross settlement for the movement of cash and central banking, which means we have to engineer quite a bit of our own market practice.

The Future In terms of product innovation, what can we expect from Nedbank over the next twelve to eighteen months? We are

currently focused on moving from direct asset management participation into master custody. We are poised to take our master custody solutions into fund accounting and administration, and compliance for all investment funds and mutual funds. This will be the major focus for Nedbank over the next 12 months, together with preparing for T+3 and looking at the blue print for the bond exchange.

We have developed two websites. The first website, which will be launched in July 2008, will be an archive of information that is of interest to the market, this will include all of the relevant newsletters. Then, hopefully, within the next three months, we will launch the first stage of an interactive transactional website. This will allow clients to electronically view their portfolio holdings and corporate action diary, as well as historical information attached to transactions.

Regarding our products, we plan to sell a portfolio of solutions and services, which will integrate our offering into the bank’s transactional suite, to our domestic clients. Our clients are looking for services with a collaborative/joint element to them, and we think that this approach sets us apart from the competition.

Biography Murray Stocks is the Divisional Director - NCSS & NIS for Nedbank’s Corporate Division.

Louise Curry is the General Manager for Sales & Marketing at Nedbank.

Money Markets | 71

List of Contributors A

Australia and New Zealand Banking Group Ltd

B

BBVA BHF Asset Servicing BNP Paribas BOISS

C

CACEIS Citco Bank Citigroup

72 | Money Markets

E

European Central Bank

F

FirstBank of Nigeria

H

Handlesbanken

N

Nedbank Nordea Bank

S

SEB

U

I

ING Securities Services

Union Bank of California United Bank for Africa UBS

M

W

Marfin Popular Bank

Wells Fargo

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Money Markets | 73

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Ms. Anne-Lise Kristiansen tel +47 2248 6238, email: anne-lise.kristiansen@nordea.com

Making it possible

74 | Money Markets