Money Markets - Volume 5 by Money Markets Ltd.

The island of Delos. Treasurer and Custodian of the Athenian Alliance.

MONEY MARKETS

FOREWORD

Managing Globalisation and the Role of the OECD Angel Gurría

CAPITAL MARKETS OVERVIEW

Emerging Market Focus – Covered Bonds Isabel Almeida

The Future of Transaction Processing Hugo Doswald

The Role of CRH Henry Raymod

Capital Markets – View from London Chris Shawyer

CUSTODY

Evaluating, Selecting and Monitoring Global Custodians 28 Ross Whitehill 2006/2007 Custody Survey Traversing National Borders – Eurobank’ s Balkan Expansion Andrew Economides

30 33

MONEY MARKETS

CUSTODY continued

The Next Chapter – Mergers,Acquisitions and the Pace of Change Christos Nikolaidis

Russia’s Market Infrastructure – the CSD is on the March Denis Solovyov

Cypriot Custody – A Market on the Move

Setting the Standard in South Africa Andre Jansen Van Vuuren & Stuart Yates

Competing with Western Europe Peter Csiszer

The Nordic One-Stop-Shop Anne-Lise Kristiansen & Peter Dahlgren

Raising the Bar in German sub-Custody Moritz Ostwald

Constantia Constantinou

VOLUME 5

MONEY MARKETS

REAL ESTATE INVESTMENT

Potential Boom in European Real Estate Securitisation 64 Fraser Hughes & Laurens Te Beek UK Residential Market Seamus Nugent

Overseas Property Investment Paul Owen

Coast to Coast – A Guide to Spanish Investment Richard A Rooke

Your Partner in Portugal Jose Nascimento

Buying in Portugal – The Next Step Luís Lapa e Borges

Portuguese Real Estate Investment – The Legal Process Dr Alexandra Pereira

Return on Investment – Bulgarian Emerging Market Focus Michael Minkov

MONEY MARKETS

EXECUTIVE EDUCATION

The Career Investment Maury Kalnitz

2006/2007 Executive Education Survey Marylhurst University – Your Stepping Stone to Success Todd Harris

The Changing Face of the MBA Landscape Guido Krickx

100

The Virtual Classroom Dr Donald Zahn

102

The Executive MBA – Opening New Doors Scott Goddard

105

Products and Services Index List of Contributors

110 112

VOLUME 5

Money Markets | 37

CEO

Victor J. Callender

Group Editor-in-Chief

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City Editor

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Financial Controller

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FOREWORD

Managing Globalisation and the Role of the OECD Angel Gurría, Secretary-General, OECD

While globalisation is without doubt a powerful motor of prosperity and poverty reduction, the management of globalisation is becoming ever more complex. Globalisation and Open Markets

There is no one accepted definition of globalisation. This makes many debates about globalization rather confusing. At the OECD, we interpret economic globalisation as a process of closer economic integration of global markets: financial, product and labour. Economies have been becoming more integrated for centuries. But in the past half century globalisation has accelerated. In particular, over the past couple of decades, many East Asia economies, especially Korea and China, have been participating more in the global economy, as have the former communist countries of central and eastern Europe, along with emerging and developing countries from

past twenty years. These trends have been driven by multilateral and national initiatives to open markets, as well as declining transport costs and rapid technological change. And while open markets have proven to be an effective tool for economic growth, there is always resistance of different kind. In this sense, I am concerned about some recent developments in the trade area. It is particularly frustrating to see the stall of the Doha Development Trade Talks in July, as this Round is an opportunity to re-balance trade rules in favor of developing countries. The Doha talks reportedly collapsed largely because of disagreements over agriculture, but clearly that is not the whole story. Indeed, some rich countries were not ready to accept larger tariff cuts or bigger reductions in tradedistorting domestic subsidies for farm products. Emerging market countries, meanwhile, offered what some saw as only modest improvements in

“The level of outward FDI relative to GDP among OECD countries has quadrupled since the early 1970s - global FDI was about $610 billion in 2004.”

all parts of the globe including my own region of Latin America. In fact, there has been an acceleration in globalisation as reflected in rapidly rising shares of trade, finance and migration. The share of trade in global GDP has tripled since 1950. The level of outward FDI relative to GDP among OECD countries has quadrupled since the early 1970s - global FDI was about $610 billion in 2004. And the number of immigrants entering OECD countries on average each year has more than tripled over the

market access for goods and services. All this is the more striking as I see an enormous gap between what officials’ say when they meet more openly in Paris and when they define their positions in the WTO in Geneva. The present impasse is a lose-lose situation, in which all countries suffer but where the poorest will suffer most. The OECD has estimated at nearly $100 billion the gains in terms of increased economic activity – and hence prosperity – that could be obtained from full tariff liberalisation for industrial and

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FOREWORD

agricultural goods. The benefits from liberalising trade in services – the fastest growing sector of the world economy - could be five times higher, at around $500 billion. A Doha agreement on trade facilitation, by clearing away procedural barriers, could contribute at least $100 billion more. Developing countries are projected to reap as much as two-thirds of these gains. The failure of the Doha talks would mean that these potential benefits are lost. More importantly, it would risk undermining the multilateral trading system and unleashing a wave of protectionism that reasonable politicians will find hard to counter. It’s time for the developed countries to show leadership and start putting into practice the recommendations that emerge from their own

becomes clear that the movement of people is one of the most difficult aspects to manage globally. All governments restrict the entry of migrants into their countries. But today, most OECD countries are facing ageing populations and slowing or negative population growth. "Enlightened migration" can be a win-win for both sending and receiving countries. This is an area to which Korea and its neighbor, Japan, will have to give further consideration in the years to come, as Korea's birth rate has plummeted over the last two decades. Reaping the Full Benefits of Globalisation As I have said, open markets are the key to globalisation. But reaping the full benefits of globalisation requires a lot more than that. The

“Foreign investors are obviously more attracted to countries with well-qualified and healthy workforces. And countries with high levels of human capital are much more able to produce exportable products for global markets, and climb the value chain as development gets launched.”

discussions at the OECD. Another area where I am greatly concerned about possible backtracking on open markets is foreign investment. In Europe, there has been some reticence about international mergers and acquisitions in sectors as diverse as steel, banking, energy and even yoghurt. The United States expressed concern about take-overs of a small oil company and of some of its port facilities. In March of this year, Chinese officials began to make warning statements about foreign involvement in their economy. And, we have recently witnessed a resurgence of expropriation in some Latin American countries. Governments obviously have the right to safeguard national security and other public interests. But, we need to be clear protectionism is not the solution. It poses a serious threat to the health and good functioning of the world economy. The third issue that I want to address is migration. As markets get more integrated, it

full range of sound macroeconomic and structural policies are necessary, such as sound monetary and fiscal policies, labour market policies that develop human skills and adaptability, economic policies that allow for firm creation and exit, an efficient regulatory framework, and good and effective corporate and public governance. I would like to highlight just a few of these issues. Human capital development is an area which is essential to reaping the full benefits of globalization. When I speak of human capital, I speak of health as well as education. Foreign investors are obviously more attracted to countries with well-qualified and healthy workforces. And countries with high levels of human capital are much more able to produce exportable products for global markets, and climb the value chain as development gets launched. Human capital is one area, among many where Korea has excelled. Let me cite just a few indicators. Among the OECD countries,

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FOREWORD

Korea registered the greatest gains in life expectancy between 1960 and 2003, with an overall increase in longevity of 25 years, bringing Korea's life expectancy to the OECD average of around 78 years. In the area of education, you may have heard of the OECD's Programme for International Student Assessment, better known as PISA. This programme has developed a set of reliable and comparable international indicators on student performance for 15 year olds. PISA measures how well students have acquired analytical skills to help them succeed in the knowledge society. This year, we will present the third edition of PISA focusing on the science and technology area. Previous exercises

structural change is to facilitate the mobility of labour and capital to more efficient uses and locations. Tackling the Dark Side of Globalisation As I have mentioned, open markets and rapid technological change have clearly been a motor for prosperity and poverty reduction. However, they may also have facilitated the expansion and globalization of a wide range of illicit activities, such as bribery and corruption, tax evasion, money laundering, counterfeiting and piracy, and human trafficking. It is important to address these problems. The OECD is at the forefront of many

â&#x20AC;&#x153;As markets get more integrated, it becomes clear that the movement of people is one of the most difficult aspects to manage globally.â&#x20AC;?

focused on mathematical abilities (2003) and literacy (2000). In the 2003 edition of PISA, Korea was near the top of the league in mathematics, reading literacy and science, and at the top for problem solving. I would now like to turn to corporate governance. One of the weaknesses identified by the OECD and other analysts after the Korean financial crisis 1997 was in the area of corporate governance. Good corporate governance is critical for ensuring the efficiency of investment. It is also essential for attracting foreign investment -- something which has become even more important for Korea. While Korea always had high levels of investment, especially by the chaebols, it was not always very efficient. However, Korea has made very impressive steps to improve the quality of its corporate governance, drawing on the Principles of Corporate Governance. The last point under this section is the importance of adjusting to structural change. Analysis by the OECD suggests that technological and demographic changes are much more important drivers of structural change than international trade and investment. In any event, the best response to

initiatives to tackle this dark side of globalisation. OECD countries and six nonmember countries have signed a far-reaching Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Its effect has been to make bribery illegal in many countries that had previously condoned it as a practice even to the extent of allowing bribes to be tax-deductible. In the taxation area, the OECD has a wide range of activities which seek to improve transparency, and information exchange, and combating fraud and non-compliance. Turning to counterfeiting and piracy, we are carrying out a major project, for which we recently received a mandate from the G8 in Saint Petersburg, to strengthen the international legal framework to combat them. Our work shows that the production of counterfeit and pirated goods has become more sophisticated. The high returns on counterfeit and pirated goods are fanning corruption and criminal activity. Links to organised crime and terrorist groups have been established. At present the outlook is not promising. While most countries appear to have adequate legal and administrative mechanisms for

FOREWORD

combating counterfeiting and piracy, enforcement actions have not been sufficient. The first phase of our project should be completed by the end of the year. Global problems need global solutions, and the OECD stands ready to contribute. Role of the OECD This takes me to the role of the OECD. The Organisation I head has a key role to play in managing globalisation – understanding it, explaining it, analysing its effects, and making policy recommendations to maximise its benefits and to tackle its challenges. We do this

public concern about the process, and as we also experience the dark side of globalisation, it is important to have a well informed view on these issues and to communicate them properly to the public. Globalization has also been signaled as the cause of higher income disparities. It is true that in more competitive markets, the less prepared individuals and regions will suffer. But avoiding the process is not the answer. It is necessary to equip these people and regions with the instruments to take the best out of it. It is also necessary for economies to keep the phase for economic reform. One of the great challenges for the policy

“Its effect has been to make bribery illegal in many countries that had previously condoned it as a practice even to the extent of allowing bribes to be tax-deductible.”

through many means: (i) Peer reviews and surveillance, like our twice-yearly Economic Outlook and regular economic surveys – for example, one of the reasons that I am visiting Korea is to launch the OECD’s survey of Korea’s environmental policies; (ii) Benchmaking performance through exercises like PISA that I referred to earlier; and (iii) Instruments like the OECD Corporate Governance Principles or the Anti-Bribery Convention. Another key aspect of the OECD today is the globalisation of our own activities as we work with some 70 non-member economies. China, Korea’s neighbor and very close economic partner, is also a close partner of the OECD. Over the last year, we published an economic survey, and reports on agriculture, foreign investment, public expenditure and governance. And we plan to involve them closely in our project against counterfeiting and piracy. The last aspect that I would like to mention today is importance of communications. I mentioned that one of our roles is to explain globalisation. As we see increased

agenda for reaping the full benefits of globalisation is the so-called political economy of reform. How can governments implement the necessary reforms without having to wait for crises to occur? In many countries, welldesigned reforms have failed to be implemented or sustained due to the near-term political costs that they entail, and the fact that opponents are vocal and well-organised while benefits tend to be more diffuse and delayed. Too often we have to wait for a crisis before reforms get launched – but with greater pain for all concerned. This points to the need to inform and convince the broader public regarding the benefits of such reforms -- or the costs of the absence of reform. In this endeavour, the OECD can offer a wealth of information and analysis, based on the experience members have shared over the decades under its auspices, drawing on the expertise of its committees and staff.

Angel Gurría is Secretary-General of the OECD .

VOLUME 5

CAPITAL MARKETS OVERVIEW

Emerging Market Focus – Covered Bonds Isabel Almeida

The Future of Transaction Processing Hugo Doswald

The Role of CRH Henry Raymod

Capital Markets – View from London Chris Shawyer

CAPITAL MARKETS OVERVIEW

Emerging Market Focus – Covered Bonds Isabel Almeida talks to Money Markets

An Introduction to Banco Espírito Santo Q. Please define the funding channels used currently by BES? A. Banco Espírito Santo (BES) is the second largest private bank in Portugal with 47bn in assets. We were quick to recognize and acknowledge the importance of good positioning within the international capital markets. This is precisely why, in 1997, we were the first to establish a Euro Medium Term Note (EMTN) programme. BES has been rated for a long time and is currently rated by the three rating agencies, S&P, Moodys and more recently Fitch. However, our first international issue was in 1993, a preferred share issue in the US market. We subsequently established a commercial paper programme from our New York branch. In 1997 we set up the EMTN programme, as I mentioned earlier, however at that time the Portuguese banking sector had an excess of liquidity. This meant that most savings, both corporate and individual, were placed in deposits. The transformation ratio, which is the ratio that measures the credit of the deposits, was well below 100% at that time. However, we acknowledged that this would not last forever. We felt that the loan business would increase. When it became apparent that customer deposits were insufficient with respect to the funding of the loan portfolio, which was at the time increasing very rapidly, it was necessary to lengthen the maturity of our funding capacity, and so we issued the EMTN. However, this did not solve the transformation ratio problem. In turn it created certain imbalances, vis-à-vis the structure of our balance sheet. This is why, in 1999, we implemented our first securitization transaction using consumer loans. It was a small transaction at the time-250m - but it was an important one, given that it was one of the first to come out of Portugal. In 2001 we did our second and third securitization transactions with a leading end-consumer.

In 2002 we launched the first residential mortgage-backed securities (RMBS) transaction of 1bn. This was replicated the following year. In 2004 and 2005 this increased in size to 1.2bn. Residential Mortgage-Backed Securities Q. Regarding triple A-rated Spanish and Portuguese RMBS, why have spreads tightened this year? A. In 2002 the spread that we paid on the AAA note was 28 basis points. When compared to the UK, the Netherlands, or Spain, I know that we paid a premium. That premium was around 10 basis points. However, it was a reflection of the ABS market at the time. Subsequently, the spread has tightened enormously. In 2004 and 2005, Lusitano, which is the brand that BES uses for its securitization transactions, outperformed the market. Last year we launched Lusitano number three, which was in fact, “deal of the year”. BES has been recognised as being a very responsible issuer, we always take great care of our investors, and price our deals according to investor expectations. We launched a transaction in September 2005 and achieved 11 basis points on the AAA. However a transaction of a similar size more recently, from a Portuguese issuer, only achieved 14 basis points. This demonstrates the market’s perception of BES; a responsible issuer that’s committed to the capital markets. I think that this is a fair assessment. If we compare Portuguese issuers to Spanish issuers, I suppose it would be fair to say that Portuguese issuers tend to behave more responsibly, in terms of pricing. Although I’m sure the international investment community have recognised this. Although we are a small market, with a smaller issuance capacity than some, we no longer pay a premium when compared to those markets.

VOLUME 5

CAPITAL MARKETS OVERVIEW

Q. Given that RMBS deals tend to be single seller transactions, will we see BES entering in to any multi-seller transactions in the near future? A. There are a number of structuring constraints when it comes to multi issuer or multi seller on securitization because of the equity pieces. In part, because of these constraints, we don’t really see any major benefit. We have sufficient dimension and power, as an originator, to be able to exceed the capital markets independently. The challenge will come when Portugal’s covered bond market begins. Second tier banks may start putting together portfolios with similar structures to Spain. Market Intelligence – The Iberian Peninsula Q. In Spain, small and medium-sized enterprises (SMEs) are a popular asset class, is this true for Portugal?

First you have liquidity; the other is balance sheet management, which is an issue of transformation ratio, and thirdly capital relief. However, capital relief does not require securitization anymore. You are able to apply the same adjustment to economic capital using or maintaining the assets in your balance sheet. As you have pointed out, the spreads on the RMBS and ABS market -as a whole-have tightened up, especially on the RMBS market. This has been the case for issuers in general over the last three to four years. A great deal of this has to do with the comparisons that investors and issuers make between the covered bond and securitization markets. Providing credit levels stay where they are, there is still room for RMBS to tighten further. I’m sure investors don’t want to kill the market. However, if they are not prepared to accept spreads tightening further, they may lose a certain amount of the supply they currently enjoy with respect to covered bonds.

“One thing that I can assure you of is that I will look at covered bonds very closely. It could be an instrument that replaces RMBS.”

A. It will be. We have already witnessed a synthetic securitization of corporate loans. In addition, a small transaction has been executed by a Portuguese bank with respect to SME’s. Regarding international investors, this will be the forth asset class to emerge from the Portuguese market. We are looking forward to putting together a transaction using the aforementioned asset class in the near future. You will definitely see these types of transactions being executed in Portugal more and more.

One thing that I can assure you of is that I will look at covered bonds very closely. It could be an instrument that replaces RMBS. It’s different; RMBS has a lot of potential when it comes to rated classes and equity pieces (nonrated classes). There is a large market today for all classes of note issued as a result of an RMBS transaction by BES. Decisions will be made based upon the economics of each transaction. It is very difficult to tell you today, it depends on various factors.

Covered Bonds or RMBS? Q. Large Spanish banks are content to sell covered bonds (cedulas) over RMBS where the mortgage cover pool remains on balance sheet. Now that covered bond legislation has been passed in Portugal will BES adopt a similar attitude? A. We consider securitization to be three-fold.

Isabel has been Executive Vice President in the Financial Department, Treasury and Capital Markets, of Banco Espírito Santo, SA, since December 1996, responsible for, among other things, the execution of the funding plan for BES Group, including securitization transactions.

CAPITAL MARKETS OVERVIEW

The Future of Transaction Processing Money Markets talks to Hugo Doswald

Q. Would it be fair to say that you are in a client acquisition phase? A. Frankly speaking we are in two phases, which are parallel. We are moving existing clients to our new technology. We presently have thirty clients using the system for German pfanbriefe that will migrate to TXSuite in the next twelve to eighteen months. We are pleased that they are willing to take this step, because TXSuite software offers enormous flexibility, which they will benefit from greatly, and the reduced cost attached to future development of the software is also a great plus. On the other hand, we have entered the market with our software solutions and we have sold TXSuite to a client outside of DG HYP, our software development partner, a customer located in Luxembourg. Q. So basically, the suite of products is evolving all the time, is it not? A. Yes, I think that’s true. We are also looking at other asset classes like trade receivables, CMBS, and small and medium entity corporate loan transactions. We have done some feasibility studies and when one of our customers needs to support their trade receivables transactions, for example, with our software, we will be ready.

Q. Can you expand upon this? A. The foundation was laid with synthetic RMBS. The first transaction that was performed using our software was a CMBS transaction. The concepts are now in place and development is but one step away for trade receivables, small and medium entities, and ship financing. In terms of transaction types we are ready for true sale and replenishable transactions. Q. So the business model has not changed? A. No. We still have the software licencing business, we have the services related to the software, and then we have independent software services for ABS transactions.

Q. Six to eight months ago you were developing replenishment and true sale functionality, in addition to EDR functionality, which you stated was geared towards the German pfandbrief market. How much progress has been made since we last spoke? A. We have developed replenishment already, which was in version 1.46, and true-sale functionality is available in 1.5, as well as EDR - electronic collateral calculation functionality is the old pfandbrief management software. We are implementing all of the functionalities that our existing customers have available, based upon our EDR software solution, so that they have it in the TXSuite as well. Therefore they can replace the old German pfandbrief software solution, which is still state-of-the-art, and enter the new world of TXSuite where they will have, on one hand, pfandbriefe, and on the other RMBS transactions, in addition to covered bond transactions, true sale, synthetic, whatever they want to do. They will able to compare different transactions based upon the same asset class. We have also evolved on the commercial side. We now offer our clients a number of different models whereby they can buy, rent or lease our software. Our clients are not forced to invest a great deal of money in a piece of software. They can rent it, and they can lease it, which is very favourable under Basel II. DG HYP – Case Study Q. Why did DG HYP decide to partner TXS financial products? A. In fact TXS financial products is a joint venture between DG HYP and the Agens Group. The Agens Group is the main shareholder with 74%. Agens Consulting and DG HYP have enjoyed a long-term partnership based upon the EDR software solution they worked on together ten years ago. This created the necessary trust and belief in the partnership. It’s always difficult for banks and IT companies to enter in to partnerships because they are from two different worlds.

VOLUME 5

CAPITAL MARKETS OVERVIEW

Q. What prompted them to pursue a best-of-breed solution for structured securitisation transactions? A. Six or seven years ago DG HYP decided to adapt its business model to the changing banking environment in Germany. They broke the financial value creation chain down in to three parts, distribution and origination of loans, portfolio management, and processing servicing of loans. The first and third parts were outsourced. For the processing and servicing they established a company called Kreditwerk, which acquired the other big credit factory in Germany this

Microsoft Excel. Later on we (DG HYP) decided to build a flexible software solution, based upon Oracle, and partnered an IT company, Hypoport, which today is our strongest German competitor. However, we went our separate ways about two and a half years ago. There were a number of reasons. Ultimately the software wasn’t as flexible, modular, and asset class/ transaction type independent as we had hoped. We also couldn’t find a common strategic basis for moving forward. It is also worth mentioning that three years ago we did a pre-study and a feasibility study involving both

“We want to develop a bespoke software solution that meets the needs of the client exactly, rather than pre-developing a large number of functionalities.“

year, Hypothecken Management. The distribution and origination part of the value creation chain was outsourced to a member of the DZ Bank Group, and they concentrated and focused on the portfolio management as a third party service for the cooperative banks. This was an important step back to the core of a German mortgage bank. If we look back, German mortgage banks really started by helping to fill the gap between short-term funding and long-term lending. So you had an interest rate management and a liquidity management capacity functioning in the banking industry, and DG HYP decided six or seven years ago it would do that for credit risk. Therefore not only did interest rate and liquidity risk need to be managed on a portfolio basis, but so did credit risk. Consequently, they decided to establish a new business field, securitization, and I was the individual at DG HYP charged with establishing this business field. At the very beginning I had to decide whether to hire a large team that would be data management intensive in order to carry out actual transactions or, invest in an IT solution that would help my team and I do an efficient job with very little operational risk. I chose the latter. However, because I couldn’t find the software, I had to build it. My objective was to create a completely new kind of software that would support my team and I, as well as the other bank personnel involved, in order to facilitate efficient, cost effective, and very low operational risk inherent transactions. The first transactions were carried out based upon

Hypoport and Agens Consulting and the Agens Consulting concept was better. So we (DG HYP) decided to go in to partnership with Agens Consulting, and later became TXS. Mainly because we wanted to establish a brand, a legal entity, and have one name that customers would recognise, TXS, the number one transaction software provider in the world. Back then I had two jobs. I was still head of securitization and infrastructure but, I was also named Managing Director of TXS financial products GmbH. In October 2005, I gave up my job at DG HYP and became the full time Managing Director of TXS financial products GmbH. I did this because I believe in the software and the direction we are moving in. Q. So basically, DG HYP is performing more of a board function at the moment? A. Yes. They are also a developing partner. They financed the development of version 1.5. We now have to look for further development partners. Q. Concentrating on the software (TXSuite) for a moment, from concept to solution, through to implementation, how long has this process taken? A. From the initial concept, to date, it’s over two years. Q. What impact has this had on DG HYP’s securitization business model? A. It’s still quite unique in Germany, because there is this intermediary function that DG HYP has in place for

34 | Money Markets

CAPITAL MARKETS OVERVIEW

its cooperative banks to help them and enable them to go to capital markets with transactions. The cooperative banks are too small to have direct access to capital market transactions like RMBS, or even covered bonds. Therefore, five or six years ago, DG HYP decided to fill this gap by establishing an infrastructure, procedures and transaction structures to bundle portfolios of cooperative banks to a large portfolio that could be transferred via the capital market. Q. So to this extent it was ahead of it’s time? A. Yes. Q. How does this compare with other German banks? A. These days the landesbanks and the Westdeutsche Immobilienbank, which is the mortgage bank of the West LB group, are trying to catch up. Last year they lost the privilege of community funding, public funding, and must now redefine their respective business models. They realize that having a strong business relationship with their savings banks, and by becoming an intermediary for them –facilitation of funding and risk transfer via capital markets instruments- could be the basis for a new business model. Q. Can this solution, and more importantly its success, be rolled out across the board, .i.e. can those banks, which are now playing catch-up, simply approach you and simply say, “install TXS”? A. Yes, indeed they can. We would recommend that we do a pre-study over say thirty project days. A small project to evaluate how TXSuite could be best utalised with respect to the client’s specific needs. TXSuite offers so many possibilities, so much flexibility, you can handle almost everything in any way, and it can easily be adapted to the specific needs and situation of the Bank. We’re not talking about SAP dimensions of customizing or implementation projects. Let me point out a couple of things. The organizational structure of a Bank is more or less unique. Even if they have the same departments, they are doing business differently. The software can easily be adapted to the business workflows and organizational structure within the Bank. Then the banks usually have their unique selling points (USPs). They don’t want to get rid of their USPs by installing a standard piece of software. If all

banks had the same software, and couldn’t implement their USPs within that software, it wouldn’t work; they wouldn’t be able to differentiate themselves. So we have to find the best way to implement and use TXSuite according to the specific environment. We’re not talking about an out-of-the-box solution like Microsoft Office. You can’t buy it and install it, because differentiation equals success. Ultimately, we want to support the success of our customers. Q. Looking to the future, what can we expect from TXS in terms of new versions and so forth? A. With the release of version 1.5, we are, in effect, implementing most of the functionalities needed for asset backed securities transactions. We will continue to sharpen the basic framework of the TXSuite in addition to establishing an English version. Our software is multilingual; therefore it’s a matter of translating, not coding and programming. So should a client need the English version they can have it within a week or two. Before developing additional functionalities, transaction types and asset classes, we prefer to sit down with clients first in order to understand the components they would like us to integrate, e.g. trade receivables, ship financing, or aircraft finance. I don’t think it’s fair to make existing and potential clients pay for functionalities they don’t need. We want to develop a bespoke software solution that meets the needs of the client exactly, rather than pre-developing a large number of functionalities. In terms of development and implementation there will be minor things -over 90% of the software is already there and ready to use- instruments on the structuring side like cash collaterals, interest swaps, and currency swaps. The rest depends on the needs of the customer. The things they tell us, we implement. Q. How do you educate investors? A. We are establishing seminars for existing and potential clients. We are in negotiation with an international partner with respect to training. As a medium sized German software company we feel the best way to expand internationally is to forge alliances with strong international partners that know our customers and their respective markets.

Hugo Doswald is the Managing Director of TXS financial products GmbH.

CAPITAL MARKETS OVERVIEW

The Role of CRH Henry Raymod, Caisse de Refinancement de l’Habitat (CRH)

CRH, a credit institution approved as a société financière, plays a special role in the financing of housing in France. It was set up in 1985 as part of the general reform of mortgage markets decided by the French government and so received the special agreement of the Act dated July 11,1985 (article 13). Its sole objective is to refinance housing purchasers loans, granted by the credit institutions, which are its shareholders, by issuing bonds. Refinanced loans are first mortgage loans, or guaranteed loans, provided they meet the strict standards of security. With close to €30bn of loans granted since its inception, CRH has taken over from the traditional French mortgage market. Its loans are matched by bond issues and secured by a pledged loans portfolio equal to 125 % of the amount borrowed as regulated by the law of December 31, 1969, modified by the law: “code monétaire et financier” (articles L. 313-42 to L. 313-49). As a result, CRH acquires ownership of the loan portfolio in the event of a borrower defaulting, without further formality and notwithstanding any provisions to the contrary. Apart from the special supervisory duties of the Commission Bancaire, defined by the law, CRH’s audit department makes regular inspections at borrowings banks, with sample tests to confirm the soundness and proper form of the pledged loans. When invalid loans are found in the pledged portfolio, CRH will claim a complementary pledged portfolio of valid loans with respect to the borrower’s institution, thus compensating for the shortfall. Should the borrower be unable to comply with the aforementioned terms, it must immediately buy a sufficient volume of bonds from the pool corresponding to the note concerned. This in turn is passed on to CRH in order to settle the repayment. Each borrowing bank must contribute to CRH’s equity capital in proportion to its outstanding borrowings.

In March 2005, shareholders’ equity amounted to €160m, which translates in to the following: GROUPE CRÉDIT AGRICOLE SA CRÉDIT LYONNAIS GROUPE CRÉDIT MUTUEL - CIC GROUPE BNP PARIBAS SOCIÉTÉ GÉNÉRALE GROUPE CAISSE D’ÉPARGNE

44.8 % 37.0 % 6,7 % 3,9 % 2,0 %

CRH’s bonds are some of the largest nongovernment issues on the Euro market, which results in very high liquidity. In addition, they are accepted as collateral for Bank of France advances and for investment of surplus resulting from special homebuyers’ savings schemes (fonds libres d’épargne logement). CRH’s bonds are also acknowledged as tier one collateral for the European Central Bank’s open market operations and as an article -22-4 - under UCITS directive bonds. CRH Outlook Looking to the future, the volume of operations will obviously depend on the growth of the French economy. Certain factors do, however, appear favorable to growth. First, the banks’ are likely to increase financing requirements as a result of the apparent diminution in regulated loan resources. Second, there appears to be a greater propensity amongst banks to retain residential mortgages on their balance sheets, as a lower level of shareholders’ equity will be required to cover these loans under the future Basel II capital adequacy requirements. Finally, the issuance conditions for CRH bonds may well improve as a result of the lower level of shareholders’ equity required for banks holding CRH bonds within the framework of the Basel II capital adequacy requirements. Henry Raymod is the Director General of CRH .

VOLUME 5

CAPITAL MARKETS OVERVIEW

Capital Markets – View from London Chris Shawyer talks to Johnathan Calens

Q. (a). Do you service non-UK companies who want to raise debt or equity capital in the London capital markets? A. The short answer is yes. Whilst our customer base is primarily focused on the UK, more and more we are finding companies who have their principal operations in Europe, but also operate in the UK, and are looking to raise money in the London markets. Provided they are customers of the Bank, we are delighted to help. There are very few barriers that prohibit European or indeed US companies from raising debt or equity capital in the London markets.

where institutional money, and that could be for example insurance companies, mutual funds, pension funds etc, will make loans –these are not very sophisticated instruments –to companies, using very similar documentation to that of an ordinary bank loan. So the methodology is familiar to both borrower and investor alike, and is quite simple to set up. Accordingly, attracting that type of transaction for our customer base is big business. It is an open market and one where over the last decade British companies have derived an advantage. So it’s a complimentary rather than

“There are very few barriers that prohibit European or indeed US companies from raising debt or equity capital in the London markets.“

Q. (b). What about UK companies seeking to raise capital in the USA? A. This is a wide-ranging question. First, we must identify the type of capital the organization is seeking to raise, since market behavior is quite different in the U.S. Clearly if the company wishes to raise public equity, then compliance with Sarbanes - Oxley regulations in the US becomes mandatory, which is causing a number of British companies to de-list because of the onerous requirements. By contrast, private equity is quite different, but there is more than enough availability on this side of the Atlantic, obviating any need to go to the US. Conversely debt capital markets in the US are far more diverse, and developed in terms of lenders who are looking to provide debt capital to companies. US domestic investors have increasingly accepted the UK as a safe haven and therefore have been open to lending to British companies. I make particular reference to the private placement market, which is essentially a market

competitive source of capital and if suitable for the capitalization and liability structure of a company, is a wonderful partner product to be able to offer them. Q. At this stage of your growth, are you more interested in the sophisticated national or multinational company that regularly uses the international capital markets or do smaller, entrepreneurial companies also factor into the equation? A. From the outset, I would say we are interested in all companies. Obviously smaller companies, particularly those that are growing swiftly, will be the champions of the future and clearly you want to be supporting them. The bigger and more mature companies are the champions of today and we would also like to support them in their activities. Here the demands are quite different; larger companies tend to be able to dictate what it is they want from their banks whereas for the smaller

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

CAPITAL MARKETS OVERVIEW

company, the relationship is more partner oriented. Our proposition is to be relationship focused. We adopt a nonregimented approach, with the required flexibility to deal with both segments, in whatever way is most appropriate. Dealing with a client needs to be relevant and personal, you cannot adopt ‘a one size fits all’ approach. That’s the exciting part, which keeps us fresh and energized.

A. I like to think so and I would promote that to be the case. Certainly it was the first to really understand the international aspect of financing growing out of the 1960’s and 1970’s and the Euro market as it was then called. One should not forget there are some major financial centers in the UK, US and Asia that can compete in size, although perhaps not in complexity. Experience has shown that London had a

“We have one of the most open financial systems in this country and as such this allows a variety of entrepreneurs to set up here, and provides credit right across the industry spectrum.”

The UK Capital Markets – Past, Present and Future Q. Has UK productivity been held back by a legacy of long-term under investment? A. Here it is a matter of perspective. Some of the big longstanding manufacturing companies, probably those that reached their peak in the 1960’s, may have had a problem, because they were unable to maintain their competitiveness over successive years. In the new economy, and increasingly that tends to be a large share of the British economy, we do not see a legacy of huge underinvestment. Many companies say they would like to invest more but this is unwarranted, as they are not operating at full capacity for the amounts already invested. Good old-fashioned investment was about new factories and long dated 30-year assets. Industry is not really about that anymore: increasingly it is people and technology driven which does not require huge capital expenditure. I do not think UK activity generally is being hindered at all by long term investment, I believe it has more to do with labour relations, labour practices and importantly, skills shortages and training issues. Q. Would it be fair to say that London is the most international of the world’s capital market centres?

headstart on the competition, because we are a trading nation, the infrastructure is in London, and that’s hard for anybody to replicate. All things being equal, I can see no reason why we should not maintain our pre-eminent position. It will always be a competitive position, -we are only head and shoulders above the others-, not light years ahead. Having said that we do have all the tools needed to stay at the top. It really is for us to lose rather than others to gain. Q. Some say that Britain has been more open to inward investment by foreign banks and financial institutions than any other European country. Do you agree with this? A. Yes, because there is a more receptive attitude to encouraging people to come here, setup shop and create employment and value. I started my career in the 1970’s, and practically every week, new foreign banks were opening in London. Regrettably, the reciprocal was not always true. For example we could not operate in certain countries, and our activities were limited to offshore business. Nonetheless our open-door approach has helped to create the pre-eminent financial services industry we have in this country. By permitting people to come here and undertake the full range of economic activities, generally speaking the corporate market place has become more competitive and our skill base has increased commensurately, which is one reason why

CAPITAL MARKETS OVERVIEW

London has one of the most skilful and diverse talent pools. In industry you could argue over the years through our rougher times, allowing and often giving relatively free and sometimes sponsored access to industry has allowed us to trade through the old and into the new, bringing fresh employment and working practices; so in the main, the country has had a positive experience by being open to inward investment. Q. The equity research scandals and mutual fund market timing issues which so affected New York up until very recently have not been an issue for London. However, that does not mean we can relax. Who ultimately is responsible for

Q. For an organization preparing for life as a public company, selecting the right capital market and establishing the right team of advisers is crucial. What advice would you give to a company in this position? A. The right advice on the capital structure that is most suited to their needs and employing the correct advisors is critical: that’s the only advice we give to people. We’ve seen companies going from public to private and vice versa, and there you certainly need to get the most accurate capital structure, and be well advised. As a bank we quite often say to the client ‘have you taken advice on this?’ When we are helping our clients through a particular process, we welcome the presence of a third person to ensure

“US domestic investors have increasingly accepted the UK as a safe haven and therefore have been open to lending to British companies.”

maintaining order, the senior management of financial institutions or the regulators? A. Market abuse is a very current and topical ongoing debate. It affects all of us because of the way the markets are changing. The tasks of providing capital and requiring capital are getting broader with the role of banks and financial institutions becoming more diverse. In a sense we are almost adopting the role of agents, finding other people to lend money in order to make investments. This is where it becomes a huge responsibility, given that we can also be seen as both agent and principal in some cases, particularly in relationship banking. The objective is to maximize value for our customers and potential investors, who want to know they can operate in a fair and trusted market place. They have the power to make that happen. If they don’t like it they will go elsewhere. The US is taking the question of abuse seriously. Europe is acknowledging it and therefore it will also have to be addressed in the UK. It doesn’t really matter whether it is the regulators or the responsibility of management; at the end of the day our aim is to deliver what our customers want.

fairness and impartiality; because we believe there needs to be accountability at every stage. That is how the market has changed. Ten years ago the banker would be both provider and adviser. With more competition, people are unsure if they are getting fair value. There has been a genuine and I think positive emergence of advisory firms that can recommend the right capital structure, solution, and offer impartial advice, as opposed to relying totally on the provider. Increasingly it is a more demanding and competitive world, with more accountability and transparency. So for people looking to float a company or make big acquisitions etc, it is almost mandatory they seek independent advice. : “That would be our advice, to take advice.” In Spite of Euro Scepticism Q. Would entry in to the EMU: (a). Reduce the cost of capital for UK firms? (b). Boost foreign direct investment (FDI) over the longer term? And what impact if any might this have on SME’s? A. The answers are not as straightforward as they would appear to be on the surface. At first blush, one can surmise that with Euro interest rates

VOLUME 5

CAPITAL MARKETS OVERVIEW

“Dealing with a client needs to be relevant and personal, you cannot adopt ‘a one size fits all’ approach.”

being lower than they are in the UK, the nominal interest costs of borrowing in a common currency would reduce the cost of borrowing: provided the status quo was maintained. On the other side of the coin, it may be that Europe moves more towards the UK economy, so interest rates may have risen by then. This remains an interesting topic with a great deal of debate with respect to the growing economies in Europe, new countries joining, the demand for credit and working capital for SME’s in areas where the local financial infrastructure is not developed. So whilst that does not answer the UK question, the idea of how SME’s across Europe can be financed and whether being one unit will help or hinder is very much on peoples mind.

Government understand the role of the SME segment in the creation of wealth. The dilemma is finding the balance between making it a free market and being competitive enough to ensure that even some of the weaker members have some negotiating power. There is some belief that it’s a cartel, because we only have four or five major banks in the UK, clearly the evidence of that is seen on the high street. However, when you are financing small to medium sized enterprises, it’s not just about an overdraft from the clearing bank, most of the finance comes through asset based finance and other types of specialist finance -there are probably 50 to 60 different providers of that type across the country. Therefore, I don’t believe that there is a shortage of people prepared to finance.

“We consider the fact that we have a more focused product to be a strength. We know what we are good at and we don’t try to deliver anything else.”

Despite being one financial system, there are many barriers to the integration of financial services. There can be no question that life is tough for the financial person in an SME. Notwithstanding, I think the whole concept of inward investment financing the growth of the SME sector is universally held across Europe and the UK, and is perceived as the engine of wealth and employment for the future, so it is of concern to both Governments and the financial community. Governmental Initiatives Q. What can the Government do to increase access to finance for small enterprises with high growth potential? A. Here in the UK, I think both business and

Secondly, the market is competitive enough to keep costs at bay and product innovation very much in the borrowers’ favour. As I said earlier, we have one of the most open financial systems in this country and as such this allows a variety of entrepreneurs to set up here, and provides credit right across the industry spectrum. I recognize that there are people in Government and industry groups who believe that SME’s are poorly served, because of high charges etc.; this will not always be the case, people dislike overpaying for anything. Over the last 2 or 3 years the constant message filtering through was not necessarily about cost, although this was a major concern, it was actually more about inflexibility. I would like to say that Lloyds TSB have improved significantly in these areas.

CAPITAL MARKETS OVERVIEW

Real Value Q. We’ve talked about your strength in syndicated loans. However, it’s also worth mentioning the accent or emphasis you place upon relationship building and your ability to tailor individual client solutions. Some might argue that because on paper your competitors offer more services they offer more value. (a). Is this false economy? (b). In adding peripheral services is there a danger that core offerings are neglected? (c). What benefits/ insights do you gain by sitting down and listening to clients? A. This is a good question in trying to analyze whether we have a competitive market place or not. Banking by its very nature is extremely competitive. Everyone is searching for that moment

You can no longer be all things to all men and you need to find your niche and your source of differentiation in the market place. With some banks now going for greater globalization and internationalization, there has been rapid growth and transformation. Institutions like the Royal Bank of Scotland and HSBC have evolved from relatively domestic bases to major international banks competing with the biggest and best on the planet. Increasingly we are seeing that there is still a role for a major national champion without needing to have a footprint right across the globe, and that’s really the place we at Lloyds TSB would like to inhabit. A great deal of the time banks feel obligated to provide additional services, and staff are given

“Here in the UK, I think both business and Government understand the role of the SME segment in the creation of wealth.”

of differentiation, which does not last very long, as the market place is constantly evolving. It is also an industry prone to cyclical movements. At the moment we are in a borrower friendly cycle, where there is surplus liquidity and capacity, demand is down and basically the big, even medium sized companies can almost dictate their needs. On the other hand, if the cycle turns as economic confidence diminishes then clearly banks will have more ability to determine what sort of products should be provided and at what price. There are purple patches where everything is in balance and then you have the reverse, which we are experiencing at the moment where things are very much in favour of the borrower. In previous years one might argue the balance was tipped in favour of the banks. Lloyds have only recently come back into the public eye as a major force in financing corporates in the UK, because the Bank wanted to be perceived as a retail financial services institution rather than a wholesale one. Now that we have refocused our strategy in the wholesale market, we do not offer all products and increasingly you will find that most financial institutions have to adopt a similar position.

incentives in order to supply these products, when actually the customers don’t need them. Again sometimes institutions are blinded by their own self-perception and therefore believe that what is good for them must also be good for their customers. We consider the fact that we have a more focused product to be a strength. We know what we are good at and we don’t try to deliver anything else. This is another reason why independent advisers are important, as they help to provide a balanced viewpoint, enabling customers to choose the institution best suited to fulfill their needs. When talking to a customer, if it is clear the solution -and this is very rare- is going to be outside of our remit, we will inform them of this, and as we have sufficient relationships with other institutions we are usually in a position to say ‘we know a man who can.’ This is the crux of relationship banking; it’s about helping our clients wherever and whenever possible.

Chris Shawyer is the Managing Director of Lloyds TSB Capital Markets.

VOLUME 5

CUSTODY

Evaluating, Selecting and Monitoring Global Custodians 28 Ross Whitehill 2006/2007 Custody Survey Traversing National Borders – Eurobank’ s Balkan Expansion Andrew Economides

30 33

The Next Chapter – Mergers,Acquisitions and the Pace of Change Christos Nikolaidis

Russia’ s Market Infrastructure Denis Solovyov

Cypriot Custody – A Market on the Move Constantia Constantinou

Setting the Standard in South Africa Andre Jansen Van Vuuren & Stuart Yates

Competing with Western Europe Peter Csiszer

The Nordic One-Stop-Shop Anne-Lise Kristiansen & Peter Dahlgren

Raising the Bar in German sub-Custody Moritz Ostwald

CUSTODY

Evaluating, Selecting and Monitoring Global Custodians Ross Whitehill discusses the subject

The task of evaluating, selecting and monitoring global custodians and related service providers is increasingly being enshrined in legislation and best market practice guidelines. Portfolio sizes and the focus on individual’s interest as beneficial owners in the portfolio, is also providing the momentum for better practice around reviews. Thomas Murray’s experience in the last 12 – 18 months is that institutional investors are concerning themselves more and more with the business of ensuring that their current arrangements are in line with best market practice. The stimulation for this has come from publicity surrounding many high profile changes of custodian and the service, risk minimisation and financial benefits that have accrued to the investor or fund as a result of the review. The industry is being drawn to three distinct levels of provider evaluation and this reflects the importance of the various stages in the lifecycle of a relationship with a provider. 1. Health Check These reviews of the current arrangements take the form of a clear “Health Check” that examines three critical elements of a relationship with a provider: • Service Level Agreement • Custody & Related Services Agreement(s) • Fees and Commercial Arrangements Service Level Agreement

The first step is to look at the Service Level Agreement in order to understand what services are being provided by the custodian. Typically the SLA is not very well constructed and takes the form of a high level description of what services are available but does not address the commitments that are required of both parties. Increasingly investors are requiring that their SLA addresses all aspects of the service, from consistency of relationship management

staff, through to disaster recovery plans. Custody & Related Services Agreement(s) Next, the main agreement gives a full picture as to the asset safety and risk minimisation provisions in the relationship and the extent to which the custodian bank/service provider will take responsibility for losses and protect the client from risks in the markets. Often the contracts that have been signed present a variety of risk evasive clauses and many agreements have unbelievable protections in favour of the service provider. When challenged, the providers will generally say that there is never likely to be a situation in which such egregious clauses would be invoked and therefore there is no cause for concern. Investors can form their own conclusions. Fees and Commercial Arrangements This is generally where the real shock comes as institutions find that they have been disadvantaged by the fee and commercial arrangements in place. Normally the ancillary cost items such as interest spreads, fx margins and securities lending splits (pre/post transaction costs) have been ignored in the past and when taken into consideration make a significant difference to the total cost of the custodian relationship. This is validated by the custodian providers many of whom will say that around 50 % of their revenues come from non-headline fees. 2. RFP Review Increasingly the findings from Health Checks are so disturbing that they trigger a full review of the custodial and related services arrangements. While the incumbent suppliers usually make strong competitive proposals to retain the business the client relationship is sometimes damaged beyond reasonable repair.

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CUSTODY

Further, competitor custodians try to add to the inducement to move by offering fee reductions, contributions and fee rebates to facilitate the transition away from the incumbent. Commitments to provide support staff during the transition and beyond can make a persuasive argument against staying with the incumbent. While reviews can be time consuming and costly, the pay back in terms of service improvements, access to new technology, reduced risk and increased asset safety provisions as well as clear commercial benefits can make a compelling case for taking a mandate to market. Investors are also saying that it has a salutary effect on custodians as it shows that the business is not necessarily with the custodian forever. In order to deliver maximum benefit, the RFP review is best when highly structured and clear on what the key buying criteria for the investor might be. Our view is that the RFP review should be structured as follows.

market practice and more particularly the SLA. Many investors neglect this element of the relationship and allow the custodian to provide quarterly or bi-annual reports Benchmarking service against the SLA is quite a clear cut activity but gathering universe data to ensure that service levels do not slip below standards generally accepted in the market, is quite different. Further, regulatory interest in benchmarking, while not prescriptive would suggest that structured ongoing comparison with the market is seen as best market practice. Our approach is to gather data from custodians across a range of service quality indicators, put them into a comparative database and analyse the results. Doing so clearly shows how a given custodian’s service for a client compares with other custodians’ service for other similar types of clients. It is important to recognise that this benchmarking will often throw up deficiencies in the clients’ operations and for this reason custodians generally welcome being compared with other providers because it provides valuable benchmark tools for them to; • Analyse their own strengths and weaknesses • Determine the problems that are client driven and seek to resolve those Conclusion

This is generally where the real shock comes as institutions find that they have been disadvantaged by the fee and commercial arrangements in place. Normally the ancillary cost items such as interest spreads, fx margins and securities lending splits (pre/post transaction costs) have been ignored in the past and when taken into consideration make a significant difference to the total cost of the custodian relationship. This is validated by the custodian providers many of whom will say that around 50 % of their revenues come from non-headline fees. 3. Custodian Benchmarking Following the appointment and transition of assets it is obviously important to maintain an ongoing review of custodian performance against best

As portfolio values increase and custodian competition for mandates accelerates, investors are well advised to put in place sound evaluation, selection and monitoring tools. The cost of implementing such tools and processes can be such that CFO approvals are required but the costs of not doing so can be such that CFO’s job retention could be reasonably challenged by any reasonably informed CEO or auditor.

Thomas Murray is a global firm specialising in the global securities industry and provides evaluation, rating (market infrastructure & custodian) selection and monitoring products and services to global, regional and domestic custodians and institutional investors worldwide. Ross Whitehill is the Chief Operating Officer of the company.

CUSTODY

2006/7 Custody Review

Selecting a custodian in today’s market is not easy given the plethora of value added services currently available to investors. As such, the Money Markets “2006/7 Custody Review” is designed to refine the filtration procedure and facilitate the investor’s decision-making process. Key Performance Indicators (KPIs): Listings have been based on the following KPIs: ✓ ✓ ✓ ✓ ✓ ✓ ✓

Securities lending Reporting capability Performance measurement Cash management Foreign exchange Systems/technology STP services

Data pertaining to the activities of certain custodians operating in the geographic territories listed below is considered, in some cases, to be highly sensitive. This may affect the inclusion and or exclusion of providers from this report. Review dates and regions: Next review date, July 2007. The inclusion or exclusion of custodians will be subject to the findings of the review panel. Selected zones only: No more than six custodians have been selected for inclusion in to any one geographic territory.

CYPRUS Position Cyprus Popular Bank Hellenic Bank National Bank of Cyprus

FINLAND Commendation Best-in-Class

DENMARK Position Danske Nordea SEB Svenska Handelsbanken

Position Nordea SEB Svenska Handelsbanken

Commendation Best-in-Class Most Improved

GERMANY Commendation Most Improved Best-in-Class

Position BHF-Bank BNP Paribas Deutsche Bank TSS

Commendation Best-in-Class Most Improved

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CUSTODY

GREECE Position Alpha Bank BNP Paribas (SS) EFG Eurobank Ergasias HSBC National Bank of Greece Piraeus Bank

SWEDEN Commendation Most Improved Best-in-Class

Client Services

HUNGARY Position Citibank Zrt. BA-CA (Unicredit Group) ING Raiffeisen Bank

Commendation Best-in-Class Most Improved

IRELAND Position AIB/BNY Bank of Ireland (SS) Citigroup GTS HSBC

Commendation Most Improved

SOUTH AFRICA Position First National Bank Standard Bank

Commendation Best-in-Class

SWITZERLAND Position Credit Suisse Kas Bank SIS Segalntersettle UBS

Position Garanti Bank Citigroup GTS Commendation

Most Improved Best-in-Class

Commendation Most Improved Best-in-Class

PORTUGAL Position Banco Espirito Santo BNP Paribas Citigroup GTS Millennium BCP

Best-in-Class Most Improved

Commendation Best-in-Class Most Improved

TURKEY

NORWAY Position DnB NOR Nordea SEB Svenska Handelsbanken

Commendation

Best-in-Class

NETHERLANDS Position BNP Paribas Citigroup GTS Fortis Bank Kas Bank

Position Nordea SEB Svenska Handelsbanken Swedbank

Commendation Best-in-Class

U.K. Position BNY Citigroup GTS HSBC RBC Dexia

Commendation Most Improved Best-in-Class

U.S.A. Position BNY Citigroup JP Morgan WSS PFPC State Street UBOC

Commendation Best-in-Class

Most Improved Client Service

Most Improved

The island of Delos. Treasurer and Custodian of the Athenian Alliance.

CUSTODY

Traversing National Borders – Eurobank’s Balkan Expansion Money Markets talks to Andrew Economides & Dimitrios Vassiliou

Relationship Management

Growth Prospects and the Balkan Region

Q. To what extent do your relationship managers sit down with clients in order to understand their business needs and strategies? A. The relationship manager should have an overview of the client’s activities, and ensure that the client is kept abreast of any changes, as they occur, in the market, and those which may occur in the future. The role of the relationship manager is extremely important. At the end of the day, a good agent has to be able to service the client from all angles.

Q. You continue to post strong financial results, year in, year out. To what extent has the Bank’s custody business contributed to this success? A. Geographically speaking, and in terms of service provision, the Group has continued to grow: • Serbia: controlling stake (62.3%) in Nacionalna ‰tedionica Banka (NSB) - September 2005 • Turkey: control of HC Istanbul Holding A.S. • Romania: acquisition of Capital Securities S.A. (brokerage firm) Additional stakes in and management control of: • Romania: Bane Post • Serbia-Montenegro: Post Postbanka (renamed EFG Eurobank Beograd) • Bulgaria: Post Bank

Q. Are you leveraging the value of relationship management as a growth strategy? A. It is not a question of growth strategy; in this business it is extremely important to have a client base that is satisfied with the level of service they are receiving. So the role of the relationship manager is an important one in terms of client satisfaction. In order to grow in this business you have to be able to provide a high level of service. However, let’s not forget that our strategy encompasses more than Greece. As you know, in

Q. (a). Can we expect to see a dedicated securities services division in each of the aforementioned countries? Q. (b). Would it be fair to say that the Bank is perceived more as a retail provider? A. In Serbia we have Eurobank Serbia (98%), and we

“When we enter a market we serve everyone, local retailers, local institutional investors, and foreign institutional investors.”

South Eastern Europe, where we have a number developments, relationship management plays a more significant role, because you are dealing with developing markets. Some of them have certain nuances which require the relationship manager to work a little harder than perhaps his counterparts in continental Europe might. Also, given the changes which are taking place in these markets in order to bring them up to speed with the rest of Europe, clients have to be constantly updated.

also bought Nacionalna ‰tedionica Banka (NSB). At the end of October the two banks merged to become one, with almost 100 branches, and the biggest network in Serbia. In Romania we have Bank Post (77%), which has 156 branches. In Bulgaria we have Post Bank Bulgaria, with 143 branches, and we have now acquired control of DZI Bank. In Poland we’ve started our own operation, with 28 branches. We recently purchased Universal

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Bank, in the Ukraine, with 32 branches. In Turkey, apart from HC Istanbul, we have acquired 70% of Tekfen Group’s holding in Tekfenbank, together with its wholly-owned subsidiary, Tekfen Leasing. The bank has an efficient and selective network of 30 branches which cover the most affluent areas of the country. Now we are on the shortlist with four other banks bidding for Bank of Alexandria in Egypt. As you know we have an office in London, and a bank in Luxemburg, EFG Private Bank Luxemburg.

investors. We are not like some foreign banks, which open a custody operation for one type of client. When we enter a market we serve everyone, local retailers, local institutional investors, and foreign institutional investors. We generally don’t service a market unless we have a big presence there. So for example, in a country like Croatia, where we don’t have a presence, we will not be establishing a service. It’s about following the strategy of the bank. In Bulgaria and Romania we hold approximately 28% of local custody business - mutual funds - and

“Everywhere that we have a presence, we either have a local team or are in the process of establishing a local [custody] team.”

Q. How do propose to build upon this? A. We started with Greece, and are the number one in this market in terms of the local institutional investors we service. This year we have had great success with foreign institutions, securing more than twelve big foreign institutions, global custodians and broker dealers. Everywhere that we have a presence, we either have a local team or are in the process of establishing a local [custody] team. We are also migrating IT systems. We have a strong team in Romania, and hold 24% of the local market in terms of mutual funds under custody. We are also implementing a system which will go live towards the end of the year. In countries that we have a presence in, or are planning to expand into, our objective is to offer custody services to more than one type of client. Therefore, we are establishing securities services teams that can provide a full range of services. The rationale behind this is simple, when you are the third largest bank in a particular region/ country, you must have a strong securities services team, not only for foreign investors but, primarily for local

will be implementing a system that we hope will be going live at the end of January 2007. We are preparing to go to market with a securities division in Turkey, Serbia and Ukraine. Despite the fact that Universal Bank (Ukraine) is not that big, they have a very good custody team. In fact, custody is one of their core businesses. So there, we were lucky; a team was already in place. Looking ahead, Romania and Bulgaria have been targeted first. Ukraine, Turkey and Serbia are scheduled for the end of next year (2007). At the end of this cycle we will be present in six countries, including Greece. Q. What do you consider to be the main challenges facing providers in the Balkan region? I suspect attitudes may be very different? A. Different because each country has its own culture. However, given that we are part of the same region, the Balkans, the divide is not that great. Yes, there are some differences, but many similarities. For other Western European countries it might be different. Consequently, it’s not as difficult for us to build up a relationship as it might be for say, an

“Looking ahead, Romania and Bulgaria have been targeted first. Ukraine, Turkey and Serbia are scheduled for the end of next year (2007). At the end of this cycle we will be present in six countries, including Greece.”

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“You push the system as far as you can. When you decide to change it, you have to realize that it’s not going to happen overnight. It’s a huge project that will take a number of years to facilitate. Even in the implementation phase, if you have everything ready, you cannot implement in one day, it’s not easy, it’s a very difficult task.”

American. To give you an example, something that is extremely important in this part of the world is religion. In Bulgaria, Romania, Serbia and Greece they follow the same religion.

will take a number of years to facilitate. Even in the implementation phase, if you have everything ready, you cannot implement in one day, it’s not easy, it’s a very difficult task.

Real Time Information

Moving Forward

Q. How important is real-time monitoring and reporting? A. Real-time information is very important. We have all of the tools and systems in place to be able to offer online real-time reporting. We are quite lucky, because we started servicing foreign institutions in late 2001. Therefore, we were able to implement a very modern IT system based upon the latest technology; we started building in 2001/2002. Q. Was your IT system created in-house?

Q. You have consolidated your position locally and continue to expand throughout the Balkan region. What’s next? A. Well, as discussed, we are building our vision. Our objective is to become one of the dominant forces in the South Eastern European region (New Europe) when it comes to servicing domestic and foreign institutions. We are already one of the top providers in Greece; therefore, we want to extend the same philosophy and vision throughout the region so that

“Our objective is to become one of the dominant forces in the South Eastern European region (New Europe) when it comes to servicing domestic and foreign institutions.”

A. Partly in-house. We gave all of the specifications to a company we have a very close relationship with, which belongs to one of the biggest software groups in Greece. It is listed on the stock exchange as one of the two largest software groups in Greece. Q. Why do "old systems" remain in place despite vast technological advances? A. I think that the answer is pretty straight forward. Some banks continue to use old systems, because changing a system requires huge investment and a lot of effort. For the big institutions, that have a vast network, the task is even more onerous. You push the system as far as you can. When you decide to change it, you have to realize that it’s not going to happen overnight. It’s a huge project that

we are all working towards the same goal. This is a huge project, which is not something that will be ready from one day to the next; it will be a big task, and one that will require a lot of investment. Systems will also have to be implemented in all of these countries. Basically, all of these projects demonstrate the bank’s commitment to this vision.

Dimitrios Vassiliou is the Manager of Operations and Business Development for EFG Eurobank Ergasias. Andrew Economides is the Director and Head of Securities for EFG Eurobank Ergasias.

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The Next Chapter – Mergers,Acquisitions and the Pace of Change Money Markets talks to Christos Nikolaidis

Q. When we last spoke you talked about the Bank’s expansion and success in South Eastern Europe and the Eastern Mediterranean. Would it be fair to say that the Bank’s growth in these markets has been fueled by its appetite for M&A? A. Piraeus Bank’s strategy to expand its business in South Eastern Europe (SEE) is based on the view that the region, which has close ties to our country (cultural, historical, political, economic), will continue to grow rapidly in order to close the gap on Northern Europe. So, as banking activities in Greece mature over the next three to five years, our operations in SEE and the Eastern Mediterranean will start contributing significantly towards Piraeus Bank’s revenues.

Transaction Volumes and the Common CSE-ATHEX Platform Q. On October 30, 2006, the Greek Cypriot Stock Exchange (CSE) and the Athens Stock Exchange (ATHEX) joined forces in order to create a common trading platform. What impact has this had on transaction volumes in general and those of Piraeus Bank? A. Over the past five weeks, following the successful launch of the common trading platform, the daily transaction volume of the CSE has increased by 150%. However, levels are still relatively low. The CSE’s general index has also risen by almost 11%;

“Over the past five weeks, following the successful launch of the common trading platform, the daily transaction volume of the CSE has increased by 150%.”

Q. In 2005, foreign operations made up a significant percentage (13.4%) of the Bank’s pre-tax profits. However, you indicated that by the end of 2007 the Bank’s goal was and is to have almost 20% of pre-tax profit coming from overseas operations. Is this still a reality, and if so, has there been any uplift in 2006? A. In Piraeus Bank Group’s -nine month- 2006 results, foreign operations accounted for 17% of pre-tax profits. Out of this percentage, 13% was generated by SEE and Egypt. In addition, the relative loan portfolio advanced by 57% y.o.y., deposits by 95%, whilst the foreign branch network expanded by 25%. So, as you can see, we are making progress towards our goal, which is to substantially enhance international profits, balances, and of course, our network. The bank’s three year target is to increase the contribution of its operations abroad by up to 25%. However, let’s not forget, domestic operations are also growing rapidly, therefore, this target may not be an easy one.

this again reflects the aforementioned five week period. ATHEX members now execute more transactions in the CSE, and CSE members in the ATHEX. I believe that the more familiar they become with each others market the better the results will be. Piraeus Bank was among the first Greek custodians to develop the requisite infrastructure and procedures necessary to be able to fully service its institutional clients with respect to their trading needs in the Cypriot market. Q. Some say that this venture should make it easier for the pool of investors who trade in Greek stocks to own shares in Greek Cypriot companies. Is this something that you concur with? A. Definitely! The common platform has secured the autonomy and national identity of the two exchanges. It has also provided a modern, automated environment for transactions with low installation and operating costs. By using a common

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infrastructure, and similar legal framework, the Greek and Cypriot markets now operate more efficiently. As a global custodian, Piraeus Bank provided custody services in the Cypriot market long before the common platform was launched. Knowing first hand the difficulties we experienced every time we had to settle a transaction at the CSE, I can assure you that by using the facilities of the common platform the results have been miraculous. Q. (a). Linking the two exchanges' trading operations is seen as the first step in a broader strategy by ATHEX to create a common trading platform for South Eastern Europe's bourses. Is this fact or fiction? A. I think that the success of the common platform ATHEX/ CSE- will make other SEE exchanges seriously consider cooperating with the venture. By doing so they will be able to enhance their market size, liquidity, and access to capital, whilst lowering

also plan to roll out our global custody hub to our subsidiary banks in SEE and Egypt early in 2007. Looking Ahead Q. Some say they would prefer custodians to remain as safe-keepers of assets. Is this view shared by the clients that you work with? A. This statement might have been true a decade ago. Our foreign and domestic institutional clients are very demanding. As such, the expectation is that you will continue to refine certain processes and procedures in order to increase efficiency. A great deal of focus is placed on control, risk reduction, cost cutting, reporting, flexibility and transparency. It goes without saying that Piraeus Bank, being in the global custody business, has developed and customised key service delivery mechanisms in order to manage the complex and diverse requirements of

“In addition, the relative loan portfolio advanced by 57% y.o.y., deposits by 95%, whilst the foreign branch network expanded by 25%.”

the costs attached to keeping up with information technology. ATHEX should, therefore, play a leading role in SEE in order to enhance its position internationally. Its officials are currently in talks with several other exchanges in the Balkan region in particular. The promotion of the aforementioned cooperation is obviously very important. The benefits include, but are not limited to, the creation of a unified legal framework, a secure and reliable infrastructure for the execution and settlement of transactions, the reduction of cross-border transaction costs, and the creation of a unique point of access to these markets for foreign institutional investors. Q. (b). How does this fit in to the Bank’s strategic plans moving forward? A. Piraeus Bank welcomes any future cooperation with ATHEX and, or, other SEE bourses. However, we understand that such alliances take time and effort. As I mentioned earlier, our objective is to grow our foreign operations significantly. Additionally, one of the banking activities that we plan to enhance is securities trading and custody. This is why we recently acquired a Romanian brokerage firm. We

local governments and markets. An example of this would be, since 2002 we have been a qualified intermediary for U.S. securities so that non-U.S. clients avoid double taxation. Q. Services like daily reporting, compliance services (especially pre-trade compliance), risk management, and much of the transaction cost analysis work being done by custodians are of little or no interest to the end institutional investor. Is this a fair statement? A. I would say it’s not. Institutional investors demand the best bundle of services from their custodians. Piraeus Bank’s custody business focuses on the needs of the individual client in each and every market. Besides enhancing our service line, and providing tailor-made reporting and compliance services, we have invested a significant amount of time and effort in re-engineering our internal processes and mentality in keeping with our ongoing commitment to excellence. By April 2007, we expect to be awarded with the “Committed to Excellence” by the EFQM. We are very excited about this and believe that our clients will benefit directly from our dedication and commitment to them.

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The Roadmap for 2007 Q. What developments can we expect for 2007 in the Greek Capital Market? A. With the successful launch of the common platform, ATHEX has entered an ambitious period of international cooperation by taking advantage of its strategic position in South Eastern Europe. Furthermore, a number of large-scale reforms are about to be implemented in the Greek market which will modernize it further and at the same time enhance international investment. A string of changes have already been, or are about to be, decided by ATHEX BoD. These pertain to liberalization and include, short selling, the borrowing of equities from the market -and not only through the derivatives market- the introduction of Exchange Traded Funds, the creation of the semiregulated market, the listing of ocean-going shipping companies, the ATHEX pricing policy reduction, the trading of stock options in FTSE/ASE 40 listed companies, as well as the application for another 10% of daily volatility of

CMWEB.CO.UK/MONEYMARKETS

shares in FTSE/ASE20. As you can imagine, weâ&#x20AC;&#x2122;ll be very busy over the next year. Q. Given your impressive growth of Piraeus Bank Group over the last couple of years, where do you go from here? A. We will continue our strong organic growth in Greece by rolling out another ten to fifteen branches. In addition, we will enhance our product range to SMEs and individuals, strengthen our position in asset management and bancassurance, and streamline our organizational and IT operations. Abroad, we will further reinforce our branch network, particularly in Romania and Serbia, by placing more emphasis on retail business, which expands robustly, and continue to reinforce our IT and HR systems. Overall, I would say that Piraeus Bank Group is definitely on-track to achieving its goal, which is to enlarge its market share and profitability. Christos Nikolaidis is the Head of Securities Services at Piraeus Bank.

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Russia’s Market Infrastructure Denis Solovyov, National Depository Centre

The Russian securities market infrastructure currently consists of five major depositories and around 80 registrars. Having such a large number of infrastructure providers impacts negatively on both market efficiency and costs. Russia is behind developed financial markets in terms of reliability, transparency and technology; investors in Russian companies are faced with the gloomy prospect of exchanging money for title-ownership recorded in a far from perfect system. Not surprisingly, therefore, a substantial share of secondary market trading in Russian securities occurs outside of the domestic market in the form of GDRs and ADRs. However, the establishment of a Central Settlement Depository (CSD) will raise the efficiency of the Russian securities market. The draft bill on the

currency, should be organized within one institute – Central Depository. Organization of electronic document interchange should also be the task of a CSD. Considering those efforts undertaken by leading infrastructure organizations in the past, in order to establish EDI technology and bring the Russian market in line with international standards regarding settlement technology, in particular STP, it would be only right. Legal recognition of EDI between market participants and the legalization of electronic documents is one of the requirements market participants have been waiting for. Without the recognition of electronic documents the market cannot develop and will not be competitive. The draft bill on the “Central Depository” will not

“The establishment of a Central Settlement Depository (CSD) will raise the efficiency of the

Russian securities market.”

“Central Depository”, prepared by the Federal Service of the Financial Market (Russian market regulator), sets out a three-level record-keeping system. This seeks to establish, in an efficient manner, a relationship between the registrar -as a primary source of information regarding ownership rights- and the depository. According to the bill, the central depository will be the only depository entitled to be the nominal holder in registers. From a broad prospective the goal of a CSD in Russia is to reduce operational risks, shorten the settlement cycle, reduce costs for market participants and support overall market development. If we are being more specific, the growing market needs an efficient, modern, reliable, convenient and understandable settlement system. Cash settlement, including settlement between issuers and securities holders in rubles and foreign

establish the way in which the Central Settlement Depository will be created. Nevertheless there are two ways this might be done; the aforementioned institution could be created on the basis of the current settlement and depository infrastructure, or by establishing a new institution from scratch using government money. Establishing a settlement depository from scratch is not the best idea as it is rather expensive and might even hurt market participants who have now adjusted to the record keeping and settlement systems we have in place today. Besides, establishing a CSD from scratch does not take into account technological and technical standards established between current settlement depositories and trading systems. The Central Depository could be established by consolidating the current settlement and depository infrastructure, the main elements of which are, the

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National Depository Centre (NDC), Depository Clearing Company (DCC) and Settlement Depository Company (SDC). NDC (which services MICEX stock exchange) has acquired shares in DCC and SDC and introduced its representatives. At the moment each settlement depository works with its own stock exchange and complies with the standards and formats set by that exchange. Depending on the trading system, the formats and standards differ quite a lot. Market players choose one or two trading systems at the most and adjust to it. It does not permit the transfer of assets between systems, which is necessary to maintain liquidity. The “bridge” between two leading trading systems, i.e. the “bridge” between NDC and DCC partly solves this problem. The “bridge” is subject to certain operational requirements and technological restrictions. Therefore, switching to

Hence it becomes a question of competitiveness. There is no ready-made answer to this problem at the moment. Maybe this question should be brought up more often during public debates. It’s important that the people responsible for establishing the structure of the CSD and preparing the legal framework that will regulate it don’t forget about this. The draft bill on the “Central Depository” does not address the issue of whether the CSD should be a central clearing company. MICEX made a decision to establish a clearing corporation that should be in place by the early part of next year and which, at first, will clear on the currency exchange. However, for this objective to be accomplished, the regulations regarding clearing corporations need to be revised. It is a question of the law and the central clearing corporation. This question is brought to light less often

“The goal of a CSD in Russia is to reduce operational risks, shorten the settlement cycle, reduce costs for market participants and support overall market development. If we are being more specific, the growing market needs an efficient, modern, reliable, convenient and understandable settlement system.”

online trading is not an option. Ultimately, this is not the best solution, especially if you are trying to establish a transparent infrastructure that facilitates trading on different systems, which in turn use different technologies. Establishing the central settlement depository should solve this. How, you may ask? The institute that becomes the central settlement depository has two options. It can set a uniform standard of interaction with all trading systems and service them using uniform formats. Alternatively, it can take the standard used by one of the trading floors as a base and service other trading systems using that standard. In the first instance, it should establish the record keeping system and EDI system between the trading floor and the settlement depository. This is quite an effective solution from the standpoint of the central depository. However, is it effective for each trading system? Well, they handle different securities, use different technologies and follow different standards. If the trading system regards its operational technology as the most efficient in the market, it has the right to press the central settlement depository to support its technology and standards.

than the issue of the central settlement depository‘s development, but that’s not to say that it is any less important. In terms of further market development, various legislative measures need to be developed simultaneously: a law on trading systems, on the central settlement depository and on the central clearing corporation. This would settle the question of Russian financial market infrastructure development. A clearing corporation, set up by MICEX, will introduce a trial platform and will help form the necessary legal framework for these kinds of activities. Another important issue for the Russian market is the possibility of a foreign depository being a nominee holder of Russian securities. Although a Russian depository can open an account in a foreign depository, a foreign depository cannot open an account in Russia. Given the way in which in our licensing requirements are set up, foreign parties cannot fulfill them. In order to open a nominee account a company must have a license. Technically a license can be issued to anyone, although special requirements should be set out for foreign depositories. However first, a number of major,

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not technical, issues must be solved. For example, we need to understand whether the presence of such an organisation would drain the local market’s liquidity. Would securities deposited with a foreign nominee holder, for example DTC, which is a settlement depository for NASDAQ and NYSE (cash settlement for Russian shares is already done mostly offshore) lead to a situation where the direct listing of Russian securities becomes possible? Will the market move offshore? This is a key question, which should be solved before we decide whether or not to allow a foreign company to hold securities. I believe that the law could prohibit this type of activity. At the moment this problem is being solved in the following way: a foreign custodian will deposit his client’s securities in to the accounts of his Cyprian subsidiary in Russia, which in reality does not own those securities; beneficial owners receive different treatment when it comes to tax. As a result, some pay too much tax and others not enough. If tax is overpaid it’s the taxpayer’s problem, however, if it’s underpaid it becomes the tax authority’s problem. The ADRs owners have another problem. For example, according to Russian regulators, The Bank of New York is deemed to be a beneficial owner of Russian ‘blue chips’, apart from Gazprom shares. Problems have also arisen in terms of

antimonopoly regulations. It is impossible to check who is really the owner of an enterprise (considering that affiliation concept is not well established). One of the recommendations of international expert groups for the organization of stock market infrastructure is the existence of single center which provides source of Corporate Actions information which would establish relations with issuers in a way when issuer provides corporate action information in a specified time and format and the center would make this information available to all market participants. I suppose, organization of a centralized source of corporate information should be a CSD function. How would the activity of that centre differ from the work of information agencies? First of all the issuer would be obliged to provide the Corporate Action information by the law. Secondly, that information would be standardized and send through EDI systems. Existence of such a center would greatly increase market transparency and confidence of foreign participants.

Denis Solovyov is Deputy CEO of the NDC. Denis has a degree in financial management from the Institute of International Law and Economics and a PhD in law from the Presidential Academy of State Services.

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Cypriot Custody – A Market on the Move Money Markets talks to Constantia Constantinou

Introduction Q. When did Cyprus Popular Bank first establish a custody department and why? A. The Cyprus Popular Bank Public Company Ltd (hereinafter CPB) had to respond promptly and effectively to a changing marketplace, and the opening of the official Cyprus Stock Exchange in 1996, which it did. By expanding the operations of the Trustee Department we were able to provide a full range of custody services, including the settlement of trades, safekeeping of securities, information and processing of corporate actions, dividend and income collection, proxy voting, reporting, and foreign exchange. Q. Given that you were the first local bank to offer custody services in Cyprus what impact has this had on your domestic market share? A. As the first local bank to offer custody services, superior service quality, and an extremely high degree of professionalism, CPB become the agent of choice for the Cypriot market amongst global custodians. It is estimated that CPB‘s market share, amongst global custodians that have appointed a local sub-custodian in Cyprus, is approximately 90%. Unfortunately, due to the non-recognition of the custodian in the clearing and settlement process, investments by foreign institutional investors have been limited. With the launch of the Common Trading Platform (CTP) on 30 October, 2006, between the Athens Stock Exchange (ASE) and the Cyprus Stock Exchange (CSE), in conjunction with the introduction of laws which govern the operation of the custodian, a new era has begun for the CSE. The CTP’s objective is to make the two markets more efficient and effective by employing a common technological infrastructure and compatible regulatory framework. CPB’s custody unit has been preparing to adapt to the new environment and aims to increase its market share both domestically and internationally (for customers investing in foreign securities).

Q. To what extent have you strengthened your custody department in preparation for the advent of mutual funds? A. It is expected that in the next couple of months the taxation issue, which held back the voting of legislation on Cypriot mutual funds, will be resolved, and mutual funds will be able to make their first appearance in the Cyprus market. CPB was among the first financial institutions to obtain the necessary licenses and have in place the infrastructure necessary to be able to offer its own mutual funds (this dates back to 2001). Given that the custody unit of the Bank was to be the appointed custodian, all of the necessary procedures and system enhancements have been put in place. In this respect, once the relevant legislation is in place, the Bank will be ready to offer its own mutual funds. This is very much in keeping with the Bank’s desire to be the dominant force in the Cypriot market. Q. A custodian’s plain vanilla offering is simply not enough in today’s competitive market, clients expect more. How do you add value? A. As a local custodian we work closely with the Cypriot authorities. We can, therefore, provide our clients with up-to-date market information and guidance. Foreign clients are constantly kept abreast of new developments as they occur. Global custodians and clients in general need to appoint local sub-custodians that follow market changes closely and have the necessary knowledge and expertise to be able to deal with domestic authorities. In the custody markets the add-on value boils down to local expertise. Q. (a). Are you at liberty to discuss the Bank’s assets under custody? A. The Bank’s assets under custody have increased substantially over the past three years, marking an average annual increase above 100%. However, in absolute numbers, assets have been maintained at low levels. This is a result of various regulatory obstacles and controls that have prevented, on the

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one hand, significant foreign investment in the Cypriot market, and on the other hand local customers from investing in international securities (controls in the flow of capital). With the introduction of the CTP there are significant growth prospects as a result of: The dynamic of the Cypriot economy, coupled with the accession of Cyprus into the European Union (EU), attracts a lot of foreign investors, thereby creating huge market potential. In May 2004, with the accession of Cyprus into the EU, the financial system was completely liberalized. Cyprus has also liberalized investment rules for both EU and non EU nationals, and foreigners can now invest freely without restriction in almost all areas of the economy.

access are now able to strengthen their presence through the Cypriot market, taking advantage of the access provided by the CTP. CPB stands to benefit from the introduction of the CTP as it acts as the local sub-custodian for a large number of Global Custodians. Q. (c). What impact will this have, if at all, on the geographical make-up of your client base? A. Whilst we estimate that the largest segment of our client base will be foreign investors, local institutional investors will also represent a significant share. Although this market is relatively small, in investor terms, it is growing rapidly. It is also expected to intensify with the introduction of Cypriot mutual funds and ongoing efforts to

“The Bank’s assets under custody have increased substantially over the past three years, marking an average annual increase above 100%.”

Cyprus has a strong economy with high GDP growth rates (consistently higher GDP growth rates than the EU average). The Cyprus economy is continuing its structural reform programme with a view to joining the Eurozone in 2008. The lowest corporate tax rates in Europe, and a large number of tax treaties, make Cyprus an attractive regional center for investments all over the world. Q. (b). Is this figure likely to increase with the adoption and implementation of Oasis, the Athens Stock Exchange trading platform? A. Unquestionably yes. The CTP facilitates access with respect to participants in both markets (members, institutional and private investors, bankscustodians, issuers, etc), and will contribute to the formation of a homogeneous, efficient, and effective environment for the conduct of transactions in the two markets, which will result in lower end-user costs. The CTP will boost accessibility, and capital market liquidity, domestically. Those who are looking for new investment opportunities in reliable and efficient markets with a low cost of

develop long-term savings products. For example, although private pension funds are relatively unknown, they are encouraged due to the problems currently faced by the government’s social insurance scheme. Also, the custodian concept was only recently introduced in Cyprus. Thus, efforts are underway to increase awareness amongst institutional investors. Our strategic aim is to increase the volume of business in both the local market and the foreign business we do. Service Delivery Q. How do you approach service delivery? A. With respect to our custody unit, a great deal of emphasis is placed on technological enhancements as well as maintaining dedicated, well-trained and experienced staff. Obviously, we regularly revisit our processes and procedures in an effort to identify areas for further improvement and concentrate our efforts in this direction. Q. Are you at liberty to discuss current cross selling and relationship management strategies? A. At this point it is worth mentioning the recent developments of our Bank.

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“The CTP allows investors to access both markets in a fully harmonized operating environment with all trading done in Euros, further reducing costs for institutional investors.”

The Cyprus Popular Bank (the second largest financial institution in Cyprus with notable international diversification - 100 branches in 5 countries - Greece, UK, Guernsey, Australia and Serbia- and representative offices in the US, Canada, South Africa and Russia) recently launched public offers for the acquisition of up to 100% of Marfin Financial Group and Egnatia Bank S.A. The new group (named Marfin Popular Bank Public Company Ltd) will have around ?3.3 billion of equity capital, and will rank first amongst all banking groups in Cyprus and second in Greece. The international presence of the new group will be expanded to include Estonia (subsidiary of Marfin Financial Group) and Romania (subsidiary of Egnatia Bank). It is also worth noting that Marfin Financial Group has a strong presence in the areas of investment banking and asset management, with significant growth rates over the years. The new group will be the fifth largest bank, and the tenth largest company, on the Athens Stock Exchange in terms of market capitalisation. The merger radically transforms our Bank into a leading player in the markets of Greece, Cyprus, and Southeastern Europe. ✓ ✓ ✓ ✓ ✓ ✓

Total Assets will reach €22.3 bil. Total Deposits €15.8 bil. Branches 300 Countries present 13 Capital Adequacy > 17% Market capitalization €5.2 bil.

The rationale of the merger lies in strong revenue and cost synergies. Revenue synergies arising from: ✓ Attainment of necessary “critical mass” so that the new group becomes an important player in the Greek banking market ✓ Increased capability for cross selling due to complementary operations ✓ Immediate access to a wider distribution network, together with a more complete range of products

✓ Utilization of excess capital, with significant asset growth potential ✓ Direct access to markets with high growth rates (Serbia, Romania, Estonia) Significant cost saving synergies arising from: ✓ Merger of three common Head Office operations and adjacent branches. This will lead to better utilization of experienced staff for the opening of new branches and growth of business. ✓ Utilization of existing technological infrastructure by the new banking group, and cost savings regarding future purchases of new computer systems. ✓ Lower cost of funding due to the utilization of a lower cost deposit base at the group level. ✓ Lower group tax charges due to the location of the holding company in Cyprus. ✓ Inevitably, our custody unit stands to benefit a lot from the synergies and cross-selling capabilities that will evolve from the new Group. Platform Integration The introduction of the CTP will remove current restrictions on custodian banks participating in the CSD. Q. (a). Moving forward, what affect, if any, will this have on settlement cycles? A. The implementation of the CTP has removed the restrictions on custodian banks participating in the clearing and settlement process at the CSE. The settlement cycle is at T+3 for both equities and corporate debt (all in dematerialized form). The Central Securities Depository handles the settlement function. All equities are traded and settled in Euro. Corporate debt is still traded and settled in Cyprus Pounds (this will be in Euro as soon as Cyprus joins the Eurozone, expected Jan 1st of 2008). For government debt, the Central Bank of

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Cyprus handles the depository functions in a physical market. The settlement cycle for government debt (traded and settled in Cyprus Pounds) is currently at T+8. However, there is currently a project for the dematerialisation of all government debt (the Central Securities Depository of the CSE will be the depository). Once dematerialization occurs, the settlement cycle will shorten to T+3. Q. (b). What steps have you taken in order to prepare for the aforementioned implementation, in terms on new technologies etc.? A. Technology certainly plays an important part in the custody business, with full straight through processing at the top of the list. Our custody system was recently enhanced in order to accommodate the necessary changes that have been imposed with the introduction of the CTP. At the other end, internal processes and procedures have been modified, where necessary, in order to conform to the new

Q. (d). To what extent will this attract foreign investors? A. The establishment of the CTP will help to open up the CSE to the world. The CTP allows investors to access both markets in a fully harmonized operating environment with all trading done in Euros, further reducing costs for institutional investors. Cypriot companies get maximum exposure to foreign institutional investors. Local investors are now able to access all Greek products, and foreign investors covering the ASE can now invest in companies on the CSE at no extra cost. Also, the accession to the EU has led to increased investment flows as Cypriot firms expand their operations abroad and foreign, especially Greek, investors turn their attention to Cyprus. An upsurge in mergers and acquisitions saw it reach over CYP 380 million in the first six months of 2006, eclipsing the combined value of such deals made in the

“The CSE general index closed at 3717.1 points on November 17, against 3390.2 points on October 25 (+9.6%), the last session before the common platform.”

environment, especially now with the recognition role of the custodian. Q. (c). What impact will the “common platform” have on existing trading volumes? A. Trading volumes are gradually increasing. Of course we witnessed a large increase before the launch of the CTP, which can be attributed in part to its anticipation. Volumes have increased from an average of ?2 million over the last two years to around ?13 million a day. Also worth mentioning is the fact that fifteen days after the launch of the common trading platform the CSE enjoyed significant gains. The CSE general index closed at 3717.1 points on November 17, against 3390.2 points on October 25 (+9.6%), the last session before the common platform. Although it’s too early to really see the benefits of the common trading platform, investor interest seems high, and goes beyond banking stocks, which traditionally absorbed most of the trading volume.

previous three years. The necessary regulations and security measures are now in place to be able to build the confidence of institutional investors. The CSE is fully integrated into EU regulation and is a fully transparent, professional, and efficient trading environment. It is also worth mentioning that the CSE recently adopted a new legislation, which is considered fundamentally important to its modernisation. The aforesaid legislation has been prepared in order to bring the CSE in line with recently introduced European directives (Prospectus Directive, IPO Directive, Market Abuse Directive etc.), and harmonises it with corresponding practices that are followed by the most developed Stock Exchanges. Q. (e). Do other providers operating in this space have the requisite resources to be able to employ the technology required to compete effectively? A. Market players need to have adequate technology in place so as to be able to survive in

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a market where fees are continuously decreasing. I should also point out that, unlike true STP, the information stops at the custodian and does not go into the market. We must also note that the two stock exchanges will maintain their autonomy and independence within the framework of the CTP. The settlement of trades will be effected through two separate systems. Current market practices, for example, the handling of corporate actions, the free-ofpayment deals that have to be executed off the floor (meaning that you need to submit to the CSE physical documentation) need improvement, and it is something that remote custodians will have to handle.

Q. Multi-market providers have secured a number of significant custody-mandates outside of their respective/traditional markets recently. Is this something we can expect to see happening in the Cypriot market? A. It is something that we expect to happen in the Cypriot market sooner or later, but we welcome it. The big global players may help to bring about changes to current market practices which help the market to evolve and become more efficient (e.g. introduce omnibus account structures, securities lending etc). However, we must note that these players, used to a strong, homogeneous, global market approach often find it difficult to adapt their

“Local players that know the marketplace intimately will have an advantage. Of course that does not mean that local players should feel safe. We must all work hard to defend our business and find ways to increase it further.”

Local players that know the marketplace intimately will have an advantage. Of course that does not mean that local players should feel safe. We must all work hard to defend our business and find ways to increase it further. The Next Step Q. For sub custodians seeking to gain market share, innovation is crucial. The development and implementation of solutions designed to facilitate derivatives clearing seems to be a trend present in a number of markets around the world. Will Cypriot providers follow suit? A. The majority of financial institutions offering custody services in the Cypriot market have put in place systems from international vendors. This is also the case with us; we have implemented a system from a Greek vendor. Given that the aforementioned system is the operating system for a number of custody service providers in the Greek market, - a market where derivative instruments are traded with significant volumes - we believe that we are well equipped in the area of technological support to address the continuously changing market environment.

respective offerings to a different fiscal, regulatory and cultural environment. On the other hand, locally focused custodians seem to have the edge when it comes to customer service and client relations. They can concentrate their efforts on developing services and products tailored to their domestic market. Q. What can existing and new clients expect from Cyprus Popular Bank over the next 12-18 months? A. CPB will continue to spearhead market developments and will aim to provide its customers with the highest level of service. The custody unit will exploit the synergies and opportunities that evolve from the formation of the new Group, and will continue to expand the services it currently offers. Innovation and technological enhancements will be at the forefront of our strategy in order to maintain our “best-in-class service provider” status in Cyprus.

Constantia Constantinou is the Head of Custody for The Cyprus Popular Bank.

Money Markets | 77

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Setting the Standard in South Africa Jonathan Calens talks to Andre Jansen Van Vuuren & Stuart Yates

Introduction - The FNB Approach Q. What do you consider your unique selling point to be? A. I think that our unyielding focus on client service certainly gives us an edge, and this is something that all of our operational departments pay close attention to. We offer a single point of contact for all cash and custody enquiries, in addition to a dedicated client services specialist and relationship manager. I should also mention that we have a surveillance area, which monitors and controls settlement, and a single point of contact for STRATE, which is unique; this ensures that failed trades are kept to a minimum and clients are given advanced warning should there be a settlement problem.

Q. Is this ultimately what differentiates First National Bank (FNB) from the competition? A. I think the value and commitment that we show our clients makes us different.

not have representation we will go directly to a sub-custodian. Alternatively we will wait until we open a branch in that particular country. FirstRand as a group is expanding in to Africa, but we are not going to lead the group in to Africa purely on the basis of custody. There really isnâ&#x20AC;&#x2122;t the volume of assets in other parts of Africa to warrant a business case. Q. (a). What is the nature of your relationship with STRATE? Q. (b). How involved are you in the evolution of market practices? A. Although we work very closely with STRATE, we also work very closely with other exchanges and market participants. Ultimately, the objective is to move the South African financial market forward so that it falls in line with international best-practice. We champion many of the ongoing market initiatives from concept to implementation. We also have representation on STRATEâ&#x20AC;&#x2122;s board, and I myself sit on the Bond Advisory Committee. We ensure that our voice, and the voice of our clients, is heard.

"We offer a single point of contact for all cash and custody enquiries, in addition to a dedicated client services specialist and relationship manager."

Q. You have cemented your position as the subcustodian of choice in the South African market. To what extent does the sub-Saharan custody market factor into your immediate plans? A. In order to expand our existing custodial offering, we are looking at regions like Namibia and Botswana where we have physical installations. With respect to the rest of the sub-Saharan custody market we will make use of our partnership with JP Morgan Worldwide Securities Services (JPMWSS). Where they do

Q. Through your partnership with JPMWSS you are able to offer a complete global master custody service. What was the rationale behind your decision to join forces with JPMWSS? A. We were really looking for a partner with a system that had been adapted to South African conditions. JP Morgan was able to tick that box. Their systems have been adapted to the compliance, regulatory, and tax needs of the South African market. It is also worth mentioning that our alliance with JP Morgan exists on a number of levels. Our asset management company uses them as an

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outsourcing provider with respect to administration services, we use them as a global custodian, and they use us as a local custodian. E-Custody Q. Kindly define your online value proposition? A. With respect to our web-based front-end, clients can view holdings, open trades, settled positions, and STP statistics. We also have an 18 month history/archive feature. Clients can log on to the system at any time with any queries they might have. The system works in near real-time (15 minute delay). We also offer a similar service on the cash side to our foreign clients.

Search and Selection Q. Most network managers in global custodian and global broker-dealer communities seem to select their sub-custodians based upon their standing, and or ranking e.g. ‘best in market’, in a particular region. Therefore, in your opinion, how important are ranking tables in the search and selection process? A. I don’t really agree with this. I think that in general, global custodians and broker dealers will not, and cannot, base their selection purely on the basis of a ranking table. They have to meet the people and really understand what they’re offering. The rating is simply one factor.

“Since we dematerialised our market in 1999/2000, the level of settlement in the South African market has improved beyond belief. Since 2001, I don’t think there has been any form of failed settlements for on-market trades.”

Service Quality Q. Would you agree that corporate action services and proxy voting are still dominating agendas in terms of service quality? A. Yes, I do agree. The full automation of corporate actions is not easy; I think the entire world’s battling with this, mainly because of the differences in terminology, globally. Obviously we automate as much as we can. We also follow the SWIFT releases that come out each year in order to keep up-to-date with the changes that are taking place in the market. We’ve seen a lot more emphasis placed on proxy voting over the last two years. Clients are more demanding, they want their votes to count at AGM’s etc. The issuers can be in no doubt as to where they stand. In certain cases fairly radical steps have been taken, e.g. the removal and replacement of an entire board. Q. As a dedicated domestic silo, would it be fair to say that clients receive a better level of service than they might from a multi-market provider? A. I think that the level of service depends on your attitude to service. It’s not about the level or complexity of the system that you’re providing.

We’ve noticed that in most of the ranking surveys/ tables, ratings are assigned according to the feedback given by the clients of the providers being assessed. Consequently, you end up seeing a lot of the same providers at the top of the ranking tables. Settlement Q. (a). I understand that various projects have been initiated in order to look into an alternative settlement model for the South African market so that T+3 – for equities – might one day become a reality. However, given the challenges involved, is this likely to happen any time soon? Q. (b). Assuming the market does move to T+3, how will this affect settlement risk? A. Given current market initiatives, such as STRATE’s money market dematerialization project, we see this as a medium term objective. Since we dematerialised our market in 1999/2000, the level of settlement in the South African market has improved beyond belief. Since 2001, I don’t think there has been any form of failed settlements for on-market trades. T+5 does give you a little more time to fix any problems that might arise though.

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“This is an exciting time for us - moving into master custody we can now target the local pension fund market.”

Nevertheless, from a credit rating standpoint, I think investors would like us to move to a T+3 scenario, even if it does mean failed trades; one seems to be outweighing the other. When you consider that our bond market, which by value is much bigger than our equity market, is at T+3, and our money market is at T+0, we’ve certainly got the technology to do it. However, in going to T+3, it will probably mean sacrificing our perfect settlement record. Q. What impact will this have on the number of foreign investors entering the market? A. The more we can bring our systems in line with what is considered to be the norm for foreign systems the more attractive we’ll be to foreign investors.

added and whether those services have a cost attached to them. It may be an accurate figure though if you take in to consideration securities lending, master custody, compliance reporting and so forth. The Next Chapter Q. Local providers continue to dominate the South African market, will this continue? A. I think they will until an international bank decides to join the local payments system. It also depends on how quickly we become internationalised with respect to our own market practices. When our market practices are indistinguishable from any

"We champion many of the ongoing market initiatives from concept to implementation. We also have representation on STRATE’s board, and I myself sit on the Bond Advisory Committee. We ensure that our voice, and the voice of our clients, is heard."

Value Added Services Q. Has core custody become a commodity? A. I think that core custody is very important, and it’s something that must be done well. However, I would say that yes, core custody is becoming a commodity with bolt-on value added services. Q. Are value-added services the key to winning mandates and staying in business? A. From a pricing standpoint, the more services you can feed in to a client, the more you can discount each of those services, and still make a reasonable return, which ultimately makes the offering more competitive. Q. Industry insiders predict that value added services may soon account for 50 per cent of revenues generated by custodians. Is this figure accurate? A. It really depends upon what you consider to be value

other, international providers will be able to use their systems here. Q. Where do you see FNB’s custody business this time next year? A. We’ve witnessed a growing equity and bond market over the past two years and we see this continuing. Our client base is growing and growing, therefore, we can only get stronger. This is an exciting time for us - moving into master custody we can now target the local pension fund market. In addition, we are also targeting the international market from a service and pricing standpoint.

Andre Jansen Van Vuuren is the Head of Custody Services for First National Bank. Stuart Yates is the Head of Securities Services for First National Bank.

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Competing with Western Europe Jonathan Calens and Peter Csiszer discuss the topic

Introduction Q. In terms of local (Hungary) market share, kindly define your position in percentage terms? A. Citigroup Corporate and Investment Bank started its securities services business here (Hungary) in 1992 and has been a major provider ever since. We were the first to market in this business. Subsequently, a number of providers have appeared which has increased competition and resulted in some segmentation of the market.. In the early 90’s we enjoyed significant market share. Foreign investors preferred using us because of our SWIFT capabilities, best in class security, and global presence combined with local language and English speaking professionals. However, after the millennium this changed slightly, for as the capital market developed, clients raised their expectations and competitors improved their respective service offerings. Consequently, we started to compete in a more sophisticated way. Today, our market share is approximately 40%, in terms of foreign business.

emphasis has been placed upon adding value, product innovation, and offering customized solutions tailored to the clients’ needs. We’ve moved beyond the basics. Hungary has reached a point whereby the custodial value proposition of its providers is close to, if not comparable with, the major markets. Clients no longer consider Hungary to be an emerging market, and I think that we are somewhere in between. Although not a major market, when you consider the size of the country, its exchange, and transaction volumes, the regulatory landscape and services available make it quite mature. The Securities Marketplace – Implementation Issues The community has worked diligently in order to unify securities standards and market practice throughout the transaction lifecycle, achieving significant results in the process, particularly in terms of documentation. Of course the next step is to turn these results into reality.

“In terms of transaction volumes, since the EU accession there has been a 100% increase.”

Q. (a). Pre EU accession, Citibank Zrt.’s transaction volumes increased by approximately 60%. Where are you today? Q. (b). Have volumes reached the level necessary to challenge, and or pose a threat to, bigger markets? A. Citigroup Hungary has been growing both organically and through acquisition - new entrants to the Hungarian market and mandates won. In terms of transaction volumes, since the EU accession there has been a 100% increase. This can obviously be attributed to EU accession, but also to favorable market conditions. Within the region, Hungary has the highest interest rates in terms of local currency. Political stability and stability of the local currency (HUF) create a healthy investment climate. This has been reflected in transaction numbers and AUC. The Hungarian market is mainly driven by international investors. On average, foreign investment in the capital market is over 70%. From a service standpoint, in recent years, a great deal of

Q. How much momentum do initiatives like the Giovannini report and the harmonisation of regulation provide? A. I would say a great deal. In terms of transaction processing, and the regulations of the clearing house, we are very close to Western European markets, e.g. Germany. When international clients look at our market and service profiles there’s no surprising information. Everything that we do is very similar to the major markets, from our settlement cycles, status reporting, and pre-matching, to the way in which clearing takes place and on-exchange transactions are settled. Transaction settlement is quite well developed. This can be attributed to the CSD’s (central securities depository) attitude. They’ve mimicked the methodology and know-how of the major markets and have implemented the things that work. The Changing Face of the Securities Landscape – Regulatory Change Compliance and conformance initiatives such as the

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Giovannini EU report on clearing and settlement, ESCB/CESR, CPSS/IOSCO, Basel II, and the G30 report, have taken center stage recently, but some say to the determent of the industry. Q. Given the number of initiatives and recommendations currently in the pipeline, can the industry cope? A. We are involved in a number of initiatives, like the Markets in Financial Instruments Directive (MiFID) and the Single Euro Payments Area (SEPA) and believe they represent an opportunity for Citigroup and our clients to develop strategies that will yield results through the efficiencies gained from a harmonized market.. Given the number of initiatives that are being rolled out, from technology through to regulation, we have to prioritize. We tend to assign special groups and individuals to those projects which have a direct impact on the bank and its clients. It’s important to make sure that we are fully represented at the right meetings, conferences, and associations. The way in which local regulators implement EU regulations into Hungary’s legislation is very important, because it determines the course of action taken by the bank. Service vs. Cost Q. Are clients expecting too much. Has the service vs. cost debate run its course? A. Clients do expect a lot, and they should. As a provider in today’s Hungarian market, if you are unable to offer top quality service and meet all of the clients needs you won’t be around for very long. Clients must, and do, come first. The natural tendency is that pricing should go down over the years. This is true for Hungary as well, however, given the local infrastructure costs, the Central European region’s pricing level is still high when compared to Western European countries. Q. Margins have been shrinking for some time which has sharpened competition. Have investors benefited as a result and what impact has this had on service levels? A. Margins are narrowing because of increasing competition. Certain [major] markets necessitate unbundling of fees, as this seems to be the only way to avoid hitting the rock bottom and make pricing more transparent. Although infrastructure costs and consequently service fees in Hungary and the C.E.E region are higher than those of the Western European markets, this trend has not reached us yet.

Clients have benefited a great deal from the increase in competition, not just in terms of pricing, but also in terms of services. As providers evolve, and services become comparable, clients will benefit more and more. European Harmonisation Q. What can the CSD community do in order to support harmonisation? A. I truly believe that Hungary, specifically the stock exchange, is too small to stay alone forever. This is the case for most C.E.E. countries, apart from Poland. However, many of the C.E.E. countries are quite reserved. Naturally they want to protect the interests of local service providers. Speaking to senior executives at the stock exchange and CSD, they realise that alliances will need to be forged. However, to date, a clear strategy has not been defined. From the perspective of regulations and code of conduct the CSD actively participates in the European harmonization process incorporating any related developments into its short and mid term strategies. Looking Forward Q. What challenges will the Hungarian market face in 2007? A. Clearing and settlement has advanced significantly in Hungary. Conversely, SWIFT development has not. The CSD is still not SWIFT based. However, it has been agreed, at the board level, that in 2007, SWIFT development will be accomplished. KELER, the Central Clearing House and Depository, will be able to receive SWIFT instructions from its members who in turn will be able to obtain SWIFT reports. This will be a major step forward. In terms of harmonisation, the CSD and clearing house functions will be separated into two legal entities, which will take affect from January 1, 2008. Clearing will be separated from the depository function in keeping with EU and major market regulations. The pace of change will be great, as will the rewards. A big question mark for the BSE and local investment service providers is whether major international investment banks will break even to decide on becoming direct members of the exchange in 2007. Potential efficiencies might lead some major players to move ahead. This would trigger others’ decisions as well and might finally reshape the whole Hungarian brokerage and clearing business.

Peter Csiszer is Securities Country Manager for Citibank Zrt.

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The Evolution of Nordic Custody Jonathan Calens talks to Anne-Lise Kristiansen & Peter Dahlgren

Competition Q. The big US banks have started to make inroads into the Nordics, which has created a certain amount of unrest amongst established players. However, others consider the emerging business model to be that of a partnership structure between foreign players and domestic banks. Where do you stand on this? A. Competition amongst Nordic providers is fierce. You really must have a local presence in all four markets, because they are all still very different when it comes to market practices. With margins decreasing it would be very difficult for a global custodian to compete; they would need to cover all four markets. Our clients are increasingly looking for a pan-Nordic provider with a local touch. It’s a very interesting game in the Nordics; competition is completely different

tied into a Nordic reporting layer. This is unique. Although we have the strongest position in this market we continue to back this up with ongoing investment in the product. The global custody landscape is completely different. Our biggest competitors are the global custodians, which are also our clients on the sub-custody side. This is why we’ve split up the business as far as global custody and sub-custody are concerned. We have an alliance with the Bank of New York in order to target the bigger clients, which has been a great success. An Integrated pan-Nordic Market Q. The Nordic Single (NS) Project consultation paper (Nordic clearing and settlement model narrative) describing the implementation of

“Given that Finland has adopted the Euro and Sweden has not, this poses a big threat to the Nordic Central Securities Depository (NCSD), especially if the scope of the project is ambitious and the timetable is short.”

between sub and global. In terms of subcustody, we operate in a very competitive environment. However, there are only really two strong providers in the market today. Although Citibank are trying to break in, it’s on a fairly limited scale. It will be interesting to see how they grow their business. It’s very hard to compete in the Nordic market unless you’re an expert in each country. Naturally, I follow the movement of all my competitors. However, Nordea has a ver y strong franchise, with local capabilities in each country. We also have a “best-fit” system in each country, which is

a single market structure intimated that full implementation could be achieved in three to five years. Twelve months on, does this seem realistic? A. In order to achieve greater harmonization, and at the same time reduce costs, the European System of Central Banks (ESCB) has launched the TARGET2 project. However, TARGET2 is geared towards the Euro currency. Given that Finland has adopted the Euro and Sweden has not, this poses a great threat to the Nordic Central Securities Depository (NCSD), especially if the scope of the project is ambitious and the

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“The Norwegian market is very expensive. However, we have been working with VPS, the Norwegian CSD, providing them with information that will hopefully lead to a reduction in prices moving forward.”

timetable is short. Looking ahead, if Finnish securities are not part of the Nordic CSD, it will be difficult to build a good business case, at least for Finland and Sweden. Should this be the case, the Nordic CSD will probably look to Denmark and Norway in order to achieve some semblance of an alliance, which will take time. I think it’s probably unrealistic, certainly in the short-term, to think that we will have a truly integrated CSD. However, Nordea will continue to work towards Nordic CSD integration, we must see real benefits for our clients though. Currently there tends to be more focus

Q. Cost pressures on local custodians are significant. However, full Nordic exchange integration could bring with it potential cost savings of 15-20%. With full Nordic CSD and CCP integration, OMX predicts cost savings could be as much as 40-45%, significantly reducing end-user costs. Surely these are savings the Norwegian market cannot ignore? A. In order to achieve this, at the very least, you will have to include Finland and Sweden; perhaps the other Nordic markets, Denmark and Norway, as well. Of course, if significant savings can be realized, everyone will be happy. However, in a few years from now, should Finnish volumes not be part of

“In order to achieve greater harmonization, and at the same time reduce costs, the European System of Central Banks (ESCB) has launched the TARGET2 project.”

placed on corporate actions, which might be an area the Nordic CSD’s will unite on. However, compared to settlements, the business of corporate actions is a complicated one. Q. Nor way is perceived by many subcustodians to be the main obstacle in the creation of an integrated pan-Nordic market. Is this fair? A. Yes, the CSD in Norway has not been very involved in the integration process. I think that if you look at the ownership of the Norwegian CSD, in the past, foreign investors were in the driving seat. Today, the makeup is completely different. The vast majority of shares in VPS belong to Norwegians. This is also reflected in the way VPS is governed.

the Nordic CSD, these savings will be unrealistic. Although we support a Nordic CSD with full integration, market levels must be harmonized so that the Nordic C S D is in fact a true CSD and not just another layer which adds cost. We have to be realistic, market practices have to be harmonized. If the Nordic CSD is simply another layer on top of the existing CSD, and we keep the same account structure and market practice, I don’t think that we gain a lot. The Nor wegian market is ver y expensive. However, we have been working with VPS, the Norwegian CSD, providing them with information that will hopefully lead to a reduction in prices moving forward. The Norwegian market is the most

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“We are winning more and more pan-Nordic mandates, and clients that are using us in one or two markets are tending to use us in other markets as well, so we feel that our strategy is definitely paying off.”

expensive one. We have urged VPS to participate in Nordic CSD cooperation. As a market-user, with good local knowledge, clearly we have an excellent picture of the overall costs in the Nordics, therefore, we have also tried to influence VPS to be more cost efficient. Local Market Developments Q. It has been suggested that the channel of communication between market authorities, namely the Norwegian Financial Supervisory Authority, and market participants has been somewhat strained. What do you attribute this to?

The Future Q. (a). Given that you have chosen to invest in the provision of both sub and Global custody services, which is of greater strategic importance to your business moving forward? Q. (b). Where will you be concentrating your efforts in 2007? Q. (c). What can we expect from Nordea next year? A. Given that Nordea is involved in each of the Nordic markets we are able to influence developments and forthcoming changes on a regional and Nordic level. We will continue to invest in our sub-

“Nordea is the biggest provider in the Nordic territory today, and we continue to grow. We stay committed to the region and its development.”

A. We try to ensure that our communication with other market participants and the tax authorities is very positive. We are in regular contact with the FSA and assist them with disclosures. We are more than happy for the FSA to be in close contact with clients. However, we encourage them to use the market more. Taxation Q. Following the inception of the Norwegian tax authority’s [tax] exemption model for companies domiciled in the European economic area, has there been increasing demand for your tax skills? A. Demand for these services has definitely risen. Foreign companies have to be evaluated to see if they are covered by the tax exemption model, and this has to be done individually, which creates a certain amount of work.

custody and clearing product, our growth in the region will be ongoing. We are winning more and more pan-Nordic mandates, and clients that are using us in one or two markets are tending to use us in other markets as well, so we feel that our strategy is definitely paying off. Nordea is the biggest provider in the Nordic territory today, and we continue to grow. We stay committed to the region and its development.

Anne-Lise Kristiansen is the Head of sub-Custody for Nordea . Peter Dahlgren is the Head of Custody Ser vices for Nordea Bank .

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18 | Money Markets

Jeanie Naggan Tel +27 11 371 3944

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* The Global Custodian, Agent Banks in Major Markets Survey

CUSTODY

Raising the Bar in German sub-Custody Moritz Ostwald talks to Money Markets

Q. BHF-BANK is not the biggest provider in Germany; however, your size, in fact, has proven advantageous, has it not? A. It’s true that, in general and across all industries, size does matter. However, it is also true that these economies of scale are less predominant in the custody sector. For example, as a relatively small provider, we currently have around €275bn in assets under custody, but compared to some of our larger German competitors, our business is highly profitable. In essence, we do not need to grow our assets under custody in order to stay profitable. The most important goal for BHF-BANK is to offer the best, and most flexible, service in the market. Providing service quality is in no way compromised, we are, of course, happy to take on new mandates.

Q. BHF-BANK took a hiatus from the sub-custody business, why was this? A. In 1995 BHF-BANK decided to partially exit the professional sub-custody business, after a track record of seven consecutive years as one of the world’s most highly regarded providers. Although the bank

custody services [for German securities] for affiliates of our shareholder, which was ING at the time. However, we quickly realised that the margin pressure and IT costs that had initially concerned us would not be as substantial as we had thought. We were also quite fortunate, as 85% of the employees that had worked in the bank’s custody business in 1995 were still in the same department in 2003. So the expertise and market know-how were still present. After investing strongly in the bank’s IT infrastructure it made sense to offer these services to non-affiliated institutional clients as well. In 2004 we made significant inroads into the professional sub-custody business, winning a number of notable mandates like The Bank of New York (BNY). This was without question the turning point in BHF-BANK’s custody story. Relationship Building Q. You place a great deal of emphasis on client service. What differentiates BHF-BANK from other providers in this area?

“When BHF-BANK clients send settlement instructions that are in line with German market standards, for example, we can already achieve an STP rate of almost 100%.”

continued to offer basic custody services to private and corporate clients, we suggested that our institutional clients select one of our former competitors. The main reason for this decision was the well-known analyst prediction that a dramatic increase in IT costs would coincide with a sharp drop in margins. Q. When did you decide to re-enter the market, and why? A. We re-entered the market in 2003 under the name of ING BHF-BANK. We started by providing sub-

A. We strongly believe that trust is the key to a successful partnership. Clients need to have faith in the bank, its processes and people to establish a lasting relationship. This is precisely why client service, especially relationship management, is of such importance to BHF-BANK. BHF-BANK’s culture is different from that of other banks. Our decision-making channels are very short. The high level of individual responsibility offers an optimal working environment for highly motivated employees, who each service a small number of sub-custody clients very well. The ratio of

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CUSTODY

relationship managers/dedicated account service officers to sub-custody clients is one of the lowest in the industry, which leads to very satisfied clients. We do not subscribe to the “production line” mentality. Clients are not just account numbers; they are individuals with different sets of requirements. Our goal is to clearly identify the specific needs of all our clients in order to provide them with a tailormade service. We offer solutions, not products. However, this can only be achieved once we have understood the demands and requirements of each and every client.

BHF BNY Securities Services Q. On the 4 July 2005, you established BHF BNY Securities Services GmbH, a jointly held subsidiary, based in Frankfurt am Main. Why did you decide to partner BNY? A. As the largest global custodian, BNY fits in perfectly with the bank’s strategy, which is to provide all our clients with the best-possible service. For our Germany-based clients looking for a global custodian with exceptional expertise in the German market, the fit could not be better. This means we can perfectly

“Clients are not just account numbers; they are individuals with different sets of requirements. Our goal is to clearly identify the specific needs of all our clients in order to provide them with a tailor-made service. We offer solutions, not products.”

Technology Intensive Q. (a). Do you consider yourself to be a technologyintensive provider? Q. (b). Is this one of BHF-BANK’s unique selling points? A. Besides our motivated staff, IT processes are another crucial factor, of course. The entire custody industry is very technology-intensive, and we indeed believe that we have a unique selling proposition with our dedicated IT systems that were specifically designed to meet the needs of our custody department. We do not depend on any third-party vendors, nor do we outsource any vital services. Most of our custody specialists work very closely with our project management and IT colleagues to ensure the success of all our projects within a short time-frame. Q. You’ve spent a great deal on technology in order to automate certain processes and procedures. What impact has this had on STP rates? A. Over the last couple of years, one of the most important tasks has been to improve STP rates. When BHF-BANK clients send settlement instructions that are in line with German market standards, for example, we can already achieve an STP rate of almost 100 %. You can keep investing in this process but returns will start to diminish. You cannot continue improving STP rates by 5 % year on year.

meet the needs of those clients requiring global services. Q. What impact will BNY’s merger with Mellon have on the aforesaid alliance? A. When things settle down they will be, by far, the largest global custodian group in the world. Although it’s too early to comment on all of the possible ramifications of the merger, we look forward to continuing our excellent partnership with BNY. The BHF BNY Securities Services alliance had a very good year in 2006 with the acquisition of some very prominent players in the German market. Drivers & Trends 2006/7 Q. In your opinion, are global custodians increasingly appointing sub-custodians who can offer a more regional service? A. Yes, this trend is clearly visible, especially for non-tierone markets. In order to relieve some of the burden global custodians and other institutional clients are facing, I think it makes sense for custodians to offer sub-custodian services in more than one market. However, to offer a service in multiple markets it is vital to ensure that there is consistent service quality across the board. With Germany being one of the top three

CUSTODY

"In 2004 we made significant inroads into the professional sub-custody business, winning a number of notable mandates like The Bank of New York (BNY). This was without question the turning point in BHF-BANK’s custody story."

countries in Europe there is still room for professional single market providers, although quite honestly they will be in the minority. Settlement Q. The increase in interoperability between the central securities depository (CSD) in Frankfurt and international CSD’s in Luxembourg and Brussels, thanks to Clearstream’s Real-Time STD, was designed to increase settlement efficiency. Has this happened? A. I think that the introduction of the real-time standard settlement cycle has led to an increase in interoperability. Prior to the introduction of the realtime STD, cross-border settlements were increasingly delayed. Real-time STD has achieved its goal of generating higher settlement efficiency within the night time processing. Final settlement results are now available early in the morning on value date.

increasing. Today, not only global custodians or other banks qualify as large firms but also hedge funds, pension funds, broker-dealers etc. are requesting custody services. Some of them are considering self-clearing instead of using specialised agents, weighing the advantage of a reduced cost base against the disadvantage of binding more internal resources to bridge the gap between the services offered by a subcustodian and being a direct member at CSD level. Q. What can existing and new clients expect from BHFBANK over the next twelve months? A. BHF-BANK will continue to offer the highest level of flexibility and service in the market. It took us no more than three years to re-establish the BHF-BANK brand in the professional custody arena. Over the next three years we will put all of our effort into further distinguishing ourselves from the competition.

"It took us no more than three years to re-establish the BHF-BANK brand in the professional custody arena. Over the next three years we will put all of our effort into further distinguishing ourselves from the competition."

2007 and Beyond Q. Most opportunities for sub-custodians tend to come from mid-tier banks and broker-dealers and not from bulge bracket firms. Large firms see a number of choices open to them - either to self-clear, or appoint an agent bank. Consequently, are opportunities in this space becoming more limited? A. I would disagree. First, clearing services in general are becoming more and more complex. As such, professional partners capable of offering the entire value chain of the services requested are in demand. The question is, can you afford to do everything by yourself? Second, the number of different types of clients is

Backed by the strong commitment of our bank’s senior management, we will further invest in improving our IT processes – such as enhancing the various instruction-entry tools in our internet portal cds@web – as well as the expertise of our staff. As our AuC rise strongly, we are continually looking to attract the best talent in the market to increase the know-how and flexibility of our staff.

Moritz Ostwald is the Head of Sales & Relationship Management, Custody Services at BHF-BANK. He is based in Frankfurt and joined BHF-BANK 3 years ago from State Street.

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REAL ESTATE INVESTMENT

Potential Boom in European Real Estate Securitisation 64 Fraser Hughes & Laurens Te Beek UK Residential Market Seamus Nugent

Overseas Property Investment Paul Owen

Coast to Coast – a Guide to Spanish Investment Richard A Rooke

Your Partner in Portugal Jose Nascimento

Buying in Portugal – The Next Step Luís Lapa e Borges

Portuguese Real Estate Investment – The Legal Process Dr Alexandra Pereira

Return on Investment – Bulgarian Emerging Market Focus Michael Minkov

REAL ESTATE INVESTMENT

Potential Boom in European Real Estate Securitisation By Fraser Hughes & Laurens Te Beek, European Public Real Estate Association (EPRA)

Where Europe fits in the Global Market

European Securitisation Lags Behind

The total size of the global investible quality commercial real estate market is estimated to be just over US$ 16 trillion. No surprises that on a country basis the United States has by far the largest real estate market in the world. The estimated size of the United States market is approximately US$ 5.3 trillion, and, when coupled with Canada, this figure rises to US$ 5.7 trillion. In other words, one third of the worldâ&#x20AC;&#x2122;s high quality commercial real estate is located in North America. Japan ranks second with around US$ 2 trillion, followed by the four major European economies. Exhibit.1 highlights the largest economies in the Europe. The German commercial real estate market is approximately US$ 1.1 trillion, closely followed by the UK. France is close to US$ 900 billion, with Italy approximately US$ 750 billion. The total size of the European market is US$ 6.2 trillion, or approximately 39% of the total global market. The North American market weighs in at 36%, Asia-Pacific at 22% and Latin America 3%.

The European real estate market is a lightweight when the focus turns to the stock exchange listed portion of the market. The size of the total listed market in Europe is close to US$ 180 billion, or just under 3% of the total underlying European commercial real estate. In comparison, the global listed market average is closer to 6.5%, indicating that Europe significantly lags behind its regional neighbours in securitisation levels. Sweden (10.3%) is the only European country to exhibit a real estate securitisation level greater than the global average. The UK, the largest listed market in market capitalisation terms (US$ 63 billion) weighs in under the global average at 5.5%. In comparison, almost 10% of high quality commercial real estate in the United States is listed on the US exchanges. The most securitised market is Australia, with over 30% of commercial real estate held in listed vehicles. In fact, the Australian market comprises over 10% of the Australian Stock Exchange (ASX) market capitalisation.

Exhibit.1

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REAL ESTATE INVESTMENT

REIT Legislation Europe is an extremely diverse region in political, economic and social terms. Every country is governed locally, under its own individual political process, determining its own legal and fiscal framework under European Union guidelines. Despite the introduction of the ?uro on 1 January 1999, Europe still has nine individual currencies in circulation, within the twenty eligible European countries of the FTSE EPRA/ NAREIT Global Real Estate Index. The countries are highlighted in Exhibit.2 below.

European REIT is to establish individual country REIT legalisation on a broader basis, throughout the European region. The Global REIT Market Exhibit.3 indicates that of the FTSE EPRA/NAREIT Global Real Estate Index, approximately 60% of the market capitalisation is derived from REITs. The other 40% comes from the real estate operating companies, or nonREITs. As you would expect, the mature North

Exhibit. 2 FTSE EPRA/NAREIT Global Real Estate Index: The 20 Eligible European Countries Austria * (€)

France * (€)

Italy * (€)

Portugal * (€)

Belgium * (€)

Germany * (€) (expected 2007)

Luxembourg * (€)

Spain * (€)

Czech Republic ** (CZK)

Greece * (€)

Netherlands * (€)

Sweden * (SEK)

Denmark * (DKK)

Hungary ** (HFL)

Norway (NOK)

Switzerland (CHF)

Finland * (€)

Ireland * (€)

Poland ** (PZL)

United Kingdom * (£) (from 2007)

* European Union member state pre-expansion on 1 May 2004 ** European Union member state post-expansion on 1 May 2004 1. Countries with existing REIT legislation highlighted in light blue 2. Country with existing hybrid REIT structure highlighted in yellow 3. Countries who will introduce REIT legislation highlighted in orange () Individual country currencies in indicated in brackets Source: FTSE EPRA/NAREIT Global Real Estate Index Ground Rules – Version 2.3 April 2006, UK Foreign & Commonwealth Office.

Of twenty countries listed, only four - Belgium, France, Greece and the Netherlands, currently have official REIT structures in operation. Italian companies make use of a hybrid structure. REIT legislation will come into operation in January 2007 in the UK, with Germany expected to follow a similar introduction timetable. It is worth mentioning that other ‘developing’ European countries not yet covered by the FTSE EPRA/NAREIT Global Real Estate Index have existing REIT legislation, for example, Russia and Turkey. The obvious first step towards a common

American REIT market comprises 41% of the global market capitalisation, with only a small proportion (3%) derived from North American non-REITs. Asia-Pacific’s expanding REIT markets means that they make up around 12% of the global market. Asia-Pacific non-REITs weigh in at 22%. Only 25% of the European market is made up of REITs, equating to only 6% of the global total. European non-REITs comprise 16% of the total market capitalisation of the FTSE EPRA/NAREIT Global Real Estate Index.

REAL ESTATE INVESTMENT

Exhibit. 3 Regional REIT & Non-REIT Breakdown as at 30 April 2006

Based on the growth and interest in REITs globally, there is huge potential for expansion in the European listed markets where attractive REIT legislation is introduced. A simple exercise is to calculate the size of the listed market in Europe if it hit the global average (6.5%) securitisation levels of commercial real estate market. Using this basis, the European listed market could increase from its current level of US$ 180 billion to over US$ 400 billion. In particular, the German market would expand its listed market considerably. Should securitisation levels hit the current global average of 6.5%, the German market would increase 10 fold. German market capitalisation would expand from its current level of just under US$ 8 billion to close to US$ 80 billion. In fact, all markets in Europe would broaden considerably, offering a new set of opportunities for investors. Summary

â&#x20AC;Śâ&#x20AC;Śbut it could expand significantly in the future Europe (22%) is disproportionately small when compared against the North American (44%) and Asia-Pacific (34%) listed real estate markets. To recap, Europe comprises 39% of the underlying commercial real estate market. North America has well established REIT markets, and Asia-Pacific has seen tremendous growth in its REIT markets over the last four years.

Europe has a long way to go to catch up the established REIT markets in North America and the recent developments in the Asian markets. However, there are a number of positive signs, particularly regarding REIT legislation in the UK and Germany. We can expect to see increased levels of activity and growth in the European listed market. Given the underlying size of the European commercial real estate market, under the right conditions, in excess of US$ 200 billion could enter the listed market over the medium term. These developments will offer investors a broader universe to deploy capital. In market capitalisation terms, the size of the European market could easily move in excess of $400 billion, or approximately 33% of the global market, closer to its natural underlying weight (39%). Given the expanding Asia/Pacific market, potential growth in Europe, and the increase in investor appetite in this increasingly global asset class, it would not be surprising to see the market capitalisation of the FTSE EPRA/NAREIT Global Real Estate Index step over well over the $1 trillion mark in the next five years.

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REAL ESTATE INVESTMENT

The UK Residential Market Seamus Nugent, Dandara Holdings Ltd

Despite the volume of negative comment in the media about the UK Residential Market, the facts paint an altogether brighter picture. UK house builders are still reporting record profits, and the general trend is echoed in the results of the countries largest house builder Barretts. Their UK housing profits of £396m rose 8% on sales of 14,351 units, or £2.472bn, up 2%, and achieved an operating margin of 16%, very healthy figures indeed. The second largest house builder Persimmon increased its average unit price by £12,000, in the last year. Barretts Chairman, David Pretty, summed up the situation by saying, “the fundamentals of the housing market remain sound, supported by low interest rates and good employment levels. Theses are underpinned by restricted supply caused by constant planning delays, and the enormous need for new housing which will have to be met in the long run.”

economy with some of Europe’s lowest unemployment figures and over 300,000 immigrants entering the country each year. The UK Housing Minister, Yvette Cooper, stated recently, ‘’over the last 30 years, while housing demand has gone up 30%, housing production has gone down 30%.’’ The Treasury-commissioned “Barker Report” calls for a build rate of at least 300,000 homes per year to meet demand. So why is the UK not building more homes, the answer in a single word is, ‘’ planning’’. Over the last four years, in a period of unprecedented demand and house price inflation, planning approvals on large housing schemes dropped by 15%. As we know, housing sites come from one of three sources, Greenfield, Brownfield or Inner City

“It may be a surprise to some, but the UK is now producing fewer houses than at any time since the Second World War.”

All of the above is very reassuring to the vast number of people who invest in the UK property market. Supply and Demand It may be a surprise to some, but the UK is now producing fewer houses than at any time since the Second World War - over the last three years the average is approximately 150,000 per annum for a growing population of 60m.. For perspective, in Ireland, with a growing population of 4 million, we build between 75 to 80,000 homes per annum and prices are still rising, demand is still not being met. Ireland is building houses at 7.5 times the rate of the UK per head of population. For the UK’s 60m population, 150,000 is well short of the requirement, especially in a strong growing

redevelopment. However, the greenbelt and NIMBY (Not In My Back Yard) lobby are highly active and they elect the local councillors that decide on planning permissions and zoning. Brownfield sites in the UK often have very expensive remediation problems and are often not well located. Inner-city sites are preferred for redevelopment, but often need to be assembled from multiple owners, leaseholders or both. Previous uses, ground obstacles, rights of light, historical and archaeological issues all have to be dealt with first and all take time. This is good news for investors - the demand for housing is set to exceed supply for the foreseeable future, keeping upward pressure on prices. This basic shortage has seen eight consecutive years of high property inflation. It took five interest rate increases to

REAL ESTATE INVESTMENT

slow it down, but it didn’t stop it; house price inflation last year was still between 5-6%. The root cause of the inflation, i.e. lack of supply, has not been addressed and the demand pendulum has already begun to swing back into play. From a demographic viewpoint, pressure is building up from all fronts. First, people are living

residential property market has a mine of past statistics and performance figures to enable analysis against other markets and other asset classes. So when viewed against all other asset classes, for example, equities, gold, funds, and so on, over the last 40 years property has increased in value by an average of 11.3% per annum. Over the last 100 years it has

“According to the 'Council of Mortgage Lenders', the average age of a first-time buyer is now 34 and home ownership among the 25-29 bracket is dropping.”

longer; homes are not being passed to the younger generation. Many couples are waiting until their mid to late thirties to start families, as opposed to mid to late twenties - 25 years ago. Consequently, household occupancy is dropping putting evermore pressure on existing stock. Single occupancy household levels are due to double over the next 15 years from 5m to 10m. Relative Performance Residential Commercial property Gilts Equities 1997-2004

Cash 0

5 10 15 Annualised total return (% pa)

Source: IPD/Nationwide/LIM

According to the 'Council of Mortgage Lenders', the average age of a first-time buyer is now 34 and home ownership among the 25-29 bracket is dropping. Renting is now more affordable; in addition, it has also fulfilled the young person’s need for flexibility. Many claim that by renting, and not buying, they have been given access to better areas and nicer properties. More and more young people, now and in the future, will not be working in factories on industrial estates but in city centre office blocks or business parks in service industries; they will live in city centre rental properties near to the leisure facilities they enjoy. Past Performance: On top of a huge economy, that a 60m-population G8 country generates, the UK

been 8% and this includes the low inflation decades in the 20’s and 30’s. It exceeds all other classes in the last 10 years and whilst average growth consists of highs and lows, the increase is still relentless. In addition to capital growth there is also the added bonus of rental income. The other main advantage of property over equities is that property can be leveraged and the rental stream used to finance borrowing on the property. The average gross yield on new property is around 5%, which rises as a percentage of the initial purchase price as rent increases. Combining yield and capital growth gives an average of approx 16% per annum, which doubles the value of an initial purchase every five years. Most investors borrow part of the capital required to make the initial purchase at say 35% equity, 65% borrowings, so that equity is growing at an average rate of 33% whilst rental income pays off the loan. This return is six to seven times what bank or building societies deposits can achieve. Many people now regard this form of investment as the most viable alternative to providing for their pensions. The UK property market is one of the world’s most liquid property markets, meaning investments can be sold and easily turned back to cash. Most UK citizens can afford to buy or rent property at current price levels - compare this to Eastern Europe where the average income per head is between €4,000 and €6,000 per annum. Such populations cannot afford to buy property at today’s inflated prices and liquidity in these markets will be an issue for many years.

Seamus Nugent is the Managing Director of Dandara Holdings Ltd.

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Overseas Property Investment Paul Owen, AIPP

Money invested in UK bricks and mortar has performed well for many investors and the market has become increasingly accessible for the ‘man on the street’. It is that very accessibility that has encouraged the savvy investor to turn to new markets. By looking at property overseas, investors have already seen encouraging results and this market is growing at a fantastic rate, according to many commentators. The growth is not just in the number of buyers coming to market but in the number of options available. However, wider choice has its rewards and its risks. Where once it was a matter of choosing a Costa and a golf course, people can now buy on every continent under all sorts of regimes in every currency, and there is a huge variety of legal systems, tax laws and exit strategies to suit every individual’s circumstances.

course, includes the investor. In a relatively young though fast-maturing market, the AIPP will help the industry through the growing pains that any teenager has to endure. All Members have voluntarily signed up to follow a Code of Conduct, one established to help and protect the buyer of overseas property. With a qualification process, training programmes and disciplinary processes for those who transgress, this body’s standards and the reassurance it brings will change the international property market for the better. As trailblazers in any market, investors should be the first to benefit. ‘40% of overseas property buyers are full-time investors or people seeing their purchase as at least a partial investment; I suspect the majority are serious investors,’ said Sue Ash, CEO of Ash Communications, a PR company which has an overseas property division and which recently

“Money invested in UK bricks and mortar has performed well for many investors and the market has become increasingly accessible for the ‘man on the street’. It is that very accessibility that has encouraged the savvy investor to turn to new markets.“

With enormous choice comes wonderful opportunity. However, it also brings the prospect of long, detailed research projects or long odds that a speculative punt on a pile of rubble in ‘Neverbeen-there-Never-will-land’ will bear any fruit. This explosion of choice in the market along with the tricky terrain in some established international property markets has seen the industry take a stance to help the consumer and improve the industry for all concerned. The Association of International Property Professionals (AIPP) is a membership organization that has been set up with the sole aim of improving standards of professionalism in this market. It will bring protection to the consumer and that, of

undertook a survey of AIPP Members about the market in the first six months of 2006. With emerging property markets in the last few years reporting capital gains of 20 to 30 % a year, it is little wonder the ears of the investor have pricked up. When the word ‘guaranteed’ is added to adverts, the investor really should listen and listen carefully. ‘The only guarantee on capital growth is historical,’ says Ray Withers of Property Frontiers, a property investment company based in the UK. ‘All investors know that but I continue to be surprised at how many forget it when buying abroad. The sort of adverts that mislead on this point (and on rental returns) are hurting the

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market. It was one of the reasons we joined the AIPP as Founder Members. It really is high time this industry grew up, used real figures and made promises it can keep. There are plenty of us doing that; unfortunately, there are also plenty who do not care whether the figures are right or reasonable or even believable!’ When faced with properties and schemes that offer guaranteed rental returns in the international market, it is vital to make sure that such guarantees are in the contract: if they are not, they are just promises. There are markets that have seen fantastic capital growth in the past and there will be more in the next few years. However, you need to do your research into the markets and you need to find out the names of reputable agents and whether their numbers add up. As with most investments, the greatest rewards tend to come with the biggest risks. ‘If you’re buying property which you hope will realise very high year on year capital appreciation, it’s likely to be in a ‘new’ country for overseas

one, such as Bulgaria, highlights the pluses and minuses of two routes in international property investment. Bulgaria has seen high capital growth in the last four years. Its expected entry to the EU has played its part as has its bid to host the 2014 Winter Olympics. With much of Bulgaria, you are buying into what this should become but, because it still has some way to go in building the roads, providing the facilities and attracting the high numbers of international holidaymakers, it is hard to be sure. Bulgarian society is changing too: many people are still relatively poor and most are unable to buy their own property. This could all change in the next few years and many experts feel sure it will, rewarding those who have bought and benefiting the country itself as local people can buy properties themselves and drive the market more strongly. International property buyers bought an enormous amount of property in Spain over the last decade. In the late Nineties and early years of

“Where once it was a matter of choosing a Costa and a golf course, people can now buy on every continent under all sorts of regimes in every currency, and there is a huge variety of legal systems, tax laws and exit strategies to suit every individual’s circumstances.”

buyers,’ said Cindy Griffith of Cavendish Brooke International which offers property in many locations across the world from its UK base. ‘The promise of such results is based on an improving national infrastructure, new road and rail links or new airlines planning international routes. It’s often based on changing local demographics – certainly key to many of the emerging markets in Eastern Europe, for example – as is the potential of EU membership. But investors should not forget the established markets of Spain, France and the US. These represent a much lower gamble as you know exactly what you’re getting: the roads, the flights, the facilities are already there; the holidaymakers know them and like them. In the long term, they may prove a good bet for many investors.’ In a simple way, the assessment of an established market, let’s take Spain, against a new

the Noughties, property prices soared. This has slowed over 2005 and 2006 in most parts. Some consider that the market has peaked in Spain and advise against investment in certain areas: they may be right. However, with an ‘established’ country comes a more mature market and you have a clearer idea on many things. The flights are already in place as are the roads, the trains, the bars, the restaurants and the millions upon millions of holidaymakers every year. It is hard to imagine a time when UK holidaymakers will not go to Spain. You know exactly what you will get there and you know whether you like it or not. Western Europe, Spain included, is home to an increasingly affluent population and it offers a lifestyle that many people want to enjoy full-time as well as during holidays. You’re unlikely to see high capital appreciation in the immediate future

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but, again, over the long term it is a safe, secure place to put your money and should see some capital growth. So, where to go from here? Well, we should start with the ‘safe, secure’ ending to our previous tale. Western Europe is ‘safer’ and ‘more secure’ in that many investors know it well. However, you can still easily get it wrong even in a country with which you feel familiar. Suffice to say, your money is only as safe as you make it or as risky as you accept. If you want to take a punt without doing

UK’s Finance Act this year and its position on leaseback properties qualifying as commercial property and therefore being cleared for use in SIPPs. Fractional ownership is on the market giving a lower cost entry point. In emerging markets, developers are looking for investors to buy land and contract the building back to them and there are even islands for sale with provisional planning permission for holiday villages in place! There really is so much to cover on the possibilities of overseas property investment: which

“This explosion of choice in the market along with the tricky terrain in some established international property markets has seen the industry take a stance to help the consumer and improve the industry for all concerned.”

research and without using professional companies, then enjoy the ride: it may be a good one. If you want to protect your investment, take precautions. Nobody will know how well the investment will perform, of course, but you can at least be sure that the agent is working legally and honestly, that the property is actually for sale, that you have full rights to it and that you’re paying a reasonable market value for the property. Much of this ground will be covered by a good lawyer and, yes, you should use one: they will cost you money but getting the purchase right will be one of the best parts of your investment. ‘Aside from the usual legal checks that the property details are true, that it’s safe to buy and that the contract terms are fair, probably the most important thing a lawyer can do is to save his client a fortune by choosing the right legal structure for the purchase,’ says John Howell of John Howell & Co English Solicitors and International Lawyers. This market is enormously exciting right now for investors worldwide. The world really is opening up and with that opportunity comes the prospect of good investment returns. We’ve touched on a few points to remember whilst you explore the globe at your investing fingertips. We’ve not even had the time to consider the guaranteed rental returns that are available, some long-term, on certain property investment products. We still await the final version of the

continent, which country; is it land, new build or old character property; do you want rental returns or capital growth or both; are you looking short, medium or long term? You know the questions you’ll want answered before you invest your money. What you may not know is who you should use and how to find them. You now have some help as the international property industry works hard to present the professionals in the industry under one united body, a body that brings self-regulation, professional guidelines and consumer confidence. This market, unregulated to date, has left you at the mercy of your own research into whether a company is professional or some way short of that. You have quite enough research to do already! When searching for an agent, a developer, a lawyer, a foreign exchange provider or a mortgage broker to help you buy property overseas, looking for the badge of AIPP membership should save you one worry. The badge shows a company leading the way to a professional, regulated and reputable market. Good for them. And very good for your money! Paul Owen is Chief Executive of the Association of International Property Professionals (AIPP), an industry body that has been set up to improve standards of professionalism in the international property market. It is a non-profit organization.

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Coast to Coast – A Guide to Spanish Investment

Richard A Rooke is an independent property consultant, member of FIABCI, The International Real Estate Federation, and established on the Costa Blanca for more than 22 years. With over 30 years experience in the real estate industry, and Spanish professional real estate qualifications, Richard's expertise is second to none. He has links with leading developers and builders, throughout the Costa Blanca, Costa Calida, and all along the coast. He has twice been awarded the title of Spanish Property Consultant of the Year, for 2004/2005 and 2005/2006, by Business Britain Magazine, and European Property Consultant of the Year 2005 by Total Business Magazine. This recognition and acclaim, is firmly establishing his company as one of the market leaders in overseas property. He can find you anything from apartments to villas,

best value for money available for the type of property required, and finance can be arranged, on the spot in Spain at advantageous interest rates, if and when required. If you are thinking of buying in Spain, and looking for help and advice on what to buy, where to look, and how to go about it, then Richard's assistance is what you should be taking advantage of. There are opportunities in different areas for different reasons, and one particular area, just at the moment, is well worth taking a look at. The two adjoining regions of the Costa Blanca and Costa Calida, on Spain’s Mediterranean coast, will inevitably become the greatest golfing destination in southern Europe. This area enjoys incredible all-yearround weather conditions, and Spain’s leading developers, are showing enormous commercial

“The company's object is to offer its clients the best value for money available for the type of property required, and finance can be arranged, on the spot in Spain at advantageous interest rates, if and when required.”

properties close to the beach, on golf courses, marinas or any other location, for holidays, retirement, or investment purposes at prices to suit most pockets. He offers both re-sales and new developments, and has a wealth of knowledge and experience that he willingly, passes on to his clients. He is on the spot, and can help and advise any serious buyer looking for property in Spain. The choice is enormous; the fun is in the choosing, and good, honest, sound advice can be worth its weight in gold. Anyone buying through his office, will receive assistance during the whole purchasing process, from start to finish (and even after wards) – avoiding any pitfalls that otherwise might be encountered on the way. The company's object is to offer its clients the

interest. Exclusive golf projects are appearing ever ywhere. Complete new communities, surrounded by beautifully designed courses, and lush green fairways, are rapidly being created, and competing with each other for pride of place in the international property market stakes. Golfing enthusiasts already spend large periods of time in Spain, and with warmer climes just a couple of hours away, they are winging away at any time of the year, to play a few rounds of golf in the sun. Individuals, businesses, and golf-lovers ever ywhere, are purchasing properties for holiday use, retirement, or purely investment purposes, on and around golf-courses, in ever increasing numbers. The choice of location and property is becoming increasingly difficult

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to make, as the availability on offer continues to grow. Knowing the area, knowing the developers, and having full knowledge of the present day market situation, means that, for someone in Richardâ&#x20AC;&#x2122;s position, this choice is not so difficult, but for the average man in the street, it might be hard to make the right final decision. The choice is enormous, and prices vary considerably. Proximity to the coast with all its additional attractions is important for a lot of people, so that most of the new developments are within 15 to 30 minutes of the sea, but there are golfing projects further inland, where peace and tranquility are more vital than the hustle and bustle of the coastal towns. One of the best known, and longest established residential/golf-course developments, is La Manga Club, within easy reach of Murcia and Alicante airports, with three 18-hole championship golf-courses, and many other sports and leisure activities available on the resort, or close-by. Shopping centres, restaurants, a host of lively bars, a luxurious five-star Hotel and a Casino, offer the best in cuisine and entertainment. La Manga Club is obviously top of the range, with every possible comfort and amenity on hand. There are still a few luxurious villas on offer, priced between 1 and 2 million euros, built to exceptional standards, and representing the investment of a lifetime, that are nearing completion and ready for occupation. You may have to wait longer, however, for properties on many other developments that are selling faster 'off plan', because of their lower prices, but that doesnâ&#x20AC;&#x2122;t necessarily mean that they are not equally good value for money. Polaris World offers different types of luxur y properties of extremely high quality, on several new Jack Nicklaus designed golf resorts, and one can see the progress they are making. These courses, which are destined to be among the finest in Spain, are attracting increasing interest from golfers and investors alike. There are numerous other companies striving to compete, with similar style resorts, and the options are far too many to list here. Which project should you choose? That's something that should be discussed with Richard out there, in Spain.

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Your Partner in Portugal Jose Nascimento, ERA-Almancil

History to Date

ERA’s entrance in to the Portuguese market was due to the strategic and futuristic vision of four business men: Fernando Sapinho, Paulo Morgado, Nuno Ramos and Orlando Gonzalez. Contracts - Master Franchising in Portugal – were signed in Las Vegas in March 1998, and in October 1998 the company opened for business in Laranjeiro, the first Portuguese ERA agency. An ambitious goal was set, to open 125 agencies by the end of 2005. With 140 agencies country-wide, 210 managers, 140 business directors, 140 file directors, 140 coordinators, 1400 sales people and 250 administrative staff and auxiliary staff, this goal was surpassed. ERA is a trade mark of Realogy Corporation, the

Portugal in 1998, which is in essence, an information distribution channel for domestic properties. One of the main drivers behind the aforementioned initiative was, and is, to provide data on certain structural deficiencies that exist within the real estate sector. However, we should also remember that the aforesaid nation-wide real estate network is also a hypermarket where thousands of properties can be accessed by millions of buyers. You can find the ERA net in all district capitals across Portugal, in addition to the islands of Azores and Madeira. As pioneers in our field, we have a responsibility to the market and our clients. Therefore, we will continue to provide innovate solutions, technologies and services. Our objective is to exceed the expectations of our clients.

“ERA brought the concept of the real estate net to Portugal in 1998, which is, in essence, an information distribution channel for domestic properties.”

real estate section of Cendant group, the biggest franchiser in the world -sectors include hotel services, tourism, car rental and real estate. Today ERA is a global trade mark, which you can find in 37 Countries around the world, 16 of which are in Europe. The ERA trade mark has become a well known real estate label in Portugal, synonymous with quality. ERA’s Value Proposition ERA’s specialty is making people feel at home. This is achieved by hiring the very best. Every ERA agency is staffed with experienced professionals, trained in sales laws, commercial communication, and bank financing. Their objective is to satisfy the client’s every need. Apart from providing the very highest level of customer service, the ERA value proposition also includes, but is not limited to, real estate marketing, qualification of buyers, planning property visits, bureaucracy and financing. ERA brought the concept of the real estate net to

The Sales and Marketing Process Clients that want to sell property can be assured that an effective marketing campaign will be conducted. Each campaign is designed, based upon tried and tested methodologies for each market. Amongst other strategies employed by ERA, print advertising plays a significant role in the promotion and showcasing of property. The magazine, “Proprietários” ("Owners"), which circulates half a million copies twice a month, is a vehicle ERA uses frequently, an example of the strength ERA demonstrates in this area. The marketing elements of ERA's value proposition make the difference whenever properties are being promoted; homes achieve the right price, and they are sold within a short space of time. No one invests in real estate marketing more than ERA agencies. Real Estate Services Bureaucracy, inherent in the sale of a property, is

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“However, we should also remember that the aforesaid nation-wide real estate network is also a hypermarket where thousands of properties can be accessed by millions of buyers.”

something ERA deals with on a daily basis. Therefore clients can rest assured that all of the unpleasant aspects of buying, and or selling, will be taken care of, allowing them time to reflect on that dream home.

addition, the credit approval process is shortened considerably, which allows clients to get a quick decision. Looking Ahead

Financing ERA has established partnerships with all of the financing institutions operating in Portugal today. Thus ERA can provide clients with access to mortgage credit simulators in their agencies, which help them to identify the best spreads, and also lower processing costs. In

Looking to the future, by the end of 2008, the company’s goal is to have 200 ERA agencies open across Portugal.

Jose Nascimento is the General Manager of ERA-Almancil.

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Buying in Portugal – The Next Step Jonathan Calens talks to Luís Lapa e Borges

Introduction Q. Can you tell us a little bit about the history of Luís Lapa e Borges – Law Offices? A. The law office started its activity around 20 years ago under the name of my late associate Dr. Leonardo Ferreira Dias. Six years ago he kindly proposed a partnership, which I immediately accepted with great honour, leaving my previous activity as a juridical adviser for the Agriculture Ministry, together with my law firm in the Algarve's regional capital, Faro. From the very beginning of its activity, our office helped foreign clients that wished to buy property to live, to rent, to resale or to develop in Portugal, mainly in the area of the Algarve. Our team is comprised of two lawyers and seven assistants who specialise in real estate legal matters. Our firm's premises are located in Loulé, Algarve, Portugal. We also represent several developments in this area, from the creation of the legal structure to the selling of the units/villas.

Why Invest in Portugal? Q. What makes the Portuguese property market conducive to investment? A. Portugal, mainly the south, is known for having excellent weather conditions all year round and our coast line has beautiful beaches with golden sand. In the Algarve there are areas like Quinta do Lago, Pinheiros Altos, Vale do Lobo and Vilamoura, which I have already mentioned. Here you will find the most exclusive developments, with some of the best golf courses in Europe, and top end luxury villas. Furthermore, the Portuguese in general are very hospititable, and make everyone who visits feel welcome. This is a unique combination that makes this market an extremely attractive investment. Q. What type of property generally offers the best return on investment? (a). What kind of rental income can investors expect from such a property?

(b). Must foreign investors pay tax on rental income? A. This is dependant on several factors - geographical area, range of investment, target market, type of investment etc. (a). Once again this depends on the factors that I mentioned above, plus the time of the year (usually associated with the golf season). For example, the owner of a top end luxury villa in Quinta do Lago may expect something in the range of between GBP 3,500.00 to GBP 5,000.00 per week rental income. (b). Yes, they must pay rental income tax (after deducted expenses) in Portugal. This is a fixed tax of 15% on the profit. However, this would be deductible from the taxes paid in the investors’ origin country, providing that the country of origin has a double taxation treaty with Portugal (as all European countries have). Financial Drivers Q. Given the Algarve’s rise in popularity, property prices have risen sharply. Can the market continue to sustain such growth? A. In my opinion yes, and for some years to come. In fact, just looking at the coast line, a large amount of new developments with very good real estate and golf projects are in the process of being developed. Especially in areas that traditionally did not have these kinds of developments like the most West and East regions of the Algarve. Buying Process Q. The legal aspect of the buying process falls into two parts, the preliminary "promissory buying and selling" contract (Contrato de Promessa de Compra e Venda) and the completion contract (escritura). How long should one expect this process to take? A. It depends on the wishes of both parties. If all legal documents are in place, and both parties want a quick completion, this process could take as little as two weeks. The average is one month for the full process.

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Q. Once the Promissory Contract has been finalized, are there any charges that the buyer or seller should be aware of should they decide to withdraw from the sale? A. Yes, if the contract is governed by Portuguese law (except if the contract includes a clause stating that this does not apply). In the event that the Vendor does not fulfill his obligations as stated in the contract then he is liable to pay back twice the amount of the deposit to the purchaser. If the purchaser does not fulfill his obligations then he loses the deposit that has already been paid to the vendor (regime do sinal). Of course, they may also incur professional and legal fees for work already completed.

grant the necessary licenses, they also govern all real estate activity. If an agent were to breach any rules the penalties could be as severe as the immediate suspension of activity. All real estate agents and employees have to complete a course in real estate matters. The New Lease Law Q. What impact has Portugal's Lease Law had on the commercial property sector? A. The Lease Law has been around for some years. However, recently it has been applied to individual apartments and villas. The intention of this law is to guarantee a minimum level of safety for properties being used on a commercial basis for

"We expect to continue to grow for many years to come, serving our clients with our extensive expertise and with the professionalism and efficiency that they have come to expect from us."

Q. I believe that legal costs can vary from 1 to 4% of the property’s value. Why is there so much disparity? A. The legal costs do vary from firm to firm, depending on their experience in the field and contacts etc, but mainly it comes down to the amount of work involved in each case. There are other important costs associated with the selling of a property that the purchaser should be aware of. There is the property acquisition tax (IMT), the amount payable varies with the value of the property on a sliding scale, up to 6% (this rate is applicable to all properties priced ?521,700.00 and over – value referred to the year 2006). If the property it is a plot for construction, or a commercial property, then the IMT applicable is always 6.5% of the price, without any variation. On top of this the purchaser should also consider the notary and registry fees, together with the stamp duty, which is around 1.1% of the purchase price. Q. Kindly talk us through the laws that govern and regulate estate agency practices in Portugal? A. Portuguese legislation is very strict regarding real estate. There is an entity called the IMOPI who

renting. Therefore, any property owner that wishes to use the property for rental purposes in a commercial capacity needs to obtain what is known as a touristic license. This law it is not applicable to private rentals (if someone rents the property without using professional agents or marketing they are free to do so). The Future Q. What does the future hold for Luís Lapa e Borges – Law Offices? A. We expect to continue to grow for many years to come, serving our clients with our extensive expertise and with the professionalism and efficiency that they have come to expect from us. We moved two years ago into a brand new office, which was built with the purpose of increasing our client base and raising the quality of our services. This will always be the goal for the many professionals working in our office.

Luís Lapa e Borges is the managing partner of Luís Lapa e Borges – Law Offices.

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Helping you through the maze of Portuguese Real Estate and so much more...

If you are considering buying real estate in Portugal either as a second home, rental property, or as an investment, we would be delighted to help you

Luís Lapa e Borges - Advogados / Lawyers Contact Urbanização Miraserra Marroquia Centro Comercial África, Loja 32 8100-684 Loulé Algarve - Portugal

Tel: 00 351 289401090 Fax: 00 351 289401099 Email: lfdlaw@mail.telepac.pt Website: www.lborgeslaw.com

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Portuguese Real Estate Investment – The Legal Process Jonathan Calens talks property matters with Dr Alexandra Pereira

Introduction Q. Where in Portugal is your practice based and how long have you been established for? A. I first started practicing law in 1985 as an independent. Initially, I opened an office in Lisbon, offering a variety of services to various clients, gradually increasing the scope of my operation, and making inherent changes to the business. After practicing in Lisbon for some five and a half years, I then moved the practice to the Algarve in 1991. Nowadays I cover all areas relevant to property matters, including the taxation element.

Q. Do you focus exclusively on the Portuguese market and are the majority of your clients institutional or private? A. The short answer is No. We have clients all over the world, but given the fact that the Algarve is a high

investment location for most of our investors; however, there is an increase of developments and interest in the Eastern Algarve. Of late some of our clients have been looking to the North, and in particular an area called the Silver Coast, which is located between Lisbon and Oporto. Having said this, the vast majority of my clients still choose the Algarve. The Buying Process Q. Property buyers should be aware of the law of subrogation, whereby property debts, including mortgages, local taxes and community charges, remain with a property and are inherited by the buyer. What steps can a foreign investor take to ensure that they are protected against this? A. The most important thing is to ensure that the

“Our client portfolio is made up of both institutional and private investors, whose needs vary greatly, from those simply requiring ownership of an overseas property, to those looking for development opportunities.”

demand location, we place a great deal of emphasis on this market. A large number of foreign investors come here to buy property, and as it happens, the majority of our clients are British. Our client portfolio is made up of both institutional and private investors, whose needs vary greatly, from those simply requiring ownership of an overseas property, to those looking for development opportunities. Q. For a small country the regions of Portugal are immensely varied, from rural Minho and Trás-OsMontes in the North, to the sandy beaches of the Algarve. Generally, where do most of your clients tend to invest? A. Generally speaking, the Algarve is still the preferred

property has a clean title. It is therefore necessary to make sure that the property is registered in the vendor’s name, and that no charges, fiscal debts or other encumbrances exist. As an example, when purchasing a property in a condominium, there may well be service charges pending or taxes outstanding. In cases like this we would insert a clause into the contract, stating that after completion the seller remains responsible for all debts accrued whilst he was the property owner. Q. Due to the high demand for new Portuguese properties, many investors tend to buy "off plan" from developers: (a). Does the legal process differ when buying a new property?

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“As property prices continue to escalate, more and more people are buying off-plan, thus securing a property well below its ultimate market value.”

(b). What do you believe to be the key benefits attached to buying a property directly from the developer? A. As property prices continue to escalate, more and more people are buying off-plan, thus securing a property well below its ultimate market value. However, one must appreciate that at this stage construction may not have commenced; the developer might only have a building license. When dealing with important issues, such as planning permission, local searches are vital. It is also necessary to ensure that the contractor makes available the project’s description, specifications pertaining to completion, stage payments on the progression of construction, and guarantees. These should all be attached to the contract. Documentation, Taxes and Costs… Q. From a taxation standpoint, what do foreign investors need to know when buying and selling property in Portugal? A. Of course, a prospective purchaser should be aware of the tax implications involved. For this reason, it is advisable to involve a lawyer and or tax adviser from the outset. There are various taxes which are levied on the purchase, ownership and sale of real estate. These include: IMT (Real Estate Transfer Tax), up to a maximum of 6.5%, subject to price and type of property, Stamp duty at 0.8% and IMI (Municipal Property Tax), which varies depending on the property and its location. Capital Gains Tax of 25% for non-residents, based on the difference between purchase price, adjusted by currency devaluation rate, and sales price, is applicable when selling property. Capital Gains Tax may also be applicable to residents but at different rates. Commercial and Industrial Property Q. (a). Aside from a utilization license, and a certified insertion at the Land Conservatory, what other documentation must a buyer investing in a commercial or industrial property obtain? Q. (b). Is Additional documentation required when

purchasing a rural property? A. These questions cannot be answered in isolation, as cases differ widely. Generally speaking, however, if buyer and seller agree terms, an agreement of sale is prepared. The buyer is then shown all of the relevant information pertaining to the building, architect designs, alterations if any, official certificates and so on and so forth. An application is made for a license of use, i.e. a legal operation license, as otherwise the property is deemed to have ‘no use’. When acquiring rural land, more commonly known as rustic land, an approval document from the city council is required if the property is to be purchased in more than one name. It is worth noting that whereas IMT tax is levied at scale rates for urban property, rustic land attracts a fixed rate of only 5%. New Legislation Q. What impact has the new lease law had on Portugal's commercial property sector? A. It is too soon to comment at length about the new lease law. This law came into force on the 28th of June and other connected laws were published on the 8th of August 2006. Having said that, the new law allows for an increase of the rents, up to a maximum of 4%, payable on commercial contracts celebrated before the 30th September 1995. This increase of rents in older contracts may eventually lead to the termination of said contracts. The new law gives greater freedom to the parties to negotiate the terms of the contract, including the celebration of short term contracts. This can only benefit the commercial property sector. It is however essential that the contract be carefully prepared to safeguard both parties interest. Q. In terms of rent, under the new law, landlords are permitted to charge up to 4% of the property's estimated value. The government believes that you should now be able to recoup your investment within 20 years. Do you believe that this is feasible? A. The new law establishes the method for increasing rents of residential property up to 4% of the

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property’s value, but this valuation cannot be an estimate. The valuation must be carried out by the Tax Office and must have taken place within 3 years of the proposed rental increase and is subject to the status and maintenance of the building. As the annual taxes on property (IMI) are based on the valuation of properties, and old properties are in general those with lower rents and poorer maintenance, the question is raised is it wise to pursue an increase in the rent? Only time will tell how effective this law will be…

coming to fruition. I am looking beyond the local environs to new markets in other countries, and I have now opened offices in Cape Verde and Brazil. With the bulk of my clientele coming from Britain, I am also contemplating opening offices in London and Dublin. A natural progression would be to expand into other Portuguese speaking countries like Mozambique, for example, where I feel we can make a significant contribution. I am excited about the future, with its vista of new projects and challenges.

Looking Ahead Q. What does the future hold for the Alexandra Pereira Law Office? A. My expectations for the future are big, very big indeed! As the property market experiences a huge resurgence, I anticipate a number of large projects

Offices in:

Dr. Alexandra Pereira has been inscribed with the Portuguese Order of Lawyers since 1985. The Alexandra Pereira Law Office has been established in the Algarve since 1991. The Head Office is located in Almancil, a town which serves as the service centre for the renowned developments of Quinta do Lago and Vale do Lobo.

Lisbon • Tavira • Cape Verde • Brazil Head Office Address:

Edifício Avenida, 1ºE Av. 5 de Outubro, nº3, 8135 - 100 Almancil, Portugal

ALEXANDRA

ADVOGADOS

/ LAW OFFICE

Telephone: +351 289 399 963 Fax: +351 289 399 965 E-mail: maplaw@mail.telepac.pt Website: www.alexandrapereira.com

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Return on Investment – Bulgarian Emerging Market Focus Money Markets talks to Michael Minkov

Introduction Q. Kindly define your unique service philosophy? A. Well, we are a one stop shop. We have an extensive investment portfolio, and can advise investors on any aspect of the Bulgarian property market. Should the investor need legal assistance, financial advice, banking partners, we can put them in touch with the relevant partners. This is precisely why we are called Bulgarian Connection. Q. Are you focused solely on the Bulgarian market? A. Yes. We are very well positioned in Bulgaria; we have an extensive network and are in constant communication with business partners, financiers and government agencies.

Q. Your portfolio includes both commercial and residential property. Do you find that the latter garners more interest? A. If we speak in terms of actual volumes, commercial property - large plots of land that are intended for malls and shopping centres generates large volumes. However, in terms of actual number of sales, I would say that residential properties and holiday apartments exceed commercial activity. Q. Do you provide inspection trips? A. We do, regularly, and because of the number of people that we take we obviously have a very good relationship with the hotel chains and airlines. We

"£28,000 will buy you a one bedroom apartment in the region of 600sq ft. In terms of rental income, this will yield between 5-7.5% of the purchase price annually."

Q. You have an office in London and Sofia. How does this assist UK investors? A. Our London office is our headquarters and main point of contact for our UK investors – ensuring ease of communication and convenience. The offices in Bulgaria (we have an office in Sofia, and we are just about to open an office in Bansko) are to maintain our connections with the various authorities and developers. We can keep on top of what is happening in the market and perform our all so vital due diligence. All of which ultimately, is of benefit to our customers. Sofia is our lead Bulgarian office. Most of the Bulgaria based staff come to the UK regularly. This allows them to attend events, seminars and exhibitions and meet our clients. In terms of consistency and coherence at both ends, this is very important.

strongly advise clients that, before they put their money into a property, they make sure they’re comfortable with the region, the investment climate, and the environment in general. Therefore visiting the country can help, and we invite clients to do this. However, seasoned investors who are satisfied by the growth of the market and the location that they have chosen don’t necessarily do this. If we were advising a client, we would recommend they experience Bulgaria first hand and be comfortable with the territory before investing. Bulgaria - The Real Estate Market Today Q. You mentioned, before we started the interview, that property prices in Bulgaria are extremely low.

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Although prices start at £28,000, what does this actually buy you? A. This will buy you a spacious one bedroom apartment in the capital, Sofia. Not in the center, but in an up and coming area with great rental potential. £28,000 will buy a one bedroom apartment in the region of 600sq ft. In terms of rental income, this will yield between 5-7.5% of the purchase price annually. Q. Now obviously this situation will not continue indefinitely, prices are bound to go up in a demand driven market? A. This is correct, I would agree with that. Prices will go up, and are going up quite rapidly. Over the

availability of this type of accommodation is there, and although it has moved up, it has not followed the general yield curve apparent in the rest of the market. Investment Dynamics Q. In terms of ROI (return on investment), as a buyto-let investor, should I focus on the Black Sea Riviera, in order to take advantage of possible tourist traffic, or the capital (business district) of Sofia, with its commercial interest? A. In our opinion, the best combination, in terms of investment appreciation and rental yield, is provided by the ski and mountain resorts. There

"In general, I would say that the best combination of equity growth and rental income would come from areas like Bansko or Pamporovo, if we are talking about taking advantage of the tourist market.”

last two years property prices have increased by 60% on average. For the last three years property prices in most areas have more than doubled, so there is a marked growth in this market. The affordability of the lifestyle is a real magnet for both tourists and investors, which is certainly a factor in pushing prices up. However, local demand is the main catalyst. Q. As prices continue to increase will the local market suffer? A. I personally do not see that happening, at least not in the next five or six years. If we cite Sofia, or the large industrial centres or towns, many parts were developed in the communist era. Typically, you will find quite unattractive apartment blocks in densely built up areas. The infrastructure at that time was ill-conceived, in terms of entertainment, shops, restaurants and recreational areas. Obviously the government’s objective in those days was completely different. However, now, these apartments have outlived their usefulness, they are not attractive, and they do not go up in price as much. They do provide that first step though, that entry level into the local market. So people do buy them, but then they move on to something better. To this end, I would say that the

are certain areas by the sea, up north, and down next to the Turkish border that will provide that as well. In fact, capital growth and rental yields were higher there than anywhere else this summer. This will continue to be the case as well. They’re surrounded by nature reserves, construction is limited, and because the territory is largely unspoilt, people -in particular families- are instantly drawn it. However, we’re only talking about a couple of areas along the coast. In general, I would say that the best combination of equity growth and rental income would come from areas like Bansko or Pamporovo, if we are talking about taking advantage of the tourist market. Bansko’s skiing infrastructure will see further expansion. Its summer activities are also limitless, there’s golf, horseback riding, hiking, just about everything. It offers year round activity. It started as a summer resort, but became a very well known winter resort three or four years ago with the implementation of a new skiing infrastructure, at a cost in excess of ?100 million. Places like this are very well positioned to take advantage of the tourist market. There is, however, a limit to its expansion. The municipality has restricted the issue of new building permits.

VOLUME 5

REAL ESTATE INVESTMENT

"You also benefit because the price you pay, normally 18-24 months before completion, can sometimes be 30-40% less than the price you would pay upon completion. So, by the time your property is ready to move in to, you’ve already picked up significant value."

Q. Selecting the right investment vehicle is very important. Therefore, based upon current market conditions, would you suggest pre-built or offplan? A. The dilemma between off-plan and pre-built is one that comes up often. One of the advantages of buying off-plan is that you usually pay in instalments (stage payments). You also benefit because the price you pay, normally 18-24 months before completion, can sometimes be 3040% less than the price you would pay upon completion. So, by the time your property is ready to move in to, you’ve already picked up significant value. This is the advantage of buying off-plan. It is also easier on cash flow. You pay approximately 30% at the very beginning, 20% four months hence, 30% six months after that, and the remaining 20% upon completion. This of course makes it easier to handle.

That is why we are very relaxed and confident when taking people on viewing trips. We don’t really do any selling over the course of an inspection visit. The purpose of the trip is to make our clients feel comfortable with the country, give them a chance to experience it, and ask any additional questions. We take them to local estate agents, property management agents, wherever they need to go in order to obtain the information they need. Q. With respect to the identification and selection of real estate, whether for investment purposes or as a second home, a surprisingly large number of investors conduct their research online. In many cases the aforementioned platform is used as a decision making tool. How advisable is this? A. Yes this is very helpful. The internet provides a vast data bank of information, and although a

"At this time I would say that over 50% of our client base has come from referrals. This is a testimony to how happy our clients have been investing in Bulgaria through Bulgarian Connection."

In terms of buying ready built properties, this mainly applies to the capital and bigger towns. In resorts which have been completed, you have the advantage of being able to go there, you can see it, you can touch and feel it, and you know exactly what you are buying. There is only so much faith one can put in computer drawings when buying off-plan. Obviously Bulgarian Connection’s due-diligence is second to none. This is another great distinction between our company and most of the competition. We take a great deal of time, and a lot of care, before we run with a property. We check the title is clean, every single planning permit and building permit.

great deal of that information is somewhat questionable, it’s certainly a very good starting point. We advise our clients to read as much as they can, from the internet and elsewhere. Of course when it comes to making a purchase, I would not do so, on the basis of a nice looking website, without first speaking to people who can assist with the brokering of the deal, or the developers themselves. Researching online is a great thing when you’re trying to gain as much information as you can about an area, country, or anything for that matter. Everyone should do it, I do it. However, it should be a starting point, a reference point, not the only thing.

REAL ESTATE INVESTMENT

Next Steps Q. When Bulgaria joins the EU, what will this do for real estate, domestically? A. This is something that the country has been preparing a while for. The last two governments served their full terms, and we are half way through another term with a coalition government that appears to be very stable. Accession to the European Union, and the country’s desire to join, has been apparent for some time. I don’t think that it will have an overnight effect on prices, but the stability it will give the economy is important. Investors

Q. (b): How will this affect property prices? A. I think that the effect on Bulgarian property prices and real estate investment will be positive very much as it boosted prices in Spain and France. Bulgarian Connection – The Way Forward Q. What can existing and future clients expect from Bulgarian Connection over the next twelve to eighteen months, in terms of service enhancements? A. Bulgarian Connection is diversifying its services. Although the core of our business is, and will remain, for the long term, the real estate market in Bulgaria.

"Researching online is a great thing when you’re trying to gain as much information as you can about an area, country, or anything for that matter. People should do it, I do it. However, it should be a starting point, a reference point, not the only thing."

will also feel more comfortable investing in another European country with a predictable economy and manageable legislation. Some predict meteoric price rises; I envisage prices going up more gradually, and a sustained growth. Q. (a): What impact will the “Open Sky” project have on Bulgaria’s tourist trade? A. This is a good thing. The Open Sky project was an agreement that was signed a few years ago, and as of May this year, it was fully implemented in Bulgaria. This opens up Bulgarian airspace to carriers from all of the member countries involved in the Open Sky agreement. It will increase competition in air travel to Bulgaria; it will also increase Bulgaria’s accessibility, and ultimately decrease the cost of flying to Bulgaria. We have seen what this did for Spain, Portugal and France. The emerging of low cost carriers boosted the local markets. It was then feasible to buy a villa in the South of France, for example, because you could get there so cheaply and with reasonable frequency. We have seen it happen across Europe and I expect this is what the Open Sky project will do for Bulgaria.

We are, however, moving on to bigger projects on the commercial side of the business, as well as diversifying into property management and the representation of tourist boards and tourist organisations within Bulgaria. Their representation in the UK has been something that we have been under pressure from the market to go into for some time, and we are now seriously looking to expand into these areas. Our company is growing with the Bulgarian market. We are also diversifying our services in order to accommodate the trust that the developers, who have built hotels, have placed in us. At this time I would say that over 50% of our client base has come from referrals. This is a testimony to how happy our clients have been investing in Bulgaria through Bulgarian Connection. We pride ourselves on the impartial service we provide our clients with.

Michael Minkov is the Managing Director of Bulgarian Connection Ltd.

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EXECUTIVE EDUCATION

The Career Investment Maury Kalnitz

2006/2007 Executive Education Survey Marylhurst University – Your Stepping Stone to Success Todd Harris

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The Changing Face of the MBA Landscape Guido Krickx

100

The Virtual Classroom Dr Donald Zahn

102

The Executive MBA – Opening New Doors Scott Goddard

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The Career Investment Maury Kalnitz, EMBA

In increasing numbers and ways, Executive MBA Programs are adding career services that help prepare Executive MBA students for greater success in the workplace. The emphasis on career services can and does take many forms. Sylvia Haas, for example, advises students in the Executive MBA Program and the Health Care Executive MBA Program at the University of California Irvine on a range of career issues – from negotiating new opportunities within their organization to navigating the many nuances of making a career change. She is often the first call for Executive MBA students who are thinking about their careers. Like a growing number of Executive MBA Programs, the Irvine programs have invested in enhancing career services for Executive MBA students. “Our students come to the program for a variety of reasons but every reason has something to do with their

optimize their careers within the sponsoring company.” Statistics support what many Executive MBA Programs already know: Students are very interested in assistance with their careers. Research by the Executive MBA Council confirms the trend. Member programs that offered on-campus interviews increased from 18 percent in 2004 to 29 percent in 2005, according to results from the 2005 Executive MBA Council Program Survey. Member programs that provided career-related workshops also rose from 55 to 62 percent. Compelling Reasons The difference today results from many factors. With rising tuition, it costs more to earn an Executive MBA degree, increasing the expectations of value for students and organizations, says Houdayer.

“We try to remain flexible; as we see needs, we work to adjust to meet those needs.”

career,” says Haas, associate director of the Executive MBA Program at the University of California Irvine. They may want to increase their visibility, they may want to transition into a new role, they may want greater responsibilities or a promotion, or they may be thinking about new opportunities. Changing Times EM Lyon in France has a tradition of providing career services only to full-time MBA students, but has found it important to widen the reach of those services. “Today, we have recognized the Executive MBA participant and sponsor concerns and have responded to them,” says Patrice Houdayer, dean of academic programs at EM Lyon. “In particular, the services clearly aim at helping the sponsoring company generate strategic value from the MBA and help participants

It’s a Different Business World “Executives in France are more mobile than in the past and are constructing personal careers that take them out of the ‘one company for my career life’ philosophy,” he says. The increasing focus on career services also can be explained in part by the growing number of students who are paying for their education from their own pockets. In 2003, one-quarter of students funded their own Executive MBA education, compared to 32 percent in 2005, according to Executive MBA Council research studies. “There is a higher percentage of students who are paying their own way,” says John Worth, director of alumni and executive MBA career management at the University of North Carolina – Chapel Hill. “As a result, students come into the Executive MBA Program

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EXECUTIVE EDUCATION

with different goals and focuses.” Self-funded or not, career development is really an issue for all students whether they remain in the same place or eventually move to a new position, says Anne Ferrante, director of the Global Leadership Executive MBA at the University of Texas at Dallas.

new skills with organizational needs and gain them the visibility that will help them move forward, says Worth. They also may choose to attend workshops on a variety of topics or take an elective course on career development entitled Managing and Advancing Your Career.

“The program uses a career assessment tool as a starting point, and based on the results, students and their career coach then develop next steps to customize their experience.”

“It’s important for students to really know how to manage their career,” Ferrante. “Career management skills are life skills that everyone should have.” The Big Picture Ferrante encourages students look at the big picture of their career and assess their strengths and weaknesses. The program uses a career assessment tool as a starting point, and based on the results, students and their career coach then develop next steps to customize their experience. Although optional for students, 98 percent take part in the assessment. “The tool gives students a better idea of what types of work scenarios and job ingredients are the most comfortable for them,” says Ferrante. “It’s a big ah-ha for students.” Students leave the program with a credential, but they also leave with new knowledge and skills. Looking at career development from a broad perspective helps students answer the question of what to do with that new knowledge and skills, she says. Good Timing Worth believes in starting early when it comes to thinking about career development. In part, understanding career goals can help students enhance their time in the classroom by giving them direction on areas to explore or strengthen. He first talks to students as part of their orientation session, encouraging them to think about their career development and explaining career services. Students can meet with Worth during their program to discuss their career strategy and specific issues. Career counseling can help students match their

Haas also believes in working with students sooner than later. She talks to students when they enter the program to learn about their goals and discuss the possibilities within their organizations. At the University of Chicago, students are starting earlier in the process, says Bob Wilcox, associate dean at the University of Chicago Graduate School of Business. “We have always provided career assistance,” says Wilcox. “When I first came several years ago, we saw more Executive MBA students seeking career services at the end of their program. Now we are beginning to see them earlier in the process.” The Organization as a Partner Programs that are working with students who receive tuition reimbursement remain sensitive to organization needs, especially when it comes to any oncampus recruiting activities. At the University of North Carolina (UNC), students in the second year of their Executive MBA Programs can attend career fairs and take part in oncampus recruiting, organized in conjunction with the Full-Time MBA Program. Before students who are funded by their organizations can participate, though, they must bring in a signed waiver that indicates their organization approves of this activity. Out of about 150 eligible students, 41 students are using the service. Companies also may set their expectations with students in advance. “Many companies have firm policies regarding tuition reimbursement,” says Wilcox. “If students take a new job at another company, they may be required to repay a portion or all tuition reimbursement funds received.” The Executive MBA Program at EM Lyon concentrates on creating a win-win for both students

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EXECUTIVE EDUCATION

and organizations. “The goal is to create value for all,” says Houdayer. Students in the program invite their corporate sponsors to attend four one-day workshops during the program. The first workshop presents a general overview and addresses the impact of the Executive MBA on life, work, and learning. In the second workshop, students and sponsors discuss the goals and objectives of the educational experience. The third workshop

prepare students for diverse opportunities. “We offer board governance training so our students will be ready to serve on boards of directors.” Increasingly, programs are turning to their alumni for assistance and offering alumni ongoing assistance? Those alumni networks may extend beyond the Executive MBA Program and include alumni of other MBA programs or of the business school. At UNC, alumni may take advantage of career services throughout their careers.

“Students leave the program with a credential, but they also leave with new knowledge and skills.”

concentrates on building value for both participants and organizations, and the last workshop explores sustaining value after graduation. The Full Plate Some Executive MBA Programs provide especially designed career services for Executive MBA students separate from Full-Time MBA Career Centers. Haas spends 50 percent of her time on career development for students and 50 percent on admissions. Others work with career service offices within their business schools on services that meet the needs of Executive MBA students. Programs also often allow their Executive MBA students to access the school’s career services. “We provide a full range of services,” says Wilcox. “We try to build a relationship with the students.” Wilcox coaches students to help them identify areas to strengthen. Students also can complete self-assessments and access the school’s career web offerings, including job postings. They can attend ongoing career workshops. At the University of California at Irvine, Haas has organized a network of high-powered coaches, who volunteer their time to support students during the program. When appropriate, the program offers selective on-campus recruiting by arranging interviews with companies that are looking to talk to the most experienced MBA students. Career assessments, resume, reviews, and workshops also are available to Executive MBA students. Career counseling isn’t just about looking for a new position, says Haas. The program seeks in many ways to

More to Come As career services expand and become more customized, programs also need to be clear about responsibility and help students set reasonable expectations. “I try to tell them that managing their career is their job, and that change isn’t necessarily going to happen overnight,” says Worth. The interest in career development and career services among Executive MBA students will likely continue to grow, says Haas. “It’s hard to keep up,” she says. Collaboration may be one solution for programs. Irvine is looking at working together with other programs and schools within its system. The same advice that many career professionals may offer Executive MBA students also applies to programs. Adapting is key, says Wilcox. “We try to remain flexible; as we see needs, we work to adjust to meet those needs.”

Maury Kalnitz has served as managing director of the Executive MBA Council since 2000. He oversees council programs, services and council collaborations with related educational associations and organizations throughout the world. He has held leadership positions in both industry and higher education. The Executive MBA Council fosters excellence and innovation worldwide in Executive MBA Programs. The council has more than 200 member colleges and universities worldwide, which offer more than 300 programs in 25 countries.

EXECUTIVE EDUCATION

The Leading MBA Providers of 2006/7 International Review

Executive MBA Providers

Full-time MBA Providers

Institution

Location

Institution

Ashridge Ceibs Chinese University of Hong Kong City University: Cass Columbia Business School Duke University: Fuqua Emory University: Goizueta Henley Management College Hong Kong UST Business School IMD Instituto de Empresa London Business School New York University: Stern Northwestern University: Kellogg Nottingham University Business School Purdue/Tias/CEU/Gisma

U.K. China China U.K. U.S.A. U.S.A. U.S.A. U.K. China Switzerland Spain U.K. U.S.A. U.S.A. U.K. U.S.A./ Netherlands/ Hungary/ Germany U.S.A. U.K. Germany U.S.A. U.S.A. U.S.A./ U.K./ Singapore U.S.A.

Ceibs Columbia Business School Cornell University: Johnson Dartmouth College: Tuck Duke University: Fuqua Harvard Business School IMD Insead

U.S.A. Canada

Online MBA Providers

Saint Maryâ&#x20AC;&#x2122;s College of California Warwick Business School WHU: Beisheim UCLA: Anderson University of California at Irvine University of Chicago GSB

University of Pennsylvania: Wharton University of Southern California: Marshall University of Toronto: Rotman

Location

China U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. Switzerland France/ Singapore Instituto de Empresa Spain Iese Business School Spain London Business School U.K. MIT: Sloan U.S.A. New York University: Stern U.S.A. Northwestern University: Kellogg U.S.A. Nottingham University Business School U.K. Stanford University GSB U.S.A. UC Berkeley: Haas U.S.A. University of Chicago GSB U.S.A. University of Michigan: Ross U.S.A. University of N Carolina: Kenan-Flagler U.S.A. University of Oxford: Said U.K. University of Pennsylvania: Wharton U.S.A. University of Toronto: Rotman Canada University of Virginia: Darden U.S.A. Yale School of Management U.S.A. York University: Schulich Canada

Institution

Location

Babson College Cardean University Drexel University Edinburgh Business School Indiana University: Kelly Manchester Business Marylhurst University Thunderbird: Garvin University of Phoenix University of Wisconsin Whitewater

U.S.A. U.S.A. U.S.A U.K. U.S.A. U.K. U.S.A. U.S.A. U.S.A. U.S.A.

VOLUME 5

It’s All About Access The Fordham University Graduate School of Business Administration’s

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EXECUTIVE EDUCATION

Marylhurst University – Your Stepping Stone to Success Money Markets talks to Todd Harris

Q. Founded in 1893, Marylhurst is one of Oregon’s oldest private universities. Clearly tradition is very important to you. By the same token, one of your resources, the Shoen Library, offers online-access to over 22 million volumes. The balance between old and new is a delicate one. How do you maintain this? A. Yes, tradition matters at Marylhurst. But the University’s mission has always been driven by change and innovation. Marylhurst was founded in 1893 by the Sisters of the Holy Names as the first liberal arts college for women in the Pacific Northwest and the oldest Catholic university in Oregon. Several of the Sisters still work on the historic campus near Portland. Reorganized in 1974 as a nonprofit, coeducational institution, Marylhurst took a bold step in pioneering educational programs for students of all ages, with a focus on quality and convenience for adult learners. Marylhurst’s initiative in Web-based learning is one of the region’s oldest and most distinguished. In 1997,

demonstrable learning outcomes, our instructors – many of them senior managers at top companies – can work better with educational and corporate partners. The curriculum is infused with interdisciplinary programs, and faculty members are encouraged to have strong professional ties to the fields in which they teach. Q. Kindly define the Marylhurst MBA value proposition? A. The Marylhurst MBA program is designed for highly motivated working adults who want to prepare themselves for general management and organizational leadership. With more than 365 admitted students, it’s one of the largest and most distinguished programs for working adults in the Pacific Northwest. Degree programs may be completed online, on campus, or a combination of both, depending on individual student needs. We call it a “blended” MBA program because of the many convenient delivery options available to our students. It’s not

“With more than 365 admitted students, it’s one of the largest and most distinguished programs for working adults in the Pacific Northwest.”

the University launched its first online courses and continues to explore new ground through accelerated online programs that reach out to underserved audiences around the world. The faculty embraces a teaching-focused and outcomes-based curriculum driven by assessment. Through our accreditation with the Northwest Commission on Colleges and Universities (NWCCU) and the International Assembly for Collegiate Business Education (IACBE), Marylhurst has kept pace with the drive to provide clear ways to assess the quality of higher education. Because the university has paid attention to defining

unusual to see a Marylhurst MBA student taking one evening class and a second class online. Adult students appreciate the flexibility. Because Marylhurst focuses on outcomes – the actual learning – we’re able to ensure the same level of academic quality whether the instructor is in Florida or in a classroom in Portland. We continue to explore the integration of new curriculum formats, such as accelerated online learning, which meets the needs of the working adult professional audience. We have several ways in which students can earn the same Marylhurst MBA: On campus, online, on Saturdays through the two-year Saturday MBA

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cohort, or in a “blended” combination of evening, online, and weekend courses. In addition, in the fall of 2006, we launched an innovative Accelerated Online MBA, a cohort degree program with intensive five-week online classes that can be completed in only 18 months. The University understands that MBA students have different needs, so we have tried to create programs that match their diverse lifestyles while delivering on our 100-year-old promise of academic excellence. Q. What separates Marylhurst University from other providers? A. Marylhurst is animated by its liberal arts traditions and religious heritage. Our professors place a high value on ethical decision making, which is significant given the spate of corporate scandals that has rocked the business world. Every MBA student is required to take a stand-alone course in ethics.

all, Marylhurst keeps a close eye on costs and tuition. The Accelerated Online MBA, for instance, costs less than $19,000 and can be completed in 18 months. It’s a great value (and investment) for the working student who wants to advance to the next level of management. Q. Please discuss Marylhurst’s approach to online learning? A. Online education is an integral part of the Marylhurst experience. We want to prepare students for a high-tech, global economy, where online collaboration is the norm. Business has changed and is no longer confined to the four walls of an office. Today, Intel managers and engineers in Hillsboro, Oregon, work virtually with their colleagues in Israel to help design the latest laptop processors. Through online learning, our business students become more comfortable with these new workplace realities.

“The Accelerated Online MBA, for instance, costs less than $19,000 and can be completed in 18 months. It’s a great value (and investment) for the working student who wants to advance to the next level of management.”

Marylhurst’s student body is purposely diverse in age and background. Women and men are represented in equal numbers, and students enter the program with a range of undergraduate backgrounds and professional interests – business, social sciences, engineering, and the humanities. Our international students also enhance the global business environment by providing a well-rounded perspective to the courses. Students are encouraged to see business as an interrelated process, including its cultural and ethical dimensions. Qualified MBA students may take other graduate coursework at Marylhurst or elsewhere, including non-business classes, in order to enhance their liberal arts perspective. The convenient online options mean that students can move across the country, taking advantage of career opportunities while still being able to complete a high-quality, accredited MBA degree. And let’s not forget affordability. Because the founders of the University – the Sisters of the Holy Names – wanted to make education accessible to

Online courses are also convenient for working adults. Some 60% of our MBA students are taking a portion of their classes online. Many are traveling on business during the term; others are stay-athome parents who can’t come to campus. Some like the online environment because they can participate more easily than in a classroom and on a timetable that works for them. Our instructors and instructional technologists strive to create online courses that are as good (or better) than their on-ground counterparts. Academic quality is always our No. 1 priority. The professors, texts, and academic content are often identical to our campus courses. Based on our analysis, student performance in our program (and after graduation) is comparable whether the student has taken the majority of work online or on campus. But naturally, there are some differences in the learning styles. Instead of coming to class for three or four hours every week, students spread out that participation time over seven days of posting and replying. It’s an “asynchronous” environment,

EXECUTIVE EDUCATION

which means students do not need to be online at any given moment. Instead of speaking out in a physical classroom, online students build strong writing skills in responding to questions from the instructors. Our e-learning platform is called “Angel,” and each online class has its own password-protected Web site. Students and faculty interact in simple, post-and-reply bulletin boards. There’s no proprietary software or clumsy installations, and

general management and operations. Employers are seeking well-rounded managers with strong ethical leadership and people skills. An MBA in general management provides the training that companies demand. Roughly 65% of our MBA students opt for the MBA without a specialization. For students who do need specialized skills or who are considering a change of careers, we offer concentrations in Finance, Marketing, and Organizational Behavior. We’re also bullish on

“We’ll never forget our educational roots or our commitment to service. But we’re ready and eager to embrace the globalization of higher education.”

students who can surf the Internet find it easy to take an online course at Marylhurst. The online discussions are wide ranging and substantive – just what you’d expect from a leading MBA program. Students are not only replying to the professor but also to each other. Our instructors handle individual questions via mail or the occasional phone call, and there is never a requirement that students come to campus. Unlike other universities who rely on teaching assistants, Marylhurst professors are actively engaged in the online classroom management and grading. Class sizes are held to 20 students to create an intimate, seminar-style feel and quality. Of course, we’ve had to invest in recruiting and training faculty who are comfortable teaching in an online environment. Not every professor who teaches on campus is capable of making the transition. Course and time management are different, and it’s crucial that teachers have an active online presence – even an online personality! We require our instructors to log on at least five days a week – posting, replying, and answering student questions. It’s a very facilitative learning model. Q. The general MBA is typically shorter in duration when compared to the specialized MBA. However, some say that the specialized MBA can make the graduate more marketable. Do you concur with this? A. The MBA credential is still the degree of choice in the business world. Of the 141,000 business master’s degrees conferred in 2003-04, more than half were for the MBA, with most of them in

several fast-growing sectors of the economy – healthcare and nonprofit – where capable managers are in short supply. For our new Accelerated Online MBA, we have designed concentrations in Healthcare Management and Nonprofit Management in addition to the popular General Management concentration. These specializations are responsive to market needs, student interests, and our own faculty expertise. Q. (a). Will we see a reduction in on-campus courses over the short to mid term? Q. (b). What is your long-term strategy? A. The emergence of for-profit universities has changed the landscape in higher education. Actually, a dose of competition is probably healthy, creating new models of learning and flexible course delivery. In the past, students didn’t have much in the way of choice, except for a full-time MBA degree or a high-priced Executive MBA for senior executives. Schools are now tailoring their offerings to specialized audiences – part-time working adults, online students, and time-pressed learners. The winners are the students who can earn an accredited and affordable MBA in a format that meets their personal and professional requirements. Marylhurst has been out in front of these demographic and marketing trends. The “blended” Marylhurst MBA lets students select the evening, weekend, or online class section that works best for them. Because of its convenient design and positive word of mouth, the program has grown nearly 10% from the year before. We’re now working with

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EXECUTIVE EDUCATION

local companies and organizations to offer the Marylhurst MBA throughout the region. We’re also excited about our Saturday MBA program, which launched in late 2005. It’s a catered, affordable Executive MBA–style experience that’s targeted to up-and-coming professionals. Students take classes from 9am to 4pm one day a week on Saturdays for eight straight quarters. In two years, they’ve earned their Marylhurst MBA. The classes have been accelerated to eight weeks from the normal 10-week quarters, and some of the coursework is completed online. A second cohort began in late September, 2006. In fall, 2006, we launched the Accelerated Online MBA, our first online program with true nationwide reach. Distance learners comprise nearly 10% of our Marylhurst MBA population. But we’ve never tapped into the growing online population outside of the Pacific Northwest. Targeted online marketing has spread the word about this accelerated course model, which enables

students to complete the Marylhurst MBA in just 18 months of intensive study. We are offering fiveweek courses, one at a time, and the instructors are trained to help working students absorb large amounts of knowledge in a short amount of time. What’s next? We’re constantly refining our graduate business programs, especially the fiveweek accelerated model. New technologies like podcasting promise to bring even greater content and dynamism to the online classroom. And in 10 years, I wouldn’t be surprised if Marylhurst had five online learners for every on-campus student enrolled, with our instructors and students scattered around the world. We’ll never forget our educational roots or our commitment to service. But we’re ready and eager to embrace the globalization of higher education.

Todd Harris, Chair of the MBA Program, Marylhurst University.

EXECUTIVE EDUCATION

New Horizons Guido Krickx talks to Money Markets

Introduction Q. Saint Mary’s currently offers several graduate programs and a variety of study options. Kindly expand upon this? A. Currently, Saint Mary’s offers a total of three graduate programs. However, we are working towards developing a fourth. Our oldest program is the executive MBA program, which targets working executives and senior managers. When we first offered the program, we were one of around forty institutions in the country at the time. This year we will celebrate thirty years since the graduation of our first cohort in the program. The second program is a professional MBA, which we are in the process of re-vamping. We are adding a number features such as the opportunity to take courses overseas, a new concentration in International Management and course offerings on Saturdays. This is a program for working professionals, and has graduated classes for twenty years. Between the two programs we have had a significant amount of experience with working managers. The third, and newest program, is the masters program in financial analysis and investment management. The program is geared towards finance professionals and has been designed to prepare them for the next step in their financial management careers. It’s a great way to get a specialized finance education and it aligns very well with the requirements of the CFA exam. The program can also be combined with the MBA program. Individuals can therefore obtain two degrees. We are currently developing a global executive MBA program. A number of companies in the Bay area have a very global outlook. Therefore, the Global EMBA program will basically address the need of these global companies, by preserving the fundamental strengths of the executive MBA Program, but combined with a greater focus on international business opportunities.

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Q. What separates Saint Mary’s from other providers? A. Given the richness of our programs, I’m always surprised that we can afford to do what we do at the price point we’re at, especially when you consider that we typically limit enrolment to no more than twenty-five students. However, most of our classes tend to be between fifteen and twenty-five students. This gives us the diversity of backgrounds and experience that make the MBA or EMBA programs truly enriching, while we also give everyone personal attention. This is very important, especially as we work with seasoned professionals. With respect to our executive MBA program, we have six different starts per year, in four different locations, all in different formats. One of the things that we found is that because executives today are very busy, certain program formats just don’t work for some of them. So we’ve made a great effort to develop flexible offerings, customized to the needs of specific groups – people who want to come on weekends, people who want to come weekdays, people that travel a lot. We’ve tried to be very creative by stratifying our offering to meet the needs of these different individuals. The cost of education is something that was intensely discussed a couple of years ago among the members of the Executive MBA Council. At Saint Mary’s we try to keep tuition costs down. Individuals who may be thinking about making this investment in their education can be assured that they will have a relatively short pay back time with the Saint Mary's programs. Q. You offer a Hybrid Executive MBA option, what does this necessitate in terms of software and hardware? A. The Hybrid program basically blends what we do offline with what we do on online. Content is in no way comprised. Unfortunately, online education has often been tarred by educational experiences that are, in some cases, limited to voice-over-PowerPoint. Clearly, this is not a very engaging model. What we’ve done instead is to put people together on alternate weekends in the classroom. This gives them a traditional classroom format. They also use

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technologies based upon a virtual platform that is powered by i.LINK. In essence, class sessions are conducted in a virtual space. Online sessions are limited to around twelve individuals and one instructor, to preserve the engagement we achieve in the classroom. From a technology standpoint, the only thing that one really needs is a high-speed internet connection, we provide the rest. In fact, we give every participant an iPod and they have access to a library of podcasts. We use microphone technology with the iPod so that students can actually use it as a recording device. We continue to explore how to use technology in a creative way.

Additionally, you have to take into consideration the demographic characteristics of your clientele. In our executive MBA program the average age is thirtyeight. I suspect that our students would be unable to take two years out for a full time program. So, a parttime executive MBA program, a program that they can do at the weekend, or in the evenings, makes a lot more sense. The other main advantage with a part-time program is that the learning can be applied directly. With a full-time MBA you can only really start to apply your skills once you’ve completed the program. Those involved in a part-time program can start to apply their skills and new found knowledge right off the bat.

Recruitment

The Future

Q. Recruiters are offering graduates higher salaries for the first time since 1996. Will this trend continue? A. One of the things that you have to recognize is that a person who comes from a good MBA program will have a better skill set. With this in mind, you would expect their salary to be higher. Naturally we have metrics on what people consider to be the payback period. In our program, because we’ve been able to keep prices relatively low, the payback period has actually gone down quite significantly. According to the latest exit surveys, individuals reported that it would take thirty-five months to recoup their initial investments since their entry into the EMBA program. This is a tremendous statistic. Basically, eighteen months after you’ve finished your EMBA you will have recovered your investment.

Q. (a). Has the market reached saturation point? Are there simply too many programs? Q. b). What can we expect from Saint Mary’s in 2007? A. I think that the market looks quite attractive. You asked about saturation, I think that there is still a solid market out there for professional formation, for managers who are preparing themselves for the next level of responsibility. I believe that this will always be the case. The key is to make sure that what you transact in the classroom has real-world relevance for those managers. Regarding Saint Mary’s, we are making some changes in terms of our current offering. We want to broaden what we do in our MBA program and are actually complementing our weekday offerings with a Saturday format for the fall. We will also offer a new concentration in international management as part of the MBA program. Second, we are working on a global executive MBA program. This will require at least two overseas immersions on at least two different continents. This will enable managers with global careers to interact with other managers in different parts of the world. Very often people are tasked to be responsible for one geographical area, they might know Europe very well, but know relatively little about Asia or South America. We want to increase their knowledge and get them ready for further advancements in their program.

Enrolment and the Full Time MBA Q. (a). Increasingly, students want to obtain an MBA in the shortest possible time. Some consider the opportunity-cost of taking two years-plus out of the workplace too high. Will interest, and enrollment, in full time MBA programs therefore continue to decline? Q. (b). In your opinion, has the full-time MBA become an overpriced commodity? A. Tuition has increased dramatically over the last couple of years. I think that there is a real opportunity-cost when you embark upon a full-time MBA program. Obviously you do not receive the compensation that you would if you were working full-time and attending a part time program.

Guido Krickx is the Associate Dean/Director of Graduate Business Programs for Saint Mary’s College of California in Moraga, California. Previously he held positions at CSU East Bay and the Wharton School.

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The Virtual Classroom Dr Donald Zahn, University of Wisconsin-Whitewater

The University of Wisconsin-Whitewater Online MBA program allows students from around the world to interact with other students and instructors, as well as experts within the field, in a shared learning environment. Students are able to research, analyze, and communicate with others in their related field online. Our goal is to provide a high-quality educational experience that will professionally prepare students for careers in business using online technology. The Online MBA Program is fully accredited by AACSB International. At present you can earn an MBA entirely online with an emphasis in Marketing, Finance, Management, Human Resource Management, or International Business. We are working on expanding our Online MBA emphasis areas. Students can choose to combine traditional classes with online classes to complete an emphasis in Accounting, Decision Support Systems, Health Care, IT Management, Operations & Supply Chain Management, and Technology and Training.

•

All credits earned online can be transferred to UWWhitewater's traditional MBA program, which has the same admissions requirements, classes and instructors. UW-Whitewater's program is accredited by Advanced Collegiate Schools of Business International (AACSB), a leading organization with more than 900 member institutions around the world. The curriculum and the software promotes interactive learning among students, through group projects and real-life business problem-solving.

Online MBA Program Among Top in Nation UW-Whitewater’s Online Masters of Business Administration (MBA) program is one of the nation’s best, according to US News & World Report and GetEducated.com.

“Our goal is to provide a high-quality educational experience that will professionally prepare students for careers in business using online technology.”

Electronic Delivery. Traditional Quality. Whether you're an individual seeking career advancement, or an employer looking for staff development options, the UW-Whitewater Online MBA has the quality and flexibility you need. UW-Whitewater built its Online MBA in 1998 on a solid foundation. It emphasized quality faculty and top academic standards, not high-tech gimmicks. Maybe that's why in only seven years, the program has already been recognized for three awards for its high quality. In fact, the Online MBA has all of the features that make UW-Whitewater’s on-campus program so successful. Consider: • A Ph.D. is required of faculty members who teach in the program, as well as specialized training to meet the challenges of online teaching.

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The University of Wisconsin-Whitewater was named the seventh-best public school in the Midwest in the 2001 edition of "America’s Best Colleges," published by U.S. News and World Report. US News and World Report used the following factors to determine the rankings of colleges and universities: academic reputation, retention, faculty resources, student selectivity, financial resources, graduation rate performance and alumni giving rate. GetEducated.com identified UW-Whitewater as “Best Buy in Distance Education’ in 2004 and 2006. A Best Buy designation indicates that the program was found to offer a high quality distance degree to a national audience at tuition rates well below the national average. Desire2Learn Software Platform Used to Deliver Online Courses Desire2Learn is the primary distance education tool

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used with online courses at University of WisconsinWhitewater. The user-friendly learning environment provides a complete web-based suite of user-friendly tools. Students enjoy the self-contained learning communities that allow for easy communication, collaboration and assessment. Streaming Media/CD-ROM Technology We believe a critical feature of all online courses is the implementation of a layered architecture. Students should be exposed to audio, video, and interactive simulations as well as written communication. The University of Wisconsin-Whitewater provides layered information in part through the use of streaming media and CD-ROM technology. All course media include an introduction by the faculty member. In addition to the faculty introduction files; video/audio files, PowerPoint slides, E-teach and Camtasia presentations or other lecture notes are provided on the media which correspond with each course module. These files allow the student to view the course lectures/demonstrations

and help desk operations. In the future, students will purchase an inexpensive pc video camera and communicate with a faculty member, other student, or help desk personnel. The future also holds several innovations concerning course content. Learning objects are being created around the world and published for use on sites such as www.merlot.org. Publishers also recognize the growth in the online education market and are creating supplementary materials using up-to-date internet links and expensive instructional design technology and software that requires skills and resources beyond those available to any individual instructor. These developments will allow professors to create more realistic, interactive lesson plans for students. Overall University Standing UW-Whitewater, founded in 1868, is the fourth largest campus in the 26-campus UW System. The university enrolls 10,600 students, employs a staff of 1,200 and has an annual operating budget of $120

“Whether you're an individual seeking career advancement, or an employer looking for staff development options, the UW-Whitewater Online MBA has the quality and flexibility you need.”

as if they were in the classroom. All multimedia files are created as executable files so the student is not required to have any special software other than Windows Media Player to view the files. Students simply double click on the multimedia files and watch the video lectures/ demonstration/activities on their computer. One advantage of this technology is that you can replay the lectures as many times as you feel necessary and learn at an appropriate pace for your learning style. Where Do We Go From Here? To eliminate technical problems the University of Wisconsin-Whitewater Online MBA Program guarantees that a person with a slow internet connection and older computer can participate in the program without technical problems. Surveys show that approximately 90 percent of the students have access to broadband connections. The faster connection speed by the large majority of students has allowed our program to launch streaming video services, internet office hours

million. UW-Whitewater provides 42 undergraduate and 16 graduate degree programs. The campus is also a regional center for cultural and athletic activities. UW-Whitewater’s Online MBA Program, which began in 1998 and currently enrolls over 350 students. “Choosing the online program at the UWWhitewater was definitely a good choice,” stated Adreiane L. Treasure from Atlanta, GA, a student alumni of the online program. “It’s a strong MBA program that gives you just the right balance of theory and detailed working knowledge. It has helped me to perform at new levels on my job.” Most students can complete the program in two years. Approximately 12 courses are offered each semester. Courses tuition is $550 per credit.

Dr Donald Zahn is an Associate Dean at the University of Wisconsin-Whitewater.

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The Executive MBA – Opening New Doors Scott Goddard talks to Jonathan Calens

Nottingham Today Q. Nottingham offers eight AMBA-accredited MBA programmes; do you intend to expand upon this? A. If we do, we will be focusing on areas of particular strength, perhaps a named MBA in entrepreneurial studies. The other potential development is an expansion of MBA’s onto our new campus in China. We will probably be offering MBAs over there in due course along side the MBAs we already offer in the UK, Malaysia and Singapore.

Q. Some schools prefer to use senior faculty members when teaching courses. Is this something that you advocate at Nottingham? A. I think it is almost essential; to put a junior, or inexperienced member of staff, in front of an MBA audience is to more or less invite a massacre, because the MBAs demand both forefront of knowledge plus business experience. So our most experienced faculty members, be they professors or practitioners, or those who have come into education a little later on in life, are the sorts of people that we need to teach MBAs. They have to be able to present a very good mix of theory and practice, and give real business experience and information as part of the learning process. Q. The quality and background of the professors charged with teaching and motivating Nottingham’s students is clearly very important. However what set’s Nottingham’s faculty apart from other schools? A. In a sense, to be an excellent provider of an MBA course, be it full time or executive, you have to offer a total package. I think that it is not just a question of the students and staff; there are other factors to take into consideration. You do need good staff, with relevant experience, you also need first-rate students, without these you can’t get anywhere on an MBA. Our students have an average of 7

to 8 years experience on the full time programmes and 12 years plus on the part time. The interaction of people with experience is a contributory factor towards the quality of the MBA. On top of that you need excellent facilities, the working environment is something that must be first class. A good selection of modules that are at the forefront of business knowledge are essential, you also need a selection of elective modules to allow people to focus on their career aspirations. If you’re offering part time programmes you need to make them flexible, in order to allow people to fit in their business commitments simultaneously; if they want to stop for 6 months and not take a module, that’s fine, if they want to speed up and take 2 or 3 modules very quickly, that’s fine also. You must provide support in terms of career development, alumni facilities, networking facilities and indeed a social package. The last thing we want is for people to come onto an MBA course and find it so intensive because there is no social dimension to the experience. We also need to bring in the benefits of having 11 advanced research centres within the business school, and link them directly to the MBA. It is important that the professors who are doing the research on the forefront areas, such as CSR, venture capital, or entrepreneurship, can feed the results of the research directly in to the programme. Q. A number of schools have introduced elearning platforms. How technology driven is Nottingham? A. We have e-learning portals, for both staff and students within the university and business school; as time goes on the “e” element of programmes will increase. I don’t think that they will take away entirely from face-to-face communications, because that is one of the major strengths of MBAs. That said there are some excellent distance-learning programmes that are exclusively e-based.

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We provide on-line, full text journals, sometimes even database software packages, which can be accessed from wherever the MBA course member is. This facilitates the progress of people throughout the programme, particularly part time and overseas course members. It is often useful to supplement the lecture and seminar process by having things available for people to work on in their own time. So for example, we provide an interactive CD for some of the subjects that people have most difficulty with, which tend to be things like accounting, finance and IT. Some people don’t need it because they are already quite strong in that area, whereas others find it very valuable. Q. The traditional draw of the Executive MBA program was from the local area. However, schools now describe classrooms with students from the four corners of the earth. Is this something you’ve experienced at Nottingham? A. You have to differentiate between full and part time MBAs. With the full time, we typically have at least 30 different nationalities on a

Q. The Nottingham University Management and Business Alumni (NUMBA) have more than 1500 MBA alumni worldwide. How important are alumni networks? A. They are very important indeed, I think we, in the UK are typically under emphasising the value of the alumni network. The States have developed very strong links with alumni over the years. The UK, and I’m afraid to say Nottingham, have been rather more backward than we should have been. In recent years we have devoted more resources to the alumni, including the development of websites and so on. We have already got very active alumni in the UK, Singapore and in Hong Kong, but want to develop in other key parts of the world where we have groups of students. Economic Drivers Q. As the world economy shows signs of consolidated growth, and corporate results bring renewed confidence to boardrooms, would it be fair to say that demand for Executive MBA programmes is growing?

“We typically have at least 30 different nationalities on a programme and this is intentional. We want the mix of cultures and experiences that you get, and obviously business practice differs in various countries.”

programme and this is intentional. We want the mix of cultures and experiences that you get, and obviously business practice differs in various countries. We find that bringing people together from so many countries is a great asset, and you benefit tremendously from the cultural diversity of the programme. Strangely enough, this is also happening with executive programmes, the bulk of our executive MBAs are obviously UK based, but at our last count we had people flying in from 8 different countries. We have a contract with a key organisation in Germany who send people regularly, we have also got people flying in from Canada, the Middle East, France and so on. This is adding a new dimension that we hadn’t really anticipated.

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A. Yes, on a global basis it certainly is. Online demand is growing because it is fairly easy to encompass both that and the executive MBA whilst continuing a career. The executive MBA is relatively expensive, but none the less, organisations seem to be increasingly taking the view that it is a worthwhile investment. Q. For some time there has been massive under investment by the Government and commercial enterprise in people and training. Is this ever likely to change? A. Well obviously we hope that it will. The government has always under invested in the UK, relative to many other countries. Companies themselves also tend to under invest in training. We believe that we have a very good

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product to sell in the business schools, and the feedback that we get is very positive from the organisations that employ our graduates. As I was saying before, it is not something that organisations prioritise. They perhaps should

and seminars in order to do justice to the MBA. Q. You’ve mentioned in the past that students attending your part time MBA programme receive more financial support from their employers than those attending full time.

“We as a business school have adopted the philosophy that we try and keep fees to a reasonable level, and we do offer a limited number of scholarships.”

take a longer-term view, and think of the implications if they cut back on training and don’t invest as much as they potentially could. Investing In Human Capital Q. An executive MBA programme requires a considerable investment of both time and money. However, how much time and money are we talking about? A. Executive programmes vary in cost depending on the organisation. Nottingham’s cost approximately £17,500 for the fees; on top of that you have to cover living expenses for 12 weeks of the programme, and probably another £500 - £1,000 on books and other expenditures. There is also the opportunity cost, which organisations have to take into account when you are not working. We do try to encourage public sector, and not-for-profit organisations, as their fees are much lower. We are aware of the problems, particularly amongst charitable organisations that are in as much need of high quality managers as anyone else. Some MBAs are much more expensive, you can pay in excess of £30,000 for an MBA in the UK, and the US ones are even more than that, so It’s a fair commitment. In terms of physical attendance, this will involve twelve weeks over anything from 2 to 4 years. You can choose how quickly you want to move through the programme. On top of that you would need to spend substantial time on a management project, typically a practical look at something within your own organisation. In terms of work on projects and reading, you need double the time you spend on the lectures

As unlikely as it may be, has this dynamic changed? What incentive and or motivation do potential students/ applicants have when it comes to enrolling in a full time programme? In percentage terms how much support/ financial assistance do students generally receive from their employers? Has this percentage increased over the years? Is the number of self-funded EMBA students growing? A. I must start by differentiating between part and full time. Full time support, if anything, is diminishing in the UK. There are very few employers willing to provide full support for someone to take a year off in order to complete the MBA. Part time is somewhat different, if anything, support is rising. Some organisations pay fees in full; some want a commitment from the course member (employee) as well. Typically a contribution of between 25 and 30% would be the sort of commitment that an employer would look for when asking for a contribution from an employee. Support can also come in the form of time. If you are doing an executive MBA, twelve weeks over a period of four years is a substantial commitment. Other support could be mentoring; people who may have experienced MBAs within the organisation could act as internal mentors. Of course support could be more directly linked to the business school. One of the things that we and other business schools can offer, if organisations wish, focuses on the provision of bespoke courses, tailored specifically to the

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student’s requirements. Internationally, I’m afraid to say there is a great deal more support than there is in the UK. A lot of international students do get support quite often from their organisations and that can be full time students as well. We as a business school have adopted the philosophy that we try and keep fees to a reasonable level, and we do offer a limited number of scholarships. There are a number of half-fee scholarships and a very limited number of full fee scholarships, which include accommodation in some cases. These are mainly linked to our corporate social responsibility MBA, trying to encourage people possibly from the developing world to come to the UK. When you compare us, or many of the British intuitions, with a lot of US schools, we don’t offer as many

you’ve got to have exposure to this, many companies tend to be very traditional in terms of how they tackle issues. They need an influx of new ideas and the MBA does this very well. Q. Across the board, applications to full-time courses have plummeted, but for those business schools offering executive MBAs (MBAs for working managers), the coffers are filling up. Does Nottingham have this problem and what can be done to address the balance? A. The full time numbers at Nottingham have fluctuated, and are down on previous years, but we are still doing better than many other leading business schools. It tends to be linked to countries. There was a phase when huge numbers were enrolling in MBAs from China, but numbers are declining. I think that they

“To be an excellent provider of an MBA course, be it full time or executive, you have to offer a total package.”

scholarships. We believe that it is better to price the course at a realistic fee level in the first place, in order to enable more people to attend, than to have a higher fee and offer more scholarships. EMBA – The Way Ahead Q. What can the Executive MBA offer in the future, is it outdated? A. There have been a lot of comments in the press over the last year, criticising MBAs, particularly in the States. Nonetheless, I feel very strongly that MBAs still have a great deal to offer to managers who are aspiring to senior and top positions. Not only do they provide a great knowledge base, and the skills base from the professors, but the mix of many different organisations coming together in a class. It is amazing to see how similar organisations tackle managerial problems in different ways. This is one of the great things that can come out in an MBA programme. If you are going to develop as an organisation

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are down about 40% in the UK and in general this year. I suspect that some organisations might have to stop providing full time programmes. Q. What other innovations do you see in the pipeline that will help you stay on top? A. There has been some debate about where MBAs have to change; the criticism has been that they are not necessarily relevant to today’s managers. I think the crucial factor is that you have to try and maintain the quality of the programme and, in particular, the quality of course members. Some institutions have tended to start taking young, and inexperienced managers. This doesn’t do the MBA any good. We’ve taken a decision to try and maintain standards, even if numbers drop on some programmes; we will not lower the intake standard, nor will we reduce the number of year’s experience we ask for. In many respects, I think that some of the US schools have more problems than their

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UK and European counterparts. If you take a look at the average age of course members, in the UK and Europe, most of them are older and more experienced. We are focusing much more on soft skills and hard skills than we did in the past, which are part and parcel of today’s managerial trends. As long as we make sure that the quality of the staff, students, and the environment are being maintained or enhanced we will stay among the forefront of MBA providers. Another thing worth mentioning is that we get quite a lot of people saying, particularly on the executive MBAs, “we don’t actually think we need the MBA qualification for our job development, because we are already fairly senior managers, but we want it for the learning experience. We want the knowledge, skills, and we want

ideas from the programme in order to develop ourselves. If we get the letters after our name that’s nice, but it’s incidental, the main thing is our own personal development in the context of what is going to be best for us in our organisation.” I think that’s a very refreshing and realistic way of looking at things.

Before becoming Director of Postgraduate Progammes at Nottingham University Business School , Scott Goddard held teaching and research posts at Birmingham University, Aston Business School and Nottingham Trent University. His Interests and publications are in financial management and international finance and he is the Examiner in Financial Strategy for the Association of Chartered Certified Accountants (ACCA) .

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Products & Services Index Asset Management

Covered Bonds

BHF-Bank Tel: +49 69 718 3738 Web: www.bhf-bank.com

Banco Espirito Santo Tel: +351213501157 Web: www.bes.pt

Citigroup Tel: +44 (0) 20 7500 2304 Web: www.citigroup.com

Caisse de Refinancement de l’Habitat Tel: + 33 (0) 42894910 Web: www.anil.org

Lloyds TSB Tel: +44 (0) 207 661 4650 Web: www.lloydstsb.co.uk

TXSuite Tel: +49 (0) 4106 7777 219 Web: www2.agens.com

Nordea Tel: +47 22 48 50 00 Web: www.nordea.com

55 Custody

Capital Markets

Banco Espirito Santo Tel: +351213501157 Web: www.bes.pt

BHF-Bank Tel: +49 69 718 3738 Web: www.bhf-bank.com

Caisse de Refinancement de l’Habitat Tel: + 33 (0) 42894910 Web: www.anil.org

Citigroup Tel: +44 (0) 20 7500 2304 Web: www.transactionservices.citigroup.com

Lloyds TSB Tel: +44 (0) 207 661 4650 Web: www.lloydstsb.co.uk

Cyprus Popular Bank Tel: +357 228 12108 Web: www.laiki.com

EFG Eurobank Ergasias Tel: +30 210 335 7228 Web: www.eurobank.gr

First National Bank Tel: +27 11 371 3451 Web: www.firstrand.co.za

OECD Tel: +33 1 45 248200 Web: www.oecd.org TXSuite Tel: +49 (0) 4106 7777 219 Web: www2.agens.com

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Alpha Bank Tel: +30 210 326 5523 Web: www.alpha.gr

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INDEX

University of Wisconsin Whitewater Tel: +1 262 472 1945 Web: www.uww.edu

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NDC Tel: +7 495 956 2790 Web: www.ndc.ru/en

Nordea Tel: +47 22 48 50 00 Web: www.nordea.com

Alexandra Pereira Law Offices Tel: +351 289 399 963 Web: www.alexandrapereira.com

Piraeus Bank Tel: + 30 210 92 94 900 Web: www.piraeusbank.gr

Luis Lapa E Borges Law Offices Tel: + 351 289401090 Web: www. lborgeslaw.com

Svenska Handelsbanken Tel: +46 8 701 2988 Web: www.handelsbanken.se Thomas Murray Tel: +44 (0)20 7830 8300 Web: www.thomasmurray.com

Real Estate Investment

Union Bank of California Tel: +1 800 490 8262 Web: www. unionbank.com

Legal Firms

AIPP Tel: +44 (0)20 7409 7061 Web: www.aipp.org.uk

Alexandra Pereira Law Offices Tel: +351 289 399 963 Web: www.alexandrapereira.com

Bulgarian Connection Tel: +44 (0)207 099 2600 Web: www.bulgarianconnection.com

Dandara Tel: +44 (0)1624 693 300 Web: www.dandara.com

Enterprise Solutions TXSuite Tel: +49 (0) 4106 7777 219 Web: www2.agens.com

Executive Education EMBA Tel: + 1 877 453 6222 Web: www.emba.org

EPRA Tel: +31 20 405 3830 Web: www.epra.com

Marylhurst University Tel: + 1 866 278 3965 Web: www.mba.marylhurst.edu

ERA – Almancil Tel: + 213 600 150 Web: www.era.pt

Nottingham University Business School Tel: +44 (0)115 951 5500 Web: www.nottingham.ac.uk/business

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Luis Lapa E Borges Law Offices Tel: + 351 289401090 Web: www. lborgeslaw.com

St Mary’s College of California Tel: + 1 925 631 4500 Web: www.stmarys-ca.edu

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Richard A Rooke Tel: +34 965 320024 Web: www.eresmas.net

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List of Contributors A AIPP Alexandra Pereira Law Offices Alpha Bank

N NCD Nordea Nottingham University Business School

B Banco Espirito Santo BHF Bank Bulgarian Connection

O OECD P

C Caisse de Refinancement de l’Habitat Citigroup Cyprus Popular Bank D Dandara

Piraeus Bank R Richard A Rooke S St Mary’s University Svenska Handlesbanken

E T EMBA EFG - Eurobank EPRA ERA - Almancil

Thomas Murray TXS financial products GmbH U F Union Bank of California University of Wisconsin Whitewater

First National Bank L Lloyds TSB Luis Lapa E Borges Law Offices M Marylhurst University

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