Money Markets - Volume 8 by Money Markets Ltd.

MM MONEYMARKETS

Money Markets | CoverA

YOUR DNA

for Innovative Fund Administration

Gulf Custody Company (GCC) is the region's leading fund administrator offering a wide array of services, from fund administration, custody, to share registrar • Administers funds domiciled in all GCC regions and the Cayman Island. • Strategic alliances with leading global fund administrators. • On-line custody information service. • Ofﬁces are located in Kuwait & Bahrain to serve in GCC, Mena and Levant regions.

Kuwait Ofﬁce:

Tel: +965 2408140 - Fax: +965 2416289

Bahrain Ofﬁce: (Gulf Clearing Company) Tel: +973 17218822 - Fax: +973 17210010

www.gulfcustody.com CoverB | Money Markets

The Region's Leading Fund Administrator

Contents

“The increasing interdependence of the global economy is also of paramount importance for central banks as it possibly affects, among others,the formation of international good prices,the inflation process, the valuation of assets, the cross-border constellation of capital flows, and international financial stability.” PG. 7

Foreword 7

G lobalisation, Inflation and the ECB Monetary Policy Jean-Claude Trichet

2 008 International Custody Review

R egionalisation - Survival of Asia’s Fittest Elizabeth Chia

Custody 24

T he Value of Local Expertise

Angelo Calvitto & Michael Campbell

C ustodian Evaluation, Selection & Monitoring in a Changing Landscape Ross Whitehill

Money Markets | 1

Contents 38

51 38

S outh African Custody â&#x20AC;&#x201C; Reaching New Heights

Andre Jansen van Vuuren

S outh African Custody â&#x20AC;&#x201C; Where Flexibility Counts

Kieran Dolan

Tertius Vermeulen

I nnovation in the Gulf Markets

T he Growth of an Independent Provider S etting the Standard in Custodial Systems John Byrne

T he Value of Local Expertise

Paul Heffernan & Fearghal Woods

Ahmed M. Al Bahar

2 | Money Markets

Money Markets | 3

71 58

O utsourcing â&#x20AC;&#x201C; Making Waves

S taying on top in Germany

I celandic Custody Gathers Momentum Gudrun Blondal

L ife after the Common Trading Platform

Moritz Ostwald

Argyo Schoenberger

T he Changing Face of Greek Custody John Avgoustis

N ordic Custody Overview

T he Changing Face of Nordic Custody

Anne-Lise Kristiansen & Peter Dahlgren

Goran Fors

4 | Money Markets

George Yemenitzis

C lient Relationship Management A Winning Formula Bob Poferl

Contents

Securitisation Supplement 86

T he “Subprime Crisis” and the Future Challenges for the European Securitisation Market Carlos Echave

B usiness as Usual for Capita

T aking Workflow Solutions to the Next Level

Sue Lawrence

Ira Keller

L ist of Contributors

Money Markets | 5

MM MONEYMARKETS CEO

Victor J. Callender

COO

Anthony Gordon

Financial Controller

Philip Ashgrove

Operations Director

Emma Sawyer

Editor-in-Chief

Jonathan Calens

European Editor

Susan Gault

Senior Editor

Simon O’Brien

Art Director

Candace Cohen

Head of Production

Steven Whitaker

Head of New Media

Silvio Ferrero

Published by Money Markets Ltd., a Callender Media Group Publication

All rights reserved. No part of this publication may be reproduced without the expressed approval of the copyright owner. Whilst every effort has been made to ensure the accuracy of the information in this publication, the Publisher accepts no responsibility for errors or omissions. The Publisher disclaims responsibility for the views and opinions expressed herein by the contributors and do not give any warranty regarding the accuracy thereof. For further information on annual subscription rates and benefits visit: www.cmweb.co.uk/moneymarkets Price per issue, including web access: £40.00 €60.00 $73.00

Head Office: Level 7, Marlow House • Cranes Park • London KT5 8AG • UK +44 (0) 870 067 2077 (UK) +44 (0) 870 067 2078 (UK)

Telephone: Fax:

Email: editorial@cmweb.co.uk Web: www.cmweb.co.uk/moneymarkets 36479_MnyMrkt 12/20/06 12:49 PM Page 1 6UBC2846COM1_MnyMrkt_7.068x4.481.qxd Money Markets_1/3/07

The bank of custody services has serviced institutional securities for 85 years and counting assigns an expert who specializes in your unique market manages a global agent network so you can work with a single source customizes straight-through processing solutions believes the best security is working with an experienced leader.

Invest in you

To see how our expertise in custody and securities lending can work for you, please call: Jeff Boyle, Senior Vice President, (800) 490-8262 jeff.boyle@uboc.com Institutional Securities Services Visit us at unionbank.com

6 | Money Markets

Foreword

•••

Globalisation, inflation and the ECB monetary policy »Jean-Claude Trichet, President of the ECB

Globalisation is certainly one of the most analysed and discussed economic phenomenon of our time. The notion of “globalisation” subsumes the concepts of cross-border market integration, country and policy interdependence, and fundamental historical change. Economists classically think of globalisation as a process of market integration that leads to price convergence across markets for goods, labour and services worldwide as well as to growing trade and financial flows. Introduction Outside economists’ circles, however, globalisation refers to a more general phenomenon of growing interdependence between countries including also technological, environmental or social aspects. It encompasses many multifaceted phenomena, from the diffusion of knowledge and cultural patterns, to the unprecedented speed and freedom of communication and travel in the age of the Internet and jet. Knowledge and ideas travel much faster than physical goods and people, a key distinctive aspect of the current wave of globalization compared to previous episodes. A striking aspect is the emergence of what has been called “self-organizing collaborative communities,”

like those that have produced Linux and Wikipedia. Academic economists know a lot about this, as they have been part of a similar community for long time, comprising the research universities of the US and Europe. [1] The current phase of economic globalisation has also coincided with the reintegration into global markets of China, India and the former Soviet bloc, transpiring into the doubling of the effective global labour force from about 1.5 to 3 billion. For this reason, the current debate about globalisation is very often indistinguishable from the debate about the advent of emerging economies and their systemic implications. Globalisation brings together in public debate a broad set of policy issues, such as trade liberalisation and competition from low-wage economies; foreign direct investment and offshoring; international capital flows; immigration and pressures on labour markets in mature economies; the implications of the global spread of technology, as reflected in discussions about intellectual property rights, for instance; or the protection and promotion of cultural diversity. On the one hand, globalisation is celebrated by its supporters because of the higher quality of life it brings about, with very similar words as those Keynes used almost a century ago to describe the heydays of the “liberal international economic order” before World War I. [2] On the other hand, the sweeping and relentless demise of physical and man-made barriers to the mobility of goods and services, ideas and people, is criticised because it supposedly also does away with necessary protections for disadvantaged workers and households in poor and rich countries, the environment and cultural diversity. All these developments have put globalisation at the centre of international policy debates. The European Union considers globalisation to be “one of the major challenges” it is confronted with and defines the phenomenon as “the increasing interdependence of the global economy and ever-growing competition on international markets.” [3] Money Markets | 7

The increasing interdependence of the global economy is also of paramount importance for central banks as it possibly affects, among others, the formation of international good prices, the inflation process, the valuation of assets, the cross-border constellation of capital flows, and international financial stability. I will touch upon some of the consequences of globalisation forces for price stability, and the implications and challenges for monetary policy. Monetary effects of globalisation were already a topical issue in 16th century Spain, during the establishment of global colonial empires, when large influx of silver from the Americas led to unprecedented increases in prices first in Spain but then also in the rest of Europe, accompanied by substantial external imbalances. Then as now the debate was whether inflationary pressures were just about relative prices or should also have implications for the price level. This incident of an early phase of globalisation was associated with the blossoming of key contributions to economics such as the quantity theory invented by the School of Salamanca, but also, quite alarmingly, the rise of protectionist mercantilism. Catalonia was indeed an early victim of protectionism, as only in 1778 it was allowed to trade with the Americas by decree of Charles III. [4]

Setting the Stage: Globalisation and the Euro Area As globalisation means different things to different people, there are also many popular measures of globalization. For example, the 2005 issue of Foreign Policy magazine ranked countries in terms of their degree of globalisation based on a variety of criteria, including international travel and tourism, membership in international organizations, contributions to United Nations peacekeeping missions, international telephone traffic, Internet hosts and so on.

Chart 1

Costs of transport, information processing costs, and tariffs(Index, 1985-100) Source: OECD. Note: Tariffs are median of national mean bound tariffs for OECDcountries, Sea freight is average international freight charges per tonne, passenger air transport is average airline revenue per passengermile/US import air passenger fares; international calls is cost of a three-minute call from New York to London, costs of processing information is costof computing an average operation (sum and multiplication).

■

The three most globalised countries turned out to be Singapore, Ireland and Switzerland; the United States was fourth. [5] When one looks at measures focusing more narrowly on economic globalisation, however, the striking and not widely known fact is that Europe, and the euro area in particular, turn out to be more closely integrated with the global economy than the US. Globalisation, if narrowly defined as growing trade openness in response to declining trade and transport barriers, has been ongoing for decades and in this sense is not a novel phenomenon. Over the last decade, however, this process appears to have accelerated, and the increasing trade integration has been accompanied by signs of a rapidly growing interdependence of economies also via production and financial market linkages, with two broad factors underlying such a development. First, falling costs of moving not only goods, but also services and information across borders, have led to changes in the production processes, most notably related to the international fragmentation of production (Chart 1). Second, there has been a large expansion in global productive capacity on account of the opening up of emerging economies to international trade and production.

“The increasing interdependence of the global economy is also of paramount importance for central banks as it possibly affects, among others, the formation of international good prices, the inflation process, the valuation of assets, the crossborder constellation of capital flows, and international financial stability.” 8 | Money Markets

Against this backdrop, euro area external trade as well as flows and stocks of foreign assets and liabilities have been growing strongly. This has been partly as a result of the increasing role of New EU Member States as trade partners, as well as rapidly increasing imports from Asia (especially China). Thus the trade openness of the euro area has increased rather markedly through time, especially since the early 1990s, and is growing more rapidly than in either the USA or Japan. In particular, trade volumes have also expanded strongly for the euro area (from 33 % of GDP over the period 1997-2000 to 38 % of GDP over the period 2001-2006 ; over the same periods, figures for the US stand at 24 % and 25 % and figures for Japan stand at 21 % and 23 %), with export and

The best part about our range of products and services, is the people who provide them. As the leading regional custody provider in sub Saharan Africa, we offer more than just the technology and resources needed for business in Africa. We also have the best people across the continent; with the specific talent and experience to not only grow your business but more importantly, to partner with you along the way. For more information please contact Adam Bateman on 011 636 6615 or visit our website at www.standardbank.co.za.

Inspired. Motivated. Involved.

Registered credit provider (NCRCP 15). Authorised financial services provider The Standard Bank of South Africa Limited (Reg.No.1962/000738/06). SBSA 811737 11/07

Money Markets | 9

Chart 2a

Openness of the euro area, the United States and JapanSource: â&#x2013;

Chart 2b

Total and extra-euro area importsand exports divided by GDP(quarterly data; indices; 2000=100; volumes)

JapanSource: ECB calculations. Note: The degree of openness is measured as exports plus imports as a percentage of GDP, average 1997-2006. Euro area based on extra euro area trade.

Chart 3a

Deposits 19992006 Euro area foreign assets (as percentage of GDP)

Chart 3b

Euro area foreign liabilities (as percentage of GDP)

â&#x20AC;&#x153;Given the different speed at which national borders have shrunk, one would expect a greater degree of convergence for asset prices than for goods and factor prices.â&#x20AC;? import volumes continually and rapidly outpacing the growth rate of GDP over the past quarter of a century (Chart 2a and 2b). Meanwhile, over the past decade world cross-border capital flows have also been growing strongly, increasing many-fold (from 4 % of aggregate GDP in 1994 to more than 14% in 2005 for the OECD countries) as a percentage of GDP (Chart 3a). A similar story holds for the euro area (Chart 3b), where the ongoing strength of capital flows is reflected in the considerable increase in outward and inward FDI virtually doubling (from 20% of GDP to 35 % of GDP as regards outward investments and from 15 % to 30 % of GDP as regards inward investments) as a percentage of GDP since 1999 (although cross-border bank lending has also significantly increased in recent years). Strikingly, while euro area external assets and liabilities at the end of 2006 amounted to 148.4% and 160.5% of GDP, respectively, the same ratios in the US were smaller, at 104.2% and 123.5% of GDP. 10 | Money Markets

Globalisation and Price Developments Economic theory predicts that this ongoing process of crumbling of national economic borders, and the associated increase in international flows of capital, goods and services, should have resulted into greater pressure towards price equalization and convergence, for assets, commodities and factors. Given the different speed at which national borders have shrunk, one would expect a greater degree of convergence for asset prices than for goods and factor prices. The available evidence seems to support this contention. While there is ample evidence that assets with similar risk characteristics yield very similarly returns in international financial markets, prices of similar goods and services are still quite different across countries. For instance, many observers have pointed out that long-term real

Keep an overview of your assets, identify opportunities.

UBS Global Custody & Investment Services. Precise, continuously updated information provides you with a comprehensive overview of your institutional assets. Contact your investment advisor or our Global Custody specialists: +41-44-236 91 89.

Foreword •••

However, a remarkable development associated with globalisation has been that, despite the limited convergence in price levels, inflation developments have seemingly reflected the influence of global factors. [8] This influence might be due to possible structural effects of globalisation on factors affecting global trend inflation; but also cyclical effects of globalisation forces – such as the soaring oil price from 1999-2007 – may provide part of the explanation. You won’t be surprise to hear from a central banker that inflation is ultimately, always and everywhere a monetary phenomenon and, as such, determined by monetary policy. Indeed, the influential observers who have connected the current period of lower and more stable inflation across the world with the workings of globalisation have done so by carefully linking it to either its influence on the incentives to engineer an inflationary bias; [9] or the emergence of an international consensus on putting price stability centrepiece as the overriding goal of independent central banks. [10] Chart 4a

China and NMS have lower import price level (euros per kg of EA manufacturing imports) Source: Eurostat Comextdata and ECB staff calculations. Note: Latest observation refers to 2005.

■

Nevertheless, the forces of globalisation may have indeed affected cyclical inflation developments through the following two channels. First, the influence of foreign conditions in the price and wage formation process may have increased because of heightened international competitive pressures, possibly decoupling inflation and standard domestic measures of macroeconomic slack. [11] Second, to the extent that the process of globalisation has resulted in a number of terms of trade shocks – attenuated increases in prices of imported manufactured goods and accentuated increases in commodity and food prices – these may have in turn worked their way into short-run fluctuations in headline inflation. [12] While there is a widespread presumption that through the latter channel globalisation forces have exerted cyclical downward pressures on inflation, it is clear that potentially favourable “tail-winds” are increasing turning into contrarian “head-winds”, posing potentially serious challenges to the maintenance of price stability. This would especially be the case were they to spill over into inflation expectations by the public, leading to their unanchoring.

The Cyclical Impact of Globalisation on Euro Area Prices and Wages Here, I will discuss the impact of globalisation on manufacturing and commodity prices and ultimately consumer price inflation in the euro area, arguing that there is evidence of only a small overall net dampening effect in last 5-10 years, reflecting the balance of opposite relative price shocks. [13] Chart 4b

Rising share of low-cost countries in euro area imports (values in euro; % of extra-EA imports) Source: Eurostat, ECB staff calculations Note: Latest observation refers to Q4 2006. Low-cost countries consists of 15 countries and regions (including ASEAN, NMS, CIS,China, India, etc). ■

interest rates in the major currencies have converged to very similar (low) levels, particularly since 2000. Moreover, there has been a large increase in cross-country correlations of these rates, suggesting that these dynamics are driven by a global factor which is quite independent from local developments in real economic growth. [6] Likewise, a simple way to gauge the lack of overall price convergence is to look at the World Bank’s latest PPP calculations, according to which prices in China and India in 2004 were still on average roughly 1/2 and 1/9 of their dollar counterpart in the United States. [7] 12 | Money Markets

Import Prices As I argued before, intra-euro area imports have been growing strongly, but euro area imports from low-cost countries such as China and the new EU Member States (henceforth NMS) have been growing even more rapidly. Based on highly detailed data disaggregated both by sectors and countries over the period 1995-2004, Chart 4a shows that the level of import prices (proxied by absolute unit value indices) from China and the NMS are estimated to be approximately one-quarter the import price of total euro area import prices, and about one-fifth the price of imports from high-cost countries. [14] Since the start of the 2000s, the share of low-cost countries in extra-euro area manufacturing imports has increased from just over one-third to almost a half (Chart 4b). [15] Rising imports from low-cost countries are putting downward pressure on extra-euro area manufacturing import prices. Overall, it is estimated

Your direct route

The universe of mutual and hedge funds is expanding quickly. The challenge is to capture the opportunities while giving your clients the service and the security they demand. The Citco Bank’s leading-edge technology helps you navigate the fund universe from your desktop. www.citcobanking.com

CITCO Curaçao • Amsterdam • Milan • Dublin • Geneva • Cayman • Bahamas • Luxembourg

Money Markets | 13

Table 1

Impact of low-cost countries on extra-EA manuf. import prices ■ Sources: ECB staff calculations. Note: “Share effect” captures the impact of rising import share and relatively low price level of low cost import suppliers (1.6 pp per annum); “price effect” captures impact of relatively lower import price inflation of low cost countries (0.5 pp per annum).

Chart 5

Extra-euro area import and commodity prices (indices: 2003M1=100, 3-month moving avg.) Sources: ECB, HWWA and Eurostat. Note: Last observation relates to dates from July 2007 to September 2007. All prices are in euro.

■

countries on manufacturing import prices. However, there have also been globalisation-related effects on euro area import prices working in the opposite direction as the strong growth in the non-OECD economies in recent years seems to partly explain the significant rise in the prices of oil and non-energy commodities since 1999. [18] Overall, Chart 5 shows how globalisation forces have helped to keep extra euro area manufacturing import prices fairly flat since the start of the 2000s, while the rising price of oil and other commodities (particularly metals and foods) are reflected in the stronger growth of total extra euro area import prices over the same period.

Wages that the increase in import penetration from low-cost countries over this period may have dampened euro area import price inflation by an average of 2.1 percentage points each year, an effect almost equally accounted for by China and the NMS. [16] The overall impact could be decomposed into two components (Table 1) : the first is the “share effect”, which captures the downward impact on import prices of the rising import share of low-cost countries combined with the relatively lower price level of low-cost import suppliers (1.6 percentage points per year); and the second due to differentials in the growth of import prices (the “price effect”), which captures the impact of lower import price inflation from the low-cost countries relative to the high-cost ones over the sample period (0.5 percentage points per year). [17] So far, I have only referred to the downward impact of low-cost 14 | Money Markets

Turning briefly to recent euro area wage developments, globalisation may have been one contributing factor to an extended period of wage moderation within the euro area (for instance, through offshoring or the threat of offshoring), across both manufacturing and service sector. While productivity growth in the euro area has also been moderate over the last decade, real wage growth has also been low. Over 1985-1995 both productivity (output per person) and real wage growth rates averaged around 1.9%. Over the period 1996-2006, average productivity growth was approximately 1%, with average real wage growth around 0.4%. While such a development might be taken to be related to a necessary moderation in a period of persistent high level of unemployment and to an additional moderation driven by globalisation, extreme caution should be made in drawing such conclusions as regards globalisation,

Foreword

•••

Chart 6a

Producer prices: Evolution of selected sub-indices relative to overall index (Difference between annualised growth rate over 1996-2006 in component relative to overall index, %)

Chart 6b

Consumer prices: average price changes in euro area HICP subcomponents (average annual change over 1996-2006, %) Source: ECB calculations based on Eurostat data. Note: Data for 92 HICP subcomponents.

■ ■

Source: ECB calculations based on Eurostat data.

“While the empirical evidence would lend support to the idea of a favorable relative price shock associated with globalisation, there have been recently signals that the disinflationary impact of low-cost countries on euro area import prices might be coming to an end due to increasing inflationary pressures in those countries.” given several caveats related to measurement issues and the fact that much of the associated decline in the wage share took place well before the recent phase of globalisation. [19] An increase in the real wage elasticity of labour demand appears to have occurred in the last years, particularly for low-skilled workers, which may signal a trend fostered by additional supply of low-skilled labour at a global level. [20] Moreover, in addition to observable factors, an unobservable “threat effect” – whereby workers in industrialised economies perceive themselves to have a weaker position and thereby moderate wage claims given a fear of production relocation to lower-cost economies– may have contributed to wage moderation. But in the euro area it appears that wage moderation since the setting up of the euro has been a very powerful response to the level of mass unemployment that characterized Europe in the 90’s. The wage moderation has been at the root of the remarkable employment success of the euro area with 15 million new net jobs created in nine years, 2 million more than in the U.S. during the same period.

Overall Impact on Producer and Consumer Prices The recent euro area experience thus indicates that relative price impacts have been strong over the last decade, with disinflation in manufactured goods contrasting with a strong acceleration in prices for commodities, though a complete assessment of their importance relative to historical norms is hampered by limited past data. As shown in Chart 6a, producer price inflation has shown strong relative price effects, with muted development in consumer goods excluding food and tobacco (-1.0 %

on average over the period 1996-2006 compared with the overall index) along with capital goods (-1.3 % on average) relative to average producer prices contrasting with a relatively strong rise (+2.5 % on average) in the energy component (which also may have also affected prices further down the production chain). As shown in Chart 6b, HICP subcomponents have also exhibited sizeable price differentials, in particular with three energy-related items displaying the highest increases over 19962006 (between +5.5 % and +7.5 %), while three ICT-intensive internationally traded goods exhibit the lowest increases (between -5 % and -14 %) over the period. Overall, numerous estimates suggest a small net dampening impact of globalisation on euro area inflation of 0-0.3 percentage point per annum over the last 5-10 years when taking into account the net impact of disinflationary effects of increased trade openness in the manufacturing sector and strong commodity price increases. On the basis of several accounting methodologies, including aggregate and sectoral analysis, ECB research finds a direct dampening effect of import openness on euro area producer price inflation Money Markets | 15

The rise in global food prices has led to notable increases in food prices in the euro area, at both the producer and the consumer level. The producer prices of food products and beverages rose by 8.6% in annual terms in December, compared with a rate of 2.2% on average in 2006. At the consumer level, the annual rate of change in HICP processed food excluding tobacco rose to 5.6% in December, up from 1.6% in 2006. Further ahead, the outlook for both world and domestic food prices remains uncertain. Although the supply of agricultural products should eventually respond to the increase in demand, the catch-up period may be more prolonged than currently envisaged. Moreover, food price developments depend on a number of factors which are difficult to predict, including technology advances and possible changes in energy policy. Hence, risks in the medium term seem to be on the upside.

Chart 7

Recent developments in extra-EA manuf. import prices by import supplier (monthly data, unit value indices, 3MMA, Euro) Sources: ECB, HWWA and Eurostat. Note: Last observation relates to dates ranging from Nov. 2006 to March 2007.

■

of 0.1-1.0 percentage point per annum for the manufacturing sector over the period 1996 to 2004. [21] Likewise, aggregate data shows a dampening impact on euro area consumer price inflation of 0.05-0.2 percentage point per year on average. [22]

The Outlook: Upside Risks to Inflation Related to Globalisation Overall, while the empirical evidence would lend support to the idea of a favorable relative price shock associated with globalisation, there have been recently signals that the disinflationary impact of low-cost countries on euro area import prices might be coming to an end due to increasing inflationary pressures in those countries. At face value, the recent increases in the prices of import from lowcost countries might be interpreted as a sign that the downward impact from these countries is waning. Moreover, from a forward looking perspective, price pressures on soft commodities (such as food) induced by globalisation forces – following pressures already witnessed on hard commodities – appear to be a potential source of strong adverse relative price shocks. These developments clearly represent upside risks to price stability. A first, distinct threat to price stability associated with globalisation comes from the fact that global food prices have risen significantly in 2007. [23] This is the result of a number of factors, such as increases in energy and fertiliser prices, adverse weather conditions in some regions, greater demand for foodstuff resulting from the changes in food consumption patterns in many developing economies, and from the emergence of new sources of demand for some agricultural commodities, for example for the production of biofuels. As these latter developments are of a structural nature, they are likely to have a more persistent upward impact on global food prices in the future. 16 | Money Markets

Against the background of a marked increase in international food commodity prices, I will remind that further liberalisation and reforms in the EU agricultural markets are particularly important. Reforms would help to enhance market efficiency and benefit European consumers in the form of lower prices. In order to allow consumers to profit from lower farm-gate prices, adequate competition in the downstream sectors (food processing, retail trade and catering) and compliance with Single Market provisions are necessary. The successful conclusion of the Doha round of world trade negotiations should also help to improve the functioning of global trade in general, and of agricultural markets in Europe and worldwide in particular.

“Overall, numerous estimates suggest a small net dampening impact of globalisation on euro area inflation of 0-0.3 percentage point per annum over the last 5-10 years when taking into account the net impact of disinflationary effects of increased trade openness in the manufacturing sector and strong commodity price increases.” Turning to risks of inflationary pressures from emerging economies, currently, some limited inflationary pressures appear to be originating from NMS (Chart 7). These recent import price increases primarily reflect the lagged impact of higher energy and raw materials prices which have pushed up the prices of virtually all euro area import suppliers. However, while the share of the NMS economies in euro area imports is rather significant, at around 11%, the relatively limited increases in their export prices – actual and expected – are unlikely to make them a significant source of imported inflation in the euro area. Turning to China and India, a noteworthy feature of both countries is the significant upturn in inflationary pressures recently. In China, food prices have been by far the main contributor to this recent rise in CPI inflation, whereas non-food prices have remained remarkably stable.

Foreword

•••

On the one hand, an upside risk is that, admittedly, higher domestic inflation could feed into wages and, eventually, export prices. On the other hand, ongoing and expected developments in domestic prices and costs in the NMS as well as in China and India suggest that potential risks to inflation originating from these two regions are relatively contained. [24] Nevertheless, economic development, robust wage increases and terms of trade deterioration in low-cost countries, as well as increasing sophistication, variety and technological content of exports would suggest that low-cost countries are making a leap-up in the value chain and that their export bundles are becoming increasingly similar to the more advanced western economies, which will ultimately lead in the long-run to a convergence of their export prices to higher international levels.

Monetary Policy Implications of Terms of Trade Shocks To what extent are these developments relevant for the conduct of monetary policy in the euro area? The European Central Bank’s mandate is to maintain price stability over the medium term, and price stability is defined as a rate of increase in the Harmonised Index of Consumer Prices for the euro area below and close to 2 percent. Hence, developments in external prices are relevant for the monetary policy of the ECB to the extent that they have an influence on medium term deviations from price stability. What are the potential risks to price stability in the medium term coming from globalisation? Before addressing these issues and drawing some lessons for monetary policy on the basis of the euro area experience, let me first reiterate that reports of the death of the effectiveness of monetary policy in a more globalised world, have been greatly exaggerated. Contrary to 16th century Europe, individual central banks are able, given flexible exchange rates, to define their medium and long run definition of price stability. [25] Moreover, as far as usual arbitrage considerations still apply, longterm interest rate determination continues to be closely related to the present discounted value of future expected short-term rates, thus giving a prominent role to central bank credibility and communication. [26] Given that inflation is ultimately a monetary phenomenon even in a globalised world, theories asserting that China is exporting deflation or inflation should be viewed as overly simplistic. Globalisation forces materialise as external shocks, which should in principle affect relative prices, rather than the overall inflation rate in the long run. However, as is often the case in economics, matters become particularly complex when we move to analyse higher frequencies. In the medium run, whether terms-of-trade developments – like increases in oil and commodity prices or cheaper imports – exert positive or negative pressure on inflation will depend on their net effect on aggregate demand and aggregate supply. Soaring import prices will in fact tend to produce two competing effects. The first effect, which can be denoted as supply effect, derives from the lower potential output growth associated with an adverse termsof-trade shock, for instance brought about by an exogenous increase in the prices of oil or other commodities which are used as intermediate input in domestic production. [27] Thus, for a given level of aggregate demand, the fall in potential output will tend to be such that actual

output exceeds potential, leading to a positive output gap and upward pressure on inflation. There is a widespread perception that commodity prices affect inflation also through demand effects. By impinging on individuals’ wealth, due to the impact of higher relative prices on current and expected future income, commodity price shocks may trigger a reduction in the demand for goods and services. For given potential output growth, the wealth effect would give rise to excess aggregate supply, thereby leading to downward pressure on domestic inflation. Whether inflation tends to increase or fall in response to an adverse terms-of-trade shock will therefore depend on which of these two effects dominates. In theory, there is no general result. The net effect will also depend on specific features of the shock, e.g. whether it reflects exogenous shifts in the commodities supply or a buoyant global demand for them, and of its transmission throughout the economy. The wealth effect will dominate when aggregate demand reacts quickly. This may be the case, for example, when relative price developments are perceived to be very persistent, or permanent. Conversely, supply effects will tend to dominate when aggregate demand adjusts more slowly. The wealth effect should also be small, thus contributing to building inflationary pressures, [28] Another important distinction, particularly in the present juncture, concerns the ultimate causes of terms of trade shocks, as they can reflect either commodity-specific or more aggregate factors. For instance, from Money Markets | 17

If you're looking for a South African custodian choose one with world-class credentials South Africaâ&#x20AC;&#x2122;s only sub-custodian to be rated for six consecutive years.* At FirstRand Banking Group Custody Services we strive to remain at the forefront of Global Custody Services through our continued dedication to innovation and entrepreneurship. Our primary services include safe custody and settlement of securities fixed income/bonds, equities and money market instruments, as well as Corporate Actions Administration, Income Collection, Proxy Voting, Reporting, Valuations, Securities Lending and Trust Services. Other related services are Investment Banking, Treasury, Trading Services, Asset Management and Corporate Finance.

Please contact us for more information

Custody Services

18 | Money Markets

Jeanie Naggan Tel +27 11 371 3944

AndrĂŠ Jansen Van Vuuren Tel +27 11 371 3451

Stephen Jackson Tel +27 11 352 1606

Annemarie van der Merwe Tel +27 11 352 1606

John Robinson Tel +27 11 371 9076

Teboho Monaheng Tel +27 11 371 8273

* The Global Custodian, Agent Banks in Major Markets Survey

Foreword

•••

“Against the backdrop of a rapidly evolving world economy, monetary policy needs to be firmly geared to maintaining price stability over the medium-term, pinning down trend inflation.”

the point of view of large economies like the euro area or the United States, an oil price increase fuelled by Chinese demand is not the same as one fuelled by a supply disruption. The factors underlying increases in Chinese demand for oil can also affect global inflationary pressures in a way that oil supply disruptions need not, for instance if they stem from favorable supply shocks augmenting global potential output. The global disinflationary effects associated with a Chinese increase of supply of goods may then counteract the adverse effects of the associated oil price increases. [29] But, in any case, whatever effect dominates, either supply or demand, both might be dwarfed if “nominal second round effects” start to appear in case of a commodity price increase. The disanchoring of inflation expectations is threatening to become the dominant factor as soon as price setters and social partners are giving a permanent status to the otherwise transitory price increases.

Some Implications for the ECB’s Definition of Price Stability The medium-term orientation of the ECB monetary policy strategy ensures that the Governing Council duly discounts short-term price volatility in its deliberations. Our medium-term orientation is supported by recent research in monetary economics. On the one hand, there is a substantial theoretical literature on the optimal response of monetary policy to inflation. On efficiency grounds the best way to absorb relative price shocks is to let more flexible prices – like those of commodities and oil – bear the brunt of the downward or upward adjustment, while stabilizing more inflexible prices and wages, and preventing inflationary pressures to materialize owing to possible second round effects. [30] On the other hand, the transmission lags of monetary policy decisions to prices (as indicated also by recent research on monetary transmission that the ECB has conducted with the National Central Banks) are long and variable, thus strongly advocating against any attempt to fine tune short-run price developments. In light of this, some observers have argued that, since terms of trade shocks often contaminate standard price measures, central banks should put more emphasis on measures of so-called “core” or “underlying” inflation, or even specify their objective in terms of a measure of core inflation. [31] These measures, it was argued, could help avoid the risk of monetary policy-makers focusing excessively on temporary price fluctuations unrelated to fundamental price trends. [32] Our medium term orientation precisely allow us to look through temporary price fluctuations and to assess risks to price stability in a forward looking manner. In addition, it overcomes several technical difficulties associated with the definition and the measurement of ‘core inflation’. First, it is

difficult to discriminate between alternative measures of underlying inflation, which typically diverge to a significant extent. Second, it is challeging to agree on a satisfying ex-ante definition of core inflation, because of the high degree of uncertainty surrounding the nature of future shocks. Third, measures of core inflation do not necessarily have good leading indicator properties. ECB research has in particular shown that for the euro area standard measures of core inflation, excluding energy and unprocessed food prices, do not have desirable leading indicator properties. [33] This implies that volatile, flexible prices like those of energy and commodities are very useful and should instead be included in the broad index monitored by the central bank, as they could provide a timely signal of inflationary pressures, arising not only in their specific markets, but more generally in the overall economy. Most importantly, a clear and transparent definition of price stability contributes to a firm anchoring of inflation expectations. In the absence of such definition, a sequence of adverse inflationary shocks could be misinterpreted by private agents as a shift in the objective of the central bank, thereby unmooring inflation expectations and eventually leading to second round effects. A definition of price stability in terms of headline CPI inflation provides a clear and measurable yardstick Money Markets | 19

Foreword •••

“A definition of price stability in terms of headline CPI inflation provides a clear and measurable yardstick against which the central bank could be held accountable and guidance for forming expectations of medium-term price developments.” against which the central bank could be held accountable and guidance for forming expectations of medium-term price developments. [34] At the same time various measures of “underlying inflation” are analysed as indicator variables in the context of our regular and comprehensive assessment of risks to price stability, as this may help, on occasion, in assessing longer-term price dynamics.

Closing Remarks How can monetary policy maintain and consolidate the current gains in terms of a low and stable inflation environment, while contributing in reaping the benefits from the process of globalisation? Against the backdrop of a rapidly evolving world economy, monetary policy needs to be firmly geared to maintaining price stability over the medium-term, pinning down trend inflation. A forward-looking policy stance is thus most appropriate, which closely monitors the ramifications of globalisation for inflation, looking through temporary changes, being constantly alert and remaining firmly committed to preventing second round effects. [1] See Leamer, E. (2007), “A Flat World, A Level Playing Field, A Small World After All, or None of the Above? A Review of Thomas L. Friedman’s The World is Flat,” Journal of Economic Literature, Vol. XLV, March, pp. 83–126. [2] “What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! […] The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his door-step; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. […] But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.” John Maynard Keynes, The Economic Consequences of the Peace, New York: Harcourt, Brace and Howe, 1920, pp. 10 –12; quoted by M. Wynne (2005), “Globalization and monetary policy,” Southwest Economy , Federal Reserve Bank of Dallas, Issue 4, pp. 1-8. [3] See Berlin declaration of 25 March 2007. [4] Papademos, L. (2007), “The effects of globalisation on inflation, liquidity and monetary policy”, speech delivered at the NBER conference on “International dimensions of monetary policy,” Girona, 11 June 2007.

20 | Money Markets

Foreign Policy (2005), “Measuring Globalization: The Global Top 20,” May/June 2005, pp. 52–60; quoted in M. Wynne (2005); “Globalization and monetary policy,” Southwest Economy , Federal Reserve Bank of Dallas, Issue 4, pp. 1-8. [6] See, e.g., Reichlin, L. (2006), Panel remarks at Conference “Financial Markets and the Real Economy in a Low Interest Rate Environment,” Monetary and Economic Studies, 24 (S-1), Institute for Monetary and Economic Studies, Bank of Japan, pp. 247-52. [7] See World Bank, http://devdata.worldbank.org/wdi2006/contents/ Table4_14.htm. [8] Ciccarelli, M. and B. Mojon (2005), “Global inflation,” ECB Working Paper No. 537. [9] Rogoff, K. (2003), “Globalization and Global Disinflation,” Economic Review, 4th Quarter, Federal Reserve Bank of Kansas City, pp. 45-78. [10] Goodfriend, M. (2007), “How the World Achieved Consensus on Monetary Policy,” Journal of Economic Perspective, Volume 21, Number 4 (Fall), pp. 47–68. [11] Chen N., J. Imbs, and A. Scott (2007), “The Dynamics of Trade and Competition,” Paper presented at ECB conference “Globalisation and the macroeconomy”, July. [12] Rogoff, K. (2006), “Impact of Globalization on Monetary Policy,” in Federal Reserve Bank of Kansas City, The New Economic Geography: Effects and Policy Implications, pp. 265-305.. [13] See for further details ECB (2008), “ Globalisation, trade and the euro area macroeconomy,” Monthly Bulletin, January. [14] This calculation is subject to caveats, notably that the accuracy of the results may be affected by the fact that unit value indices do not control for changes in quality. [15] Among the low-cost countries, China and the New EU Member States (NMS) were the main contributors to this increase with their shares roughly doubling since the mid-1990s to stand at around 12% and 14% respectively in 2004. [16] See ECB (2008). [17] This methodology follows the methodology in Kamin, S., Marazzi, M. and Schindler, J. (2004), “Is China exporting deflation”, Board of Governors of the Federal Reserve System International Finance Discussion Papers, No 791 (April). [18] See, e.g. Pain N, I Koske and M Sollie (2006), “Globalisation and inflation in the OECD economies,” OECD Economics Department Working Paper No. 52. They calculate that if the GDP of the nonOECD countries during the period 2000- 2005 had grown at the slower pace of the OECD countries then the world real oil price would have been up to 40% lower by the end of 2005. [19] Trade theory would suggest that enhanced trade between developed and developing countries places downward pressure on the relative returns to unskilled workers – whereby the relative real return to the [5]

PROVIDER, a t r u s te d AD V I S O R m o re t h a n a

Put Your T r ust In A Safe Place.

We call it Strategic Relationship ManagementSM. You’ll call it peace of mind. Strategic Relationship Management, developed by the experienced institutional trust professionals at Wells Fargo, uses a disciplined approach to provide customized solutions to meet your needs. It’s a very thorough process, led by your Wells Fargo Relationship Manager. Only at Wells Fargo, this pivotal role is filled by an expert with an average tenure of 17 years. Your Relationship Manager works closely with you and additional Wells Fargo team members to create and implement a successful strategy. We offer a complete spectrum of

domestic and global trust and custody products and services, including performance measurement, accounting and reporting, online reporting, benefit payments, securities lending, commission recapture and transition management. More than that, we offer a lasting relationship in which we serve as a resource and a trusted advisor focused on your success. Delivering great service has always been a key part of all Wells Fargo relationships. Now Strategic Relationship Management takes the experience to a whole new level. To find out more, call Wells Fargo Institutional Trust Services at 1-800-368-1225.

For over 150 years, Wells Fargo has provided the outstanding service that our customers have come to expect. The Strong Box continues to represent our financial strength and unwavering commitment to clients. Money Markets | 21 © 2007 Wells Fargo Bank, N.A. All rights reserved.

Foreword •••

“Trade theory would suggest that enhanced trade between developed and developing countries places downward pressure on the relative returns to unskilled workers – whereby the relative real return to the factor used intensively in the production of a good whose relative price falls/ rises should also fall/rise according to the StolperSamuelson proposition.” factor used intensively in the production of a good whose relative price falls/rises should also fall/rise according to the Stolper-Samuelson proposition. However, real wage developments have remained similar across all skill groups in the euro area; see further details in ECB (2008), “ Globalisation, trade and the euro area macroeconomy,” Monthly Bulletin, January. [20] See, e.g. Pula G. and F. Skudelny (2007), “The impact of rising imports from low-cost countries on euro area prices and labour markets: Some preliminary findings,” Paper presented at ECB conference “Globalisation and the macroeconomy”, July; Molnar M., N. Pain and D. Taglioni (2006), “The internationalisation of production, international outsourcing and OECD labour markets,” OECD Economics Department Working Papers 561. [21] See Pula and Skudelny (2007). [22] Pain et al. (2006) find a combined effect on consumer inflation from lower noncommodity import price inflation and higher commodity import price inflation of up to 0.3 percentage point per annum over the period 2000-05. Using similar methodologies, Chen et al. (2007), and Helbling T., F. Jaumotte and M. Sommer (2006), “How has globalisation affected inflation?,” IMF World Economic Outlook, Chapter 3 (April), report findings of a similar magnitude for other countries and regional groupings. However, for some caveats on these accounting methodologies see Ball, L. (2006), “Has globalisation changed inflation?” NBER Working Paper No. 12687. [23] See ECB (2007), Monthly Bulletin, December. [24] See ECB (2008). [25] See, e.g., Woodford (2007), “Globalization and Monetary Control,” NBER Working Paper No. 13329, to appear in Galí, J. and M. Gertler eds., The

international dimensions of monetary policy, University of Chicago Press. [26] Bernanke, B. S. (2007), “Globalization and Monetary Policy,” Remarks at the Fourth Economic Summit, Stanford Institute for Economic Policy Research, Stanford, California, 2 March. [27] Under standard assumptions, imported commodities enter the production function of domestic gross output, but not the production function of domestic value added (see, e.g., Rotemberg, J. and M. Woodford (1996), “Imperfect Competition and the Effects of Energy Price Increases on Economic Activity,” Journal of Money, Credit and Banking Vol. 28, No. 4, Part 1, pp. 549-577). [28] See Blanchard, O.J., and J. Galí (2007), “The Macroeconomic Effects of Oil Shocks: Why are the 2000s so Different from the 1970s?” NBER Working Paper No. 13368, to appear in in Galí, J. and M. Gertler eds., The international dimensions of monetary policy, University of Chicago Press. [29] Rotemberg, J. (2007), “Comment,” to appear in Galí, J. and M. Gertler eds., The international dimensions of monetary policy, University of Chicago Press. [30] See, among others, Clarida, R., J. Galí, and M. Gertler (2003), “A simple framework for international policy analysis,” Journal of Monetary Economics 49, 879-904; Corsetti, G. and P. Pesenti (2005), “International dimension of optimal monetary policy,” Journal of Monetary Economics 52, 281-305; Corsetti, G., L. Dedola and S. Leduc (2007), “Optimal monetary policy and the sources of localcurrency price stability,” NBER Working Paper No. 13544, to appear in Galí, J. and M. Gertler eds., The international dimensions of monetary policy, University of Chicago Press. [31] See among others, D. Gros, J. Jimeno, C. Monticelli, G. Tabellini and N. Thygesen (2001), “Testing the speed limit for Europe,” 3rd report of the CEPS Macroeconomic Policy Group; and A. Alesina, O. Blanchard, J. Galí, F. Giavazzi and H. Uhlig (2001), “Defining a macroeconomic framework for the euro area,” Monitoring the ECB 3, CEPR, London. [32] See ECB (2001), “Measures of underlying inflation in the euro area,” ECB Monthly Bulletin, pp. 49-59. [33] See Cristadoro R., Forni M., Reichlin L. and G. Veronese (2005), “A Core Inflation Index for the Euro Area,” Journal of Money, Credit and Banking Vol. 37(3), pp. 539-560; and Lenza, M. (2006), “HICP and Core Inflation in the Euro Area,” ECB, mimeo. [34] For the purpose of setting a quantitative objective for monetary policy, a price index should embody a number of essential properties. These include the credibility of the index as perceived by the general public, a high level of reliability (e.g. revisions should be infrequent), and the availability of the index with sufficient timeliness and frequency. See Camba-Mendez, G. (2003), “The definition of price stability: Choosing a price measure,” in ECB, Background studies for the ECB’s evaluation of its monetary policy strategy.

Biography Jean-Claude Trichet is the President of the ECB

22 | Money Markets

Wherever you are â&#x20AC;&#x201D; with what you need

Direct custody and clearing

Wherever in the world you discover opportunity, you need

a bridge to the local market. You want an established custodian who not only supports you with a powerful network, but also with an exceptional record of market advocacy. Put the full span of Citigroup to work for you.

Global Banking

Global Capital Markets

Global Transaction Services

Please visit our website: www.transactionservices.citigroup.com To contact us directly: Asia Pacific: Alvin Goh +65 6328 5292 Harle Mossman +852 2868 7002

Europe, Middle East, Africa: Marco Siero +352 4 514 14367 Richard Street +44 20 7500 2304

Latin America: Alejandro Berney +1 212 816 6448

North America: T. Andrew Smith +1 212 816 3832

ÂŠ 2006 Citigroup Global Markets Inc. Member SIPC. All rights reserved. CITIGROUP and the Umbrella Device are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

Custodian Evaluation, Selection & Monitoring in a Changing Landscape

»Ross Whitehill talks to Money Markets Significant changes and challenges in the global securities markets in recent years have shaped the future of the custodial and administrative services landscape in a variety of ways. Firstly, it has caused some groups to decide that the sum of their parts is much greater than their individuality, e.g. The Bank of New York and Mellon, while others have identified product strengths and an injection to scale that is quicker bought than built, i.e. State Street’s acquisition of Investors Bank and Trust. Still, others world wide are questioning their position in the business, identifying new models for supporting their business going forward while others are questioning their modus operandi. The background to much of this consolidation and soul searching can be traced to a variety of factors including: • Increased shareholder activism in driving boards to maximise revenue growth and profit to highly competitive levels. • Increased investment product complexity and diversification, which demands increased levels of knowledge, technology and expertise in custodian and fund administrators. • Increased competition from industry participants as they seek to build their client base and scale. • New geographies that need to be serviced as countries develop, funded pension plans begin and new investment funds are created. These challenges and changes in the shape of the custodian industry are caused, to an extent, by the investment managers and funds themselves as they continue to diversify their investment strategies and instrument types. What is clear is that the investment management industry and

“Funds are becoming far more forward thinking and are either conducting extensive evaluation and selection review exercises to find the right custodian/administrator to support their investment strategies going forward, or monitoring their service provider much more closely.” 24 | Money Markets

Custody

•••

in the last few years and many of those have concluded that a change in service provider is necessary. This has generally been to the benefit of the large well known global custodians who have been working to complement their institutional investment client base. The reviews have tended to be highly structured and very comprehensive in nature following defined stages as the figure below shows:

the custody/fund administration industries have not worked closely enough over the years to develop closer working strategies that support each other. Much of the product development in the custody/fund administration industry has been lagging some distance behind the investment industry and in many cases has caused custodians to acquire investment administration and support capabilities from small groups who have established themselves as specialists in various segments of the investment administration industry. In some respects, given the experience of almost the last ten years of custodians pursuing the investment administration capabilities of asset managers, it is odd that the investment and custody/fund administration industries are not closer in sync.

Increasingly funds are adopting best market practice and regulatory obligations to monitor their custodial arrangement and this has caused the development of highly specialised Custodian Monitoring tools.

These services include: • A “rating” of the custodian which is an independent assessment of the custodial business and service standards. These detailed ratings are reflected in alpha symbology, e.g. AA – and are supported with textual analysis. • A review of the custody agreement to ensure that the appropriate risk minimisation clauses and indemnities are in place to support the institutional client. • A periodic review of fees to ensure that fees remain consistent with market bids

However, funds are becoming far more forward thinking and are either conducting extensive evaluation and selection review exercises to find the right custodian/administrator to support their investment strategies going forward, or monitoring their service provider much more closely. The number of high value institutional reviews has increased globally

“The number of high value institutional reviews has increased globally in the last few years and many of those have concluded that a change in service provider is necessary.”

What is Prompting unprecedented Levels of Review uK & Europe JP Morgan

Exit

nat West Exit

Barclays Exit

Morgan Stanley Exit

RBS Trust Bank Exit

Lloyds Bank Exit

Deutsche Bank Exit

nCS

Canada CIBC Exit

Canada Trust Exit

Montreal Trust Exit

Bank of nova Scotia

Bank of Montreal Exit

Exit

TD Bank

Exit

RBC

uS JP Morgan Exit

Manufacturers Hanover Trust

Exit

Bank of America Exit

Bankers Trust

Exit

Deutsche Bank Exit

Wachovia

Exit

Who is next and what can be done to protect institutional investors? Money Markets | 25

“Increasingly funds are adopting best market practice and regulatory obligations to monitor their custodial arrangement and this has caused the development of highly specialised Custodian Monitoring tools.” • Ongoing service monitoring across a wide range of service factors to compare the service providers performance against a benchmark universe of service providers performance, addressing things like STP, fails management, income performance, taxation reclaims, enquiry resolution, etc. • FX benchmarking to assess whether custodian execution rates are competitive and within day trading ranges. • Securities lending performance analysis to determine the

effectiveness of the custodians’ agent lending programme compared with an industry benchmark. The benefits of Custodian Monitoring are substantial. Firstly, it sends a clear message to the provider that their services are under ongoing scrutiny. This can mean that commercial benefits are offered before being demanded as the providers know that the client is now armed with improved fee and overall commercial information. It also allows the client to determine where its provider sits from a competitive market standpoint and where less than best market practice is provided, the client can seek to understand why. Many funds today are seeking to ensure that they are able to demonstrate to their regulators, trustee boards and clients that their custody and fund administration arrangements remain at a commercially reasonable level and the benefits of independent assessment against a comparative universe is of significant help. Similarly, the advantage of getting a clear understanding as to where the market is, without conducting a costly Request for Proposal evaluation review, is not lost on resource challenged investors.

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

Act globally? Think locally. ANZ Custodian Services – Thinking globally. Experts locally. At ANZ our focus is where you need us most. Here. For more than 50 years, ANZ has been providing premium custodian and clearing services to local and international clients in our

home markets of Australia and New Zealand. With teams in Melbourne, Sydney and Wellington, ANZ offers a powerful mix of products, capabilities, local market insight and global reach.

Speak to the Australian and New Zealand market experts today. Call Angelo Calvitto on +61 3 9273 1907

www.anz.com Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522. ANZ’s colour blue is a trade mark of ANZ. Item No. 927346 04.2007 W108047

108047_Custodian_HalfPage.indd 1

26 | Money Markets

30/3/07 10:57:32 AM

Custody

•••

2008 International

Custody Review

South Africa Provider

Commendation

Computershare

Technology

FirstRand Banking Group

Client Service

Nedbank Standard Bank

Innovation Award

Selecting the right custodian is critical. Switching providers can be an expensive, time-intensive process, not to mention highly disruptive. In order to accurately assess and compare the relative strengths and weaknesses of custodians, the MM (Money Markets) Review Panel employ a proprietary best practice benchmark tailored to the needs and requirements of the investor. The aforementioned evaluation framework utilizes a risk-based approach, focusing on the custodian’s product and service capabilities and the risk controls attached to each function. MM’s benchmark analysis comprises over twenty categories, representing more than eighty specific evaluation criteria. Thus, investors are able to compare the capabilities and controls of providers and market standards, both globally and locally. Such analysis facilitates the identification of product and service gaps within the context of a client’s specific situation.

Commendations The following commendations and categories recognize excellence and apply to the tables listed below: Technology // Client service Value-added services // Most improved Best-in-Class commendations are awarded to those providers which have excelled in all of the aforementioned categories.

Innovation Awards ICT (information and communications technology) forms the centerpiece of the 2008 Innovation Awards. This year’s Innovation Awards recognize those providers which continue to evolve their value propositions, creating, in the process, truly client-centric solutions and real value. 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 & Regions: Next review date, July 2008. The inclusion or exclusion of custodians will be subject to the findings of the MM Review Panel.

Selected Zones Only: No more than six custodians have been selected for inclusion in to any one geographic territory.

china Provider

Commendation

DBS HSBC Standard Chartered

Best-in-Class

Hong Kong Provider

Commendation

Citigroup GTS DBS

Most Improved

HSBC

Best-in-Class

Standard Chartered

Client Service Japan

Provider

Commendation

Bank of Tokyo Mitsubishi Citigroup GTS

Most Improved

HSBC

Client Service

Mizuho SMBC Standard Chartered

Best-in-Class

Singapore Provider

Commendation

Citigroup GTS DBS

Innovation Award Client Service

HSBC Standard Chartered

Most Improved

Union Bank of California Money Markets | 27

Taiwan Provider

Germany Commendation

Provider

Commendation

Central Trust of China

BHF-Bank

Innovation Award

Citigroup CTS

BNP Paribas

HSBC

Deutsche Bank TSS

Most Improved

JP Morgan Standard Chartered

Best-in-Class Pan Asia Commendation

Provider

Citigroup CTS Most Improved

DBS

Technology HSBC Best-in-Class

Standard Chartered

Greece Provider

Commendation

Alpha Bank

Innovation Award

BNP Paribas (SS) EFG Eurobank Ergasias HSBC National Bank of Greece

Best-in-Class

Piraeus Bank

Client Service

Client Service hungary Provider

Commendation

Citibank Zrt.

Best-in-Class

BA-CA (Unicredit Group)

Most Improved

ING Australia

Raiffeisen Bank

Provider

Commendation

ANZ

Innovation Award

Citigroup HSBC National Australia Bank

Iceland Provider

Commendation

Arion Custody Services

Best-in-Class

Glitnir Landsbanki Ireland

Cyprus

Provider

Commendation

Bank of Ireland (SS)

Client Service

Citco Group

Innovation Award

Provider

Commendation

Citigroup GTS

Marfin Popular Bank

Innovation Award

HSBC

Hellenic Bank National Bank of Cyprus

Netherlands

Denmark Provider

Commendation

Danske

Most Improved

Nordea SEB

Best-in-Class

Provider

Commendation

BNP Paribas

Most Improved

Citigroup GTS Fortis Bank Kas Bank

Svenska Handelsbanken

Norway

Finland Provider

Best-in-Class

Commendation

Provider

Commendation

DnB NOR

Most Improved

Nordea

Nordea SEB

Best-in-Class

SEB

Svenska Handelsbanken

Most Improved

Svenska Handelsbanken

28 | Money Markets

Best-in-Class

Norway Provider

Commendation

DnB NOR

Most Improved

Custody

•••

Technology

Nordea SEB

Best-in-Class

Svenska Handelsbanken

Commendation

Nordea SEB

Commendation

Information Mosaic

Innovation Award - Global

SunGard

Sweden Provider

Provider

Innovation Award

TCS Financial Solutions Vermeg Vontobel Group

Innovation Award - Switzerland

Svenska Hadelsbanken Swedbank Switzerland Commendation

Provider

Bank Julius Baer

U.S.A

Most Improved

BNP Paribas

Provider

Citigroup

Commendation

BNY

Credit Suisse

Citigroup GTS

SIS SegaInterSettle AG Innovation Award

UBS

Gulf Markets Provider

Commendation

Citigroup Gulf Custody Company

Innovation Award

HSBC Standard Chartered Bank

Most Improved

Best-in-Class

JP Morgan WSS PFPC State Street UBOC

Innovation Award

Wells Fargo

Technology

MM would like to confirm that the National Bank of Greece was 2007’s Best-in-Class provider - Greece.

Custody Services Alpha Bank provides a full range of Custody Services to Greek and Foreign Institutional Investors, covering the following areas: Founded in 1879, Alpha Bank is the second largest Bank in Greece. With 450 Branches, Alpha Bank Group is also active in the international banking market, with presence in Cyprus and Southeastern Europe as well as in New York, London and Jersey in the Channel Islands. With faith, loyalty and vision, Alpha Bank preserved the principles and values that have governed its operation since its establishment. Our primary aim is credibility, reliability and efficiency in banking services. Our everyday concern? Constant qualitative and quantitative improvement of our products and services, modern and responsible treatment of all the banking needs of our clients. _

Securities Safekeeping in Greece International Markets Settlement of Transaction in Athens Exchange International Exchange Houses Bond Settlement Listed Derivatives and OTC Transactions in Greece and abroad Corporate Actions ADR/GDR Custody Execution and Settlement of Cash Orders - FX Deals – Repos – Swaps Tax Services Reporting Alpha Bank Custody Services are tailored to the needs of each investors profile and clients come in contact with specialised personnel, focusing on the delivery of high quality services at reasonable cost. The full range of the Investors needs in financial services is covered, in collaboration with Alpha Bank Group companies. _

Corporate and Investment Banking Operations Division 6-8-10 Xarilaou Trikoupi Str., 4th Floor, GR – 106 79 Athens E-mail: HYPERLINK mailto: corpinvest@alpha.gr corpinvest@alpha.gr Greek Investors Custody Tel: +30 210 326 5540, +30 210 326 5516, +30 210 326 5556

Foreign Investors Custody Tel.: +30 210 326 5523, +30 210 326 5516, +30 210 326 5556 Swift Address: CRBAGRAA Web site: www.alpha.gr

Money Markets | 29

The world is full of opportunities. Discover them!

We take pride in developing flexible and innovative solutions that focus exclusively on your individual requirements. After all, we both share a common goal: striving for success. With your BHF-BANK skipper at the wheel, you can rest assured that experience, expertise and a highly creative approach will steer you a safe course through the waters of custody business. We are dedicated to service â&#x20AC;&#x201C; welcome on board! For further information please contact Cornelia Keth on +49 69 718-3738, cornelia.keth@bhf-bank.com or visit us at www.bhf-bank.com

30 | Money Markets

Custody

•••

Regionalisation -

Survival of Asia’s Fittest »Elizabeth Chia talks to Money Markets Introduction

What sets DBS apart from the competition? Kindly define the bank’s third party assets under sub-custody. What percentage of this figure is comprised of local assets? You are recognised as a technology intensive provider. Aside from the investment DBS has made in recent years, from a technology standpoint, how have you managed to anticipate the needs of your clients?

DBS has been in the custody business for the last twenty years, concentrating primarily on the Singapore market. However, as DBS has expanded its footprint in the region, the custody business has grown in line with client requirements. Clients like the fact that we are an Asian bank, and this is also what sets us apart from the competition; they also recognise the success that we’ve had locally. Many of our clients are global banks and global custodians. DBS understands the Asian market and is totally committed to meeting the challenges in Asia. In fact, our clients want us to focus on building an Asian custody network so as to work closer and to forge more partnerships with us. In terms of AuC, locally, we have $220bn (SGD) and we’re still growing. Over the last two years we’ve expanded into Hong Kong, India, Indonesia and China. We are now fully operational in five markets. Our

“We are also working with our clients on a number of different products custody, fund administration, transfer agency - something that would not have been possible or scalable as a single market provider. We are currently the only local bank and one of only three in Singapore to offer securities lending.” target next year will be to open more network branches; in particular, we’re considering Taiwan and Korea. We believe it’s about building gradually, and in the right way. As part of our ongoing push to grow regionally, DBS has rolledout a $20m (SGD) regional system, which has allowed us to enjoy certain economies of scale. Naturally, the aforementioned platform and system can also be customised according to the market and cliMoney Markets | 31

“The QFII mechanism has opened up China’s securities markets and has given foreign investors an opportunity to share in China’s phenomenal growth. China, at the last count, had a market capitalisation of approximately US$2,627bn of which about one third is freely tradable.”

ent, which is very important. As you are aware, custody is getting very commoditised. As a result, clients are increasingly asking for additional value added services. For example, global custodians are now asking for special reporting and customization; it’s not just about providing the client with settlements services. DBS is the only bank in Asia to be appointed by the two central securities depositories, Euroclear and Clearstream. We believe these appointments reflect our ability to provide a level of customisation that is second to none. The Helicopter View

A number of global players have entered the domestic market, what impact has this had on competition and service levels in general? Yes, some global custodians have selectively entered some

markets and have begun to in-source, which naturally saves them money. However, a number have preferred to identify local partners. The market has grown beyond core custody; fund administration is now a significant and dynamic requirement of the clients. The fund market in Asia has been evolving tremendously. Domestic funds in all of the local markets have demonstrated significant growth and some of these funds are now investing outside of the country. Consequently, a number of global banks are reviewing opportunities with us to develop onshore value added services. The influx of global interest pertains more to the selective building of partnerships and value added services. Is regionalisation - the appointment of a single custodian across the entire region- gaining momentum? Yes, regionalisation is key as

it is very difficult to sustain one’s self as a single market custodian. Custody is a scale business, and that is why we have grown and expanded our custody business. China

Thanks to the Qualified Domestic Institutional Investor (QDII) scheme, fund management companies, securities companies and custody banks can now invest in overseas securities markets. What will this do for the migration of international best practices?

From a custodial standpoint we are focusing on the QFII (Qualified Foreign Institutional Investor) scheme. In essence, the QFII scheme al32 | Money Markets

lows qualified foreign institutions to trade Chinese A-shares via special accounts opened at designated custodian banks. The QFII mechanism has opened up China’s securities markets and has given foreign investors an opportunity to share in China’s phenomenal growth China, at the last count, had a market capitalisation of approximately US$2,627 billion (as of 31 July 2007) of which about one third is freely tradable. The global quota allocated to foreign investors was initially $4bn; that figure has now increased to $10bn, and there are plans to raise it to $30bn, which is why everyone is flocking to the market. However, the high barriers to market entry have been a hindrance. It’s very much like Taiwan was in the past. But those that have already entered the market have done very well. QDII is the opposite. In the past local investors in China could not invest overseas, new regulations have overturned this rule. However, there is a caveat; a memorandum of understanding (MOU) must first be signed between the China Securities Regulatory Commission or China Banking Regulatory Commission (CBRC), and the equivalent regulators in other markets. The CBRC, who govern banks’ investment under QDII, for example, has currently signed an MOU with the Hong Kong Monetary Authority. This is driving the growing fund markets in Hong Kong. Hong Kong

The market permits agency clearing. The next step is of course third-party clearing (TPC). Where do you stand on this? Hong Kong Exchanges and Clearing Limited hope that the inception of TPC will enable Hong Kong’s securities clearing infrastructure to conform to international standards. Is this realistic? Yes, this is be-

ing introduced by the local securities depository in Hong Kong. They are recommending that brokers be allowed to outsource their administration to a custodian. At the end of the day, that’s what the TPC is all about. This is great news for the brokerage houses, particularly smaller ones, to realise economies of scale. Therefore, interest in the TPC will continue to grow as we move forward. Market drivers, such as this one, can only help the custody market in Hong Kong to grow. I think eventually more markets in Asia will follow suit. India

Over the last few years a number of significant developments have changed the custodial landscape in India, most signifi-

“DBS has rolled-out a $20m (SGD) regional system, which has allowed us to enjoy certain economies of scale. Naturally, the aforementioned platform and system can also be customised according to the market and client.” cantly the implementation of the market’s straight-through processing (STP) infrastructure, which was introduced in 2002 and made mandatory in 2004. What impact have these changes had on the bank’s custody business locally? Following India’s

example, and addressing the expectations institutional investors thus have of Asian markets, Singapore is in the process of introducing pre-matching and STP capabilities. In contrast to emerging markets, implementing a significant revamp of established infrastructure and practices in a mature market comes with its own challenges. PSMS, the central pre-matching utility, is expected to be available in early 2008, as part of The Singapore Exchange Ltd’s suite of posttrade services. As Chair of the Singapore Securities Market Practice Group and part of the user group established by SGX, DBS has been one of the driving forces behind the changes taking place in the market.

Looking Ahead

What can new and existing clients expect from DBS over the next six to twelve months? As we’ve discussed, we are expanding into the region.

We are also working with our clients on a number of different products custody, fund administration, transfer agency - something that would not have been possible or scalable as a single market provider. We are currently the only local bank and one of only three in Singapore to offer securities lending. The future is not just about custody, it’s about value added services, it’s about being able to provide our clients with bespoke solutions.

Biography Ms Elizabeth Chia is the Head of Securities Services, Global Transaction Services division in DBS Bank Limited. With over 25 years of extensive experience in the securities markets, she is responsible for expanding the Bank’s custody network into the Asian markets, establishing new markets and developing new products and services into the region. Included in her areas of responsibility for Domestic Sub-Custody and Domestic Fund Administration, is the overall regional Product Management, Sales and Marketing, Product Development and Securities Lending. Ms Chia is a qualified Banker and certified Investment Analyst, commencing her career in the field of asset management before moving into the global and domestic subcustody services. Her experiences in securities services extend over a diverse portfolio of functions from running day-to-day operations to system development and risk management, advancing into product and business development.

Money Markets | 33

34 | Money Markets

Custody

•••

The Value of Local Expertise »Money Markets talks to Angelo Calvitto and Michael Campbell Introduction What separates ANZ from the competition? Well, we are one of only two local banks to provide custody services. We can offer new core custody and securities finance technology. Furthermore, our integrated custody and cash clearing/management solutions are headed up by a single decision maker for the “Financial Institution Products” business unit, Antony Cahill. How much emphasis do you place upon client relationship management? Strong emphasis at

product level, and at broader bank level through our dedicated Client Relationship Model segments such as Financial Institutions (FIs), Government, Property etc. This kind of “client segmentation” happens at the broader relationship management level, i.e. a single

“Our clients recognise that customer service is an important part of the overall service. There can be a lot of hidden costs if you don’t get your customer service proposition right.” point of contact for clients who will look after all product areas and lending, and is closely aligned with the specialisation in the product areas. Our dedicated Financial Institutions Group cover global and local FIs by type, i.e. funds, non-bank FIs, banks etc. erosion of said fees? We’ve taken a number of proactive steps. Aside

An Issue of Cost

from the implementation of new products, we’ve also introduced integrated complimentary product solutions, such as cash clearing/management and FX. Additionally, we offer competitive minimum fees and have started to charge for non-STP transactions.

With fewer providers competing for the same business, fees have declined. What steps have you taken in order to combat the

Will fees continue to decrease as custodians try to hold on to existing clients? Not necessarily. Clients are demanding more and we

Kindly define your AuC? Our assets under custody total $165bn

(AUD) and $9bn (NZD).

Money Markets | 35

“Clients are demanding more and we believe that fees have reached a level whereby they cannot be reduced any further.” believe that fees have reached a level whereby they cannot be reduced any further.

In your opinion, do lending returns adequately compensate participants for risk? That’s a difficult question to answer in general terms

because of the varying risk return appetites of clients. Is customer service being overlooked by clients in their quest to reduce custodial fees? Not in our view, client decisions are driven by

Is third-party lending invisible to the beneficial owner? Not nec-

different factors and service requirements. Our clients recognise that customer service is an important part of the overall service. There can be a lot of hidden costs if you don’t get your customer service proposition right.

essarily. It’s important that the beneficial owner is aware of the structure and understands how it operates. Levels of reporting can vary depending on client requirements. That said, ANZ does not participate in third-party lending.

Will fee-unbundling deliver the benefits clients expect, e.g. transparency etc? Unbundling certainly provides transparency as it

Consolidation

outlines the services being delivered and the cost to serve.

Consolidation has brought about a number of opportunities and efficiencies to the capital markets - processes have been streamlined, costs have been cut, straight-though processing strategies have been implemented, controls and safeguards have been increased, risks have been reduced and advanced technologies have been developed. With this in mind, would it be fair to say that the effects of consolidation have been largely beneficial for clients and the industry in general? Will consolidation continue to prevail? Consolidation has both pros and cons in any

Technology To what extent do you use technology as a differentiator of service? Although technology is a differentiator, you have to also consider

the people, brand, service model and importantly the implementation of solutions that meet customer needs. Given the technology you employ and the vast amounts of data you collect, do you feel you are becoming more of a data warehouse? This has been, and is increasingly becoming, the case in cus-

todian services. Custodians are the holders of the assets, the primary record keeper, and more and more an extension of the front and middle office of the buyer of the service.

Securities Lending How much impact does securities lending have on buying decisions in custodial services? This varies from client to client. At

times it has a strong impact and at other times it’s not a part of the transaction or service offering. However, it’s important to ensure that it can be added to the overall solution at the outset or sometime further down the track. 36 | Money Markets

industry and there continues to be consolidation in the custody industry globally. Two large transactions took place at the top end last year BoNY/Mellon and State Street/ IBT. Domestically speaking, HSBC acquired Westpac’s custody business in 2006. To what extent will consolidation factor into ANZ’s plans moving forward? Like all custodians in the market, ANZ takes a keen interest

in market developments through consolidation. Biographies Angelo Calvitto is the Head of Account Management & Sales -Custodian Services- for ANZ. Michael Campbell is the Head of Custodian Services for ANZ.

Money Markets | 37

South African Custody -

Reaching New Heights

»Money Markets talks to Andre Jansen van Vuuren

FirstRand Banking Group - Custodial Update

In line with the expansion of your sub-custody business you mentioned, when we last spoke, that you were looking at Namibia and Botswana where you have physical installations. Do the aforementioned territories still factor in to your plans moving forward? Yes, we are still on track with our plans regarding

not important, provided we can offer the same level of service to our clients, either via JPMWSS or the sub-custodian we have selected in that particular market. A number of providers have adopted a hub mentality, thus negating the need for a significant on-the-ground presence. Is there a danger that clients will start to feel like a number on a conveyer belt? In our opinion the client should not feel like a number on a con-

veyer belt provided their service experience is at the same level that they

“Over this time competition has increased significantly and this has led to margin compression as well as a significant increase in service levels.” a custody offering in Namibia and Botswana via our subsidiaries in those countries. Are you considering additional locations? No, as we previ-

ously advised, we will make use of our partnership with JP Morgan Worldwide Securities Services ( JPMWSS) to provide a service in those countries where they are represented. Where they are not represented we will go directly to a sub-custodian servicing that market. Ultimately, when you decide to enter a new market, how important is it for you to have a physical presence on the ground? It’s

38 | Money Markets

are used to in other markets. You’ve intimated that there really isn’t the volume of assets in other parts of Africa to warrant a business case for expanding the bank’s custodial offering to a much wider audience. Granted, although volumes are generally small, relative to South Africa, indifferent peformance in certain markets must create a significant workload for some of your clients? I would guess so, although most

of our clients are not active in the African markets as yet or have a direct relationship with a domestic custodian in the country concerned. That being said, there is a definite interest in expanding into the African markets to satisfy our clients needs.

Custody

•••

With this in mind, might we yet see FirstRand Banking Group creating a regional custody network over the mid to long term?

In terms of the FirstRand philosophy, the business case would have to drive the decision. As we said previously, at this stage, the volume of assets in other parts of Africa does not currently warrant a regional custody network and we do not foresee this changing over the medium term. We will, however, be watching developments in these regions in case this picture changes. Defining the Business

Do you consider yourself to be a specialist custodian? We believe that our understanding of the South African market and our commitment to our clients are our differentiating factors. If this makes us a specialist custodian then we would be happy to be classified as such.

the SSEM project is to investigate a new approach to securities settlement. To what extent will the aforementioned initiative assist South Africa in realising internationally accepted best practices? One of the prime objectives of the project is to

validate where South Africa is in terms of adopting international best practices and how we can move forward to achieve these best practices. STRATE’s initial consultations reflect the need for a single settlement platform for all financial instruments, streamlined and efficient processes, and exception-based messaging. Do you support this notion? We support streamlined and efficient processing and

To compete, specialists say they need to ensure that their service is more flexible than that of the global institutions. Do you concur with this? We believe that because of our knowledge

the use of exception-based messaging where possible, but this does not necessarily go hand in hand with a single settlement platform for all financial instruments. A single platform does provide cost savings in terms of IT infrastructure, but could introduce complications in terms of application changes where markets, which should not be affected by the change, still need to thoroughly test their functionality to ensure it has not been impacted.

of the South African market we are able to offer solutions which are tailor-made to conditions in the market. This is not as easy for global custodians who tend to use the same solutions across multiple markets.

STRATE’s current technology was first introduced in 1998. Therefore, should the aforementioned initiative have been launched sooner? No, I think the focus on dematerialising the

The Future of Clearing and Settlement in South Africa

STRATE has rolled out an initiative called the Security Services Enhancement Model (SSEM). STRATE claim the idea behind

equities markets and improving the settlement ratings for South Africa as a whole, as well as addressing the need to move the Money Market to electronic settlement, was correct. Please also bear in mind that while the system was first introduced in 1998 there have been ongoing enhancements to functionality over the period. Money Markets | 39

FAKE TEXT Africa is more about cooperation than competition at this stage? Winning Mandates

Yes, very much so.

Do you feel that clients are selecting providers based upon credit ratings? This is certainly an important factor which is taken

The Service/Cost Equation

Q. This text is fake (ERP) attempts to integrate all rather than streamlines operations. How do you as an into consideration, although definitely not the only factor influencing Can custodians maintain service levels despite shrinking mardepartments and functions across a company using a HR consultancy work at dispelling this myth? the decision. gins? We have to optimise our investments in technology and processes single interface, which in turn helps to service the A. This text is fakeWe would always advise that a full so that we can maintain service levels despite shrinking margins. Obvineeds of each particular department throughout the impact assessment is undertaken prior to embarking To what extent does service quality and/or product range influ- ously economies of scale also become important in this environment. organisation. Some believe that this complicates upon an ERP implementation. We a ence pricing? It is an important consideration – we would far rather rather than streamlines operations. How do you as an Q. This text is fake (ERP) attempts to integrate all be positioned as a custodian with excellent service quality and product The unbundling of fees has been discussed at great length, is this a HR consultancy work at dispelling this myth? departments and functions across a company using a range than be known as the cheapest in our market. That being said, strategy FirstRand Banking Group will be following? From a custody single interface, which in turn helps to service the A. This text is fakeWe would always advise that a full value for money pricing is important. perspective we have never provided our clients with a bundled fee except needs of each particular department throughout the impact assessment is undertaken prior to embarking when they have requested it. Our fees are normally broken down into a organisation. Some believe that this complicates upon an ERP implementation. We a How much importance do you place upon relationship manage- transaction fee, the fee levied by the depository for each transaction, and a rather than streamlines operations. How do you as an Q. This text is fake (ERP) attempts to integrate all ment? It is an exceptionally important part of our business. We need management fee, which is based on the value of the portfolio. HR consultancy work at dispelling this myth? departments and functions across a company using a to be close to our clients to understand their needs and requirements single interface, which in turn helps to serviceLooking the Forward A. This text is fakeWe would always advise that a full in detail. needs of each particular department throughout the impact assessment is undertaken prior to embarking organisation. Some believe that this complicates upon an ERP implementation. We a In your opinion, are foreign institutions tending to select global What can new and existing clients expect from FirstRand Bankrather than streamlines operations. How do you as an Q. This text is fake (ERP) attempts to integrate all banks over local sub-custodians? This could be the case where the ing Group this year? An ongoing commitment to service quality and HR consultancy work at dispelling this myth? departments and functions across a company using a foreign institution is investing in many markets, as it makes the interac- working in partnership with our clients to fully address their needs single interface, which in turn helps to service the A. This text is fakeWe would always advise that a full tion with the service provider far less complicated. and requirements. needs of each particular department throughout the impact assessment is undertaken prior to embarking organisation. Some believe that this complicates upon an ERP implementation. We a Infrastructure Development rather than streamlines operations. How do you as an Q. This text is fake (ERP) attempts to integrateBiography all HRvan consultancy this myth? departments and functions across a company using a Andre Jansen Vuuren is thework Headatofdispelling Custody Services for FirstRand In order to facilitate the fine-tuning of the market’s infrastrucsingle interface, which in turn helps to service Banking the A.Group. This text is fakeWe would always advise that a full ture would it be fair to say that the custody business in South needs of each particular department throughout the impact assessment is undertaken prior to embarking organisation. Some believe that this complicates upon an ERP implementation. We a

A Durham qualification can seriously enhance your career prospects. Durham MBA

Durham Masters Programmes

Durham Research Degrees

Full Time, Executive, Distance Learning

MSc, MA, Distance Learning, Executive

DBA, PhD

A postgraduate qualification from Durham Business School can help you become an expert in business. It comes from one of the world’s most established and pioneering business schools and is AMBA, EQUIS and AACSB accredited. Employers find our reputation for developing business leaders particularly alluring. For further information please call +44 (0) 191 334 5533, email pg.bus@durham.ac.uk or visit www.durham.ac.uk/dbs. It’s the best business decision you will ever make.

makers of business leaders

40 | Money Markets MONEYMARKETSONLINE.NET

169

Custody

•••

South African Custody – Where Flexibility Counts »Jonathan Calens talks to Tertius Vermeulen

What separates Computershare from the competition? There are

two important factors separating us from the competition. First, the practical application of our motto, “where you bank is your choice,” and second, we are the only entity prepared to provide a service to the private investor. You are the only CSD (Central Securities Depository) participant which is not a bank. Do you consider this to be one of Computershare’s unique selling points? Yes, absolutely. It is not always easy to

change your custodian and, concurrently, your banker. However, with the service we provide, a prospective client need not change his banker unless of course he wishes to do so. On the negative side, where there are outside facilities linked to the account, we cannot provide those. However, we have obviated the problem by creating a pledge facility whereby securities can be pledged as security for the facility that the client had with his bank. How much emphasis do you place upon client relationship management? Because our biggest client base is the private investor, we

“There are two important factors separating us from the competition. First, the practical application of our motto, “where you bank is your choice,” and second, we are the only entity prepared to provide a service to the private investor.” maintain that client relationship management as such is inapplicable in our situation. Our policy is to create a product that brings down the cost and automatically sells itself to the client when they have signed up. On the institutional side, apart from myself, we utilize our senior management team. There is also a settlement manager, whom has a direct relationship with the client. Therefore, the client has one contact person with whom he can interface for the resolution of any issues. Money Markets | 41

What is the nature of your relationship with STRATE? Bearing in

mind that they are the regulators, it is of paramount importance to maintain a good relationship with them. My own relationship goes back to the very beginning. However, there was one issue where STRATE wanted to buy the Registrar segment of one of our competitors: the consensus was that in our environment it was impractical to have a player who was also a regulator and this move was not approved by the Competition Commission. How involved are you in the evolution of market practices? I am

involved in all of the market practice groups. I have a seat on the three advisory Boards of STRATE, covering Money Markets, Equities and Bonds. I also sit on the JSE Clearing and Settlement Advisory Board, as well as other SWIFT and SWIFT User Committee’s.

Outsourcing You’ve had a great deal of success in the back-office outsourcing arena. To what do you attribute this? We saw a gap in the market and

capitalized by creating a product with concomitant services tailor-made to various client types. As examples, there are brokers who look after institutional clients only, or private clients exclusively, and again you can find brokers who cater to both types. In this connection we have created a product that offers a solution for each case. In handling their back-office tasks, we are able to reduce costs significantly. From a practical standpoint, it would take a minimum of nine staff to cater to the necessary segregation of duties, with salaries alone being in excess of the transaction cost incurred by us providing the service.

out there that the South African market simply cannot support 6 CSDPs (Central Securities Depository Participants). Given our niche market, and the fact that our income stream is not derived, in the main, from traditional custody and settlement fees only but from issuers in payment for maintenance of the Register, we are less affected. Will fee-unbundling deliver the benefits clients expect, e.g. transparency etc? The fee is already transparent. On its website, STRATE

lists the fees charged to the CSDPs and brokers. This means that anyone can see what the market cost are to carry out settlement in South Africa. Therefore, in my opinion, fee unbundling is not an issue; it’s a question of the return shareholders in STRATE need to realise given their investment in STRATE over the years.

Bespoke Solutions To what extent do you use technology as a differentiator of service? For our niche markets, we create specific system developments to

look after and service the private investor. We also cater to the smaller asset managers who have private clients, and we have created products around them and introduced technology to make it easier and cheaper for them to settle into the market. Given the technology you employ and the vast amounts of data you collect, do you feel you are becoming more of a data warehouse? Yes, I think so. However, what is pertinent is that it’s not our

data: it belongs to the investors, and with the privacy laws in South Africa, this data cannot be utilized without approval from the investors.

Securities Lending As operations and technology become more and more expensive, can we expect to see further growth in this space locally? As you

well know, a business cannot stand still. To this end, we are always busy. Usually, there are 3 or 4 new quotes in the market at any given time.

How much impact does securities lending have on buying decisions in custodial services? In your opinion, do lending returns adequately compensate participants for risk? Many of the institu-

“My feeling is that the fees for standard services have been cut to a point where they are now quite uniform across the board. A differentiation can only be made through the addition of value added services.” With fewer providers competing for the same business, fees have declined. What steps have you taken in order to combat the erosion of said fees? My feeling is that the fees for standard services have

been cut to a point where they are now quite standardised across the board. A differentiation can only be made through the addition of value added services. Part of the problem with our market is that we provide a world class service without having a world class number of transactions - pure transaction unit costs will differ according to the region. So it’s back to the volume game, but I fear there will always be a squeeze on the market. It would appear that both custodians and clients are unhappy with the fees being charged by STRATE. I feel that in time the situation may prove not to be viable for some institutions and as a consequence they may decide to leave the business. Moreover, there is a school of thought 42 | Money Markets

tions that set up securities lending desks at the very beginning built efficient systems, and although returns have decreased there is still a business there. It is a case of investing in the right systems and putting the right controls in place in order to minimize the risks. However, for a new entrant into the market, I don’t think it’s worth it. I have investigated the viability of setting up my own securities lending desk a few times, but I conclude it would not be a fruitful venture. At this stage I play intermediary between the two players. I feel it’s more important for me to provide my clients with the best service I can than to try and make a great deal of money out of securities lending.

Consolidation Consolidation has brought about a number of opportunities and efficiencies to the capital markets - processes have been stream

Custody

•••

lined, costs have been cut, controls and safeguards have been increased, and the list goes on. With this in mind, would it be fair to say that the effects of consolidation have been largely beneficial for clients and the industry in general? Will consolidation continue to prevail? If you look at the consolidation of

lead to consolidation on the custody side, but not on the banking side, the big four banks are far too large. In view of the foregoing, I think we are likely to see more investment from the international banks in South Africa rather than internal consolidation.

investment managers, I don’t think it is happening in South Africa. I see more new asset managers opening shop: on the investment and fund manager side there will be a significant consolidation of back office outsourcing, which is controlled by three big players who provide the appropriate services.

The Future

“Part of the problem with our market is that we provide a world class service without having a world class number of transactions.” On the exchange side there are two exchanges, however, discussions pertaining to possible consolidation have thus far proved fruitless. My personal view is that consolidation will help to reduce costs and, in the long run, it will benefit the market. However, there is no unanimity of opinion on this as many feel a monopoly could be created thereby. On the custody side, I am not certain there will be consolidation; however, one or two players may go out of business. Ironically this could

What can new, and existing, clients expect from Computershare over the next twelve to eighteen months? We have built our busi-

ness to a point where we now need to look externally. In this connection we have a letter of intent with EcoBank, who are involved in some twenty-eight countries, to move into registry and custody services with them. In the South African environment there are certain requirements for black economic empowerment of the previously disadvantaged. This gives us an opportunity to work with the market, and by utilizing our expertise and know-how, products and services are created, which in turn service a large number of private investors. Having completed a few schemes, we are delighted to see that a number of other companies have started to take the necessary steps to attract the non-banking sector. We are playing a big part in this development.

Biography Tertius Vermeulen is the Head of Custody for Computershare

8::FDGC@J? DFI< :fdglk\ij_Xi\ `j X ^cfYXc c\X[\i `e jg\Z`Xc`j\[ ÔeXeZ`Xc j\im`Z\j%

@e Jflk_ 8]i`ZX n\ Xi\ k_\ fecp j_Xi\ i\^`jkiXi XYc\ kf X[dè`jk\i Yfk_ Z\ik`ÔZXk\[ Xe[ leZ\ik`ÔZXk\[ i\^`jk\ij Xe[ k_\ fecp :J; GXik`Z`gXek j\im`Zè^ k_\ gi`mXk\ èm\jkfi% Fli iXe^\ f] Zljkf[p j\im`Z\j èZcl[\j jX]\ Zljkf[p# kiX[\ j\kkc\d\ek# Xjj\k X[dè`jkiXk`fe# èZfd\ Zfcc\Zk`fe Xe[ [`jki`Ylk`fe# ZfigfiXk\ \m\ekj Xe[ Xe fne eXd\# `jjl\i$jgfejfi\[ fne eXd\ Xe[ efdè\\ j\im`Z\% nnn%Zfdglk\ij_Xi\%Zfd

:fdglk\ij_Xi\ Ck[ `j Xe Xlk_fi`j\[ =`eXeZ`Xc J\im`Z\j Gifm`[\i Xe[ GXik`Z`gXek i\^lcXk\[ Yp k_\ =`eXeZ`Xc J\im`Z\j 9fXi[ Xe[ JKI8K< Ck[

Money Markets | 43

Innovation in the Gulf Markets » Ahmed M. Al Bahar talks to Simon O’Brien

Introduction Given the fact that Gulf Custody Company (GCC) was incorporated in Kuwait in 2001, you have already enjoyed significant growth. To what do you attribute this? We started life in 2001, providing fund

administration and custodial services for investment funds. Although we were not the first, we were the only provider to offer a core service. We established GCC Bahrain in 2004: it was timed to perfection, a number of investment companies in Kuwait, and investment managers in the region, started using Bahrain as a domicile for their investment funds. We also started to receive recognition in the UAE, Oman, Jordan and Saudi Arabia. As a truly local player in the region, we know the market. Therefore, we are able to offer fund managers services that they have not had access to in the past.

“As a truly local player in the region, we know the market. Therefore, we are able to offer fund managers services that they have not had access to in the past.” tionally. For example, if clients require investment in private equity or hedge funds in the USA, the alliance with Standard is very useful. It is clear that we must integrate with other global custodians and fund administrators in order to extend our reach and thus fully cater to the needs of our clients. Hence, we are in the process of concluding alliances with other global custodians and fund administrators. The advantage of such alliances is that the cooperation is two-way.

These are some of the drivers behind our significant growth. Is the aforesaid alliance focused exclusively on the local market? How important is relationship management in the asset servicing business today? Having a strong relationship with our fund managers

is essential, given that we perform most of the back office work for their investment funds.

Yes, the focus is domestic. We rely upon external players to complement our services. We focus upon the region because the infrastructure is well known to us. I think we would be best described as a local player with international reach courtesy of our strategic alliance.

Kindly define your AUC? We tend to use the expression AuA (Assets under Administration), which at the end of 2007 totaled some $9bn. There are over 90 different funds from a variety of investment schemes - equities, both local and regional, international equities, money markets and real estate, and private equity funds. We have around 32 fund managers operating in Kuwait, Bahrain, Saudi Arabia, Oman and Jordan.

Have additional business opportunities emerged as a result of your partnership with Standard Bank Offshore Group? A num-

GCC and Standard Bank

Given that fund managers want fund administrators to be essentially local; this creates a huge opportunity for international fund administrators who are able to cater to these funds.

To what extent has the GCC-Standard Bank Offshore Group alliance strengthened GCC’s position in the fund custody and administration arena? We can unreservedly say that the alliance has

strengthened our position. Although we have a strong value proposition, there are certain elements that we are unable to cover interna44 | Money Markets

ber of potential business opportunities have arisen as a result of our partnership with Standard. Fund managers in the region are introducing their clients to new funds, unlike the plain vanilla offerings of the past, for example, private equities and hedge funds in Europe and Asia.

Additionally, in Bahrain, according to the regulators, local administrators are required to handle the funds. Forming strategic alliances is the obvious answer.

Custody

•••

Technology

As a technology intensive provider, how important is GCC-Fund Custody View with respect to your value proposition? I think it is

Your web-based platform, CCC-Fund Custody View, enables clients to access their accounts 24 hours a day, 7 days a week, around the world. With this in mind what security measures have you implemented in order to safeguard information? Our system,

fair to say that internally we are relatively technology intensive, externally less so. One must remember that the market in which we exist is short on technology, it is non-dematerialized, and is therefore physical in nature.

designed by TSC, allows us to enforce all of the necessary security measures. In addition to standard protection such as firewalls etc, we have also added internal safeguards to ensure that clients only have access to their personal data, as this is highly confidential.

We do not have custodians in all markets. There are brokers using information in paper format, receiving instruments from fund managers on paper and through faxes and so on.

Another important point to mention, fund managers cannot directly override information we have provided them with. Of course they remain free to request any additional information they may need.

You will find that although SWIFT exists, it is not used by anyone in the region. Therefore, no matter how sophisticated your system and or platform may be, the external infrastructure is still the limiting factor.

Some providers have a “one size fits all” approach to technology. How much flexibility does the aforementioned platform offer?

So, we continue to develop our technology in order to provide our clients with an expeditious service. However, receiving information is a different proposition all together. We work in a labour intensive market, and this extends across the entire region.

The service emerged from small beginnings. Initially, providing fund managers with basic information. Over time, as demand warranted, we started to provide fund managers with a lot more information, for example, market analysis, profit and loss accounts, exposure in each market etc. We understand our clients’ needs. Some managers require more sophisticated forms of reporting than others, and as we continue to grow our knowledge-base we will be able to tailor information more specifically to the individual needs of managers.

Trends & Drivers How important are the major asset management support functions, such as depositary and custody work, fund administration and transfer agency services, to the long-term success of the investment fund sector? I think it’s very important that asset man-

agers not only understand the role played by fund administrators, fund Money Markets | 45

“We understand our clients’ needs. Some managers require more sophisticated forms of reporting than others, and as we continue to grow our knowledge-base we will be able to tailor information more specifically to the individual needs of managers.” custodians, transfer agencies and so on, but also all of the support functions associated with the provision of solutions. Some will need to be educated in the use of less time-consuming methods e.g. a onestop-shop for all services. If all of the agencies differ, you can imagine how much longer it will take to execute transactions. So, by consolidating everything, we can provide a single solution, thus replacing the three or four that would normally be required to carry out the type of work we do. By doing this, we are providing our managers with a more efficient service. The global market for third party fund administration services is delivering a host of new business opportunities. What does the future hold for international service providers? We will certainly see more

international service providers entering the region. I don’t think, however, that it will be a success story from a business standpoint. We have learned from experience that you need a physical presence in Kuwait and Bahrain in order to succeed in this business. Personally, I think the future lies in the formation of strategic alliances and joint ventures between local and international operators. This enables the local provider to offer international services and gives the international provider a foothold in the local market. The growing convergence of traditional and alternative asset management styles is creating a new range of challenges and opportunities for the investment and asset servicing industries. What steps have you taken in order to prepare for the challenges ahead? We’ve

already talked about new opportunities arising from the expanding 46 | Money Markets

range of sophisticated investment funds and emerging markets – funds such as private equity and hedge. Also, by covering the Asian markets, together with a combination of European and local interests, we anticipate huge growth; e.g. $1-2bn funds focused on the aforementioned markets and investments.

The Future Do you plan to extend your service offering beyond Kuwait and Bahrain? What can new and existing clients expect from GCC over the coming year? Our goal is to be present in all markets throughout

the region. As I mentioned, we started GCC Bahrain in 2004. However, we are currently working on a joint venture in Saudi Arabia with some of the local players there. Over the next two years we will expand into Oman and Saudi Arabia and hopefully, later on, register with the DFIC (Dubai International Financial Centre). Once these plans have come to fruition, we will have extensive coverage throughout the entire region. We will continue to develop our technology as required. The primary objective will be to identify less labour intensive methods, e.g. electronic trading. Over the next two years our systems will be upgraded and enhanced, this will enable us to supply our fund managers with even more sophisticated reporting. Our objective is to exceed the expectations of our clients.

Biography Ahmed M. Al Bahar is the General Manager of Gulf Custody Company.

Money Markets | 47

Keep an overview of your assets, identify opportunities.

Custody

•••

The Growth of an Independent Provider »Simon O’Brien talks to Kieran Dolan

In mid-February, Citco announced that it would be adding 150 people in administration services over the next three years in Blackrock, Cork, one of Citco’s Irish offices. The news of the expansion (particularly at this time) is a testament to the success of Citco, which has been expanding continuously in Ireland since it set up services there almost 10 years ago. The company has over USD650bn under administration and USD325bn under custody and is a fund specialist. As well as fund administration and corporate/fiduciary services, Citco provides execution, settlement, custody & financing for the whole range of clients who invest in mutual and hedge funds. “From a custody perspective, we service a variety of clients - big investment banks, private banks, fund of funds, all who invest into mutual and hedge funds. As long as it is a fund, we deal with it electronically on our platform,” points out Senior Vice President Kieran Dolan.

weekly meetings devoted to development,” says Kieran. “Most of the items are put forward by our clients. They provide us with a wish list; we put it into the context of the funds business and what needs to be done. If we conclude that it will be of importance to all of our clients, it will be a priority. Of course it has to make sense, and the case has to be made, but if it passes through evaluation at committee level we will do it.” It is this “open to ideas policy” that has helped Citco evolve along with the needs of its clients. Citco adopts the same approach when it comes to appointing relationship managers. “Some clients specifically ask for a relationship manager, and that’s fine,” explains Kieran. “If they have specific requests we’re fine with that. If clients want to select from a panel of candidates, that’s also fine, we are open to suggestions. The whole point is understanding what your clients do in a complex environment.”

“From a custody perspective, we service a variety of clients - big investment banks, private banks, fund of funds, all who invest into mutual and hedge funds. As long as it is a fund, we deal with it electronically on our platform.”

Citco’s formula for success is simple. “We are an independent provider, and we are totally focused on the fund business,” explains Kieran. “This sets us apart from many of our competitors; we are not simply a smaller part of a larger organisation.”

Kieran also emphasizes the importance of the relationships Citco develops with its clients. “Pretty much everything we have developed in terms of services has been in response to client feedback. This is possible because of the long term nature of some of the relationships we’ve fostered over the years; we have, in a number of cases, grown up together with our clients.” In this context, CRM is an immensely important tool. Citco uses the feedback it gets from clients to help develop its systems. “We have

And Citco is not frightened by the complex. It built its systems to cope with the complicated demands of the AIM (Alternative Investment Market) market. “This means that when it comes to more mainstream funds and, in some cases, simpler processes, we are well placed,” says Kieran. This is in stark contrast to most in the industry -Citco’s competitors-, many of whom are now playing catch-up as a result of meager technology investment at the outset. Technology has remained a key part of the Citco offering. “Our technology is a part of everything we do” explains Kieran, “and we spend a lot time focusing on it. It enables us to provide better core and value added services to our clients. It also mitigates risk, which is a big factor for us and our clients - it’s a fundamental part of the job, regardless of what division you work for.” Money Markets | 49

“The technology intensive Citco, not one for standing still, has been developing a fully automated risk and collateral management tool, ARC Risk Management System, which is designed to manage fund link credit products.” Citco expects the aforementioned tool to be used by all of its fund of fund and investment bank clients. “This is the audience we are targeting”, explains Kieran. “We are very confident that there is nothing like this out there. Its unique selling point is that it provides benefits to both the lender and the borrower!” Looking to the future, Kieran comments that, “Within the context of fund of funds, one of the things we have seen is the emergence of middle office systems and services. International service providers will place increasing importance on being able to provide their fund of hedge funds clients with a robust, middle office platform and service. “Whilst focusing on managing their clients’ money, investment managers are seeking additional support from their administrators to assist with middle office services; such tasks include ad-hoc valuation, supported by specialized pricing teams, cash management, portfolio planning and FX hedging. Consequently, the challenges attached to the identification and implementation of operational and technological requirements can be outsourced, thus reducing the amount spent on these aspects of the business as the fund grows.

The technology intensive Citco, not one for standing still, has been developing a fully automated risk and collateral management tool, ARC Risk Management System, which is designed to manage fund link credit products. The new system, three years in development, offers benefits to both the client and the institutional lender. It provides online facility modeling and pre trade verification. Therefore, only deals within the model guidelines are accepted and executed. Consequently, the entire process is expedited and made more efficient. Furthermore, the bank’s risk model is online. As such, borrowers can determine whether or not they meet the necessary criteria and compliance issues with the press of a button. This negates the complicated, and largely mechanical, process of going through the various risk and compliance provisions with another party using spreadsheets. With clients on both sides of the equation, fund of funds and investment banks, the new system is ideal for Citco’s role as an intermediary. 50 | Money Markets

“Of course the credit crunch has also had, and will continue to have, an impact on the environment within which international service providers operate. Single source credit providers may be seen as a less attractive option by those with a prudent eye on diversification from a credit perspective.” In a broader sense, the fund market will continue to be dominated by the need for greater automation and stardardisation. “These have been the central requirements of this market for some time. We’ve made progress but the industry is not there yet,” concludes Kieran.

Biography The Citco Group is a worldwide group of independent financial service providers, comprised of international banks, trust and fund services companies. For over sixty years, Citco Group companies have served the growing needs of a diverse client base from its network of international offices. Kieran Dolan is Senior Vice President of Citco Bank Nederland N.V. Dublin Branch

Custody

•••

Setting the Standard in Custodial Systems »John Byrne talks to Simon O’Brien Information Mosaic CEO, John Byrne, gives us an insight into the growth of his company. “I think that in general businesses tend to set themselves unrealistic one year goals, which they fail to achieve. However, the same goals can be exceeded over a five year period. This is why, as a company, we are committed to five year plans. “Another reason for our five year plans is the input we receive from our investor - SEB. Successful Swedish companies, like SEB, tend to look at things over a five year period - and this brings a good discipline to Information Mosaic.” The company also places a great deal of emphasis upon recruitment, as John explains, “If you have the best people you will end up with the best systems.” Information Mosaic hand picks the very best personnel globally; however, effort is concentrated on Dublin, London, New York and Luxembourg. “The right people are not always available when you want them” says John, “so, ironically, the current market slowdown has opened up opportunities for us. “If you combine the knowledge base of our entire custodial operation, we have over 500 years of experience. Our aim is to have more corporate actions experts than any of our competitors.” Information Mosaic is technology neutral as John explains, “At the outset we developed component-based technology, which could be deployed regardless of the institution’s technology. This is significant, because it allows the banks to leverage all of their business applications with the technology that they already have in place. This means that they do not have to make any further investment. “In a major system, when using a GUI (graphical user interface) based browser, you can change the software on the server very easily. Conse-

“If you combine the knowledge base of our entire custodial operation, we have over 500 years of experience. Our aim is to have more corporate actions experts than any of our competitors.” Money Markets | 51

“When making an investment, you want to be assured that the underlying technology is viable and will be around for a long time.”

Converg–e was designed by Information Mosaic to be a one-stop-shop solution. Accordingly, it manages trade processing and settlement, portfolio accounting, corporate actions and performance measurement. It also deals with custody management, foreign exchange, cash management and the generation of Visa charges. In summary, converg–e provides comprehensive middle and back office functionality.

quently, client upgrades become redundant. However, this was not always the case. In the past you had to install a machine for every user. This obviously had huge implications on upgrades and maintenance, not to mention cost. You need a system that is easy to maintain.”

In addition to the aforementioned, converg–e is also capable of handling legacy systems. “At ING, we integrated into 30 different legacy systems. The open architecture we use means that we can support a significant number of file transfer protocols,” comments John.

Maintenance is key claims John, “People are not only interested in the underlying functionality; they are just as interested in the cost of owning and running the technologies. Times are changing and people are far more aware of the costs attached to running systems.

So, what of the competition, especially from Asia? Information Mosaic puts things into perspective, “Most of our clients want to build internally. The majority of Asian providers simply offer a framework, some offer consulting services, we are providers of intellectual property.

“Many custody systems are now 30 years old. Consequently, they have been developed in languages that no modern programme today will support. This means the cost of ownership is enormous. So, when making an investment, you want to be assured that the underlying technology is viable and will be around for a long time.”

“Our development output is very high; we have two product releases per year. Our aim is to provide 95% client functionality; future functional gaps are supported by our product programme. A typical project lifecycle for us, when talking about a global project, is between 9 and 18 months. The consulting model, however, takes between 4 and 5 years.

52 | Money Markets

Custody

•••

“We have been focussed on building convergence from the very beginning. The aim was to establish a single platform that would support multiple markets, currencies and teams across numerous time zones.” The economics are compelling; Information Mosaic can get clients up and running very quickly,” stresses John. In keeping with Information Mosaic’s one-stop-shop approach, convergence has certainly been a driving force, “We have been focussed on building convergence from the very beginning. The aim was to establish a single platform that would support multiple markets, currencies and teams across numerous time zones - custodians with multiple operating centres are able to process transactions and manage data both centrally and locally. You need to build in flexibility from the outset; this is not something you can add.” In dealing with the cultural nuances and challenges attached to the provision of a regional, and in some cases global, solution, John again points to the flexibility of converg-e and the strength of Information Mosaic’s human capital, “The system has the flexibility to set up workflow for different cultures. Having the right global service team is also vital in terms of being able to understand the cultural nuances between the different markets.” One of the main drivers of new systems has been the degree of audit trail - chronological sequence of audit records -, a prerequisite for all aspects of custody. As John explains, “converg-e was designed from the outset to cope with all areas of workflow. Every action can be set up with a producer and an authoriser so the audit trails are clear.” On the subject of corporate actions, Information Mosaic has carved out an impressive niche in the automation of corporate actions processing space with CAMA - Corporate Action Management Application. John explains, “CAMA was designed to be of industrial strength and scale. At this end of the market there really is no other system with this level of industrial strength. That is why 6 out of 10 global custodians use CAMA or converge-e.” Looking ahead, John detects a change in the market mood, “Five years ago investment in corporate actions was aimed solely at saving money. Today, most of the decisions are made for operational risk reasons. As-

set managers, who are running underlying risk in their corporate actions, are very keen to mitigate risk. Typical operational savings are around 25%. “One big change we see is the widespread adoption of the ISO standard CFC, and custodians will drive this. We want clients to interface with ISO messages, and CSDs supporting ISO standards. “There is a divergence between national and international standard company governance, this varies greatly between different countries. ISO have made great strides in making sure there are ‘like for like’ comparisons with all of the message types. For example, the US 2-for-1 stock split is rendered by SWIFT as x for y. By removing the English, the ambiguity is also removed. There has been too much variation between the US and UK with regards to different terms.” So equipped, as Information Mosaic is, with the solutions, staff and industry knowledge, one wonders where this provider stands on support, a quality few providers seem to possess. “We are advocates of training our clients early in the cycle. The better trained our clients are, the fewer user errors. Subsequently, there are greater utility benefits,” stresses John. “Every six months we bring in an independent company to survey client satisfaction. Employee rewards at Information Mosaic are based on client satisfaction. This is a network market, and reputation is key. Our market strategy is to manage client expectations and deliver,” John points out. “Looking to the future, we see the US market growing strongly. We have been present in the US for seven years and our clients include Mellon Bank, Brown Brothers Harriman and Northern Trust,” explains John. “In fact, we will be doubling our operation in the US.” Biography John Byrne is the CEO of Information Mosaic.

Money Markets | 53

“ A masterpiece! The story hinges around BNP Paribas Securities Services, who are always coming up with new and ingenious ways of providing their clients with a winning solution. In this book, we uncover the secrets of their success: their on-the-ground presence in Europe, Asia-Pacific and the US means they are perfectly placed to address the full range of their clients’ business needs, on a global scale.

”

BNP Paribas Securities Services - close to clients, close to markets.

BNP Paribas Securities Services is incorporated in France with Limited Liability and authorised by the French Regulators (CECEI and AMF). BNP Paribas Securities Services London Branch is regulated by the Financial Services Authority for the conduct of its investment business in the United Kingdom and is a member of the London Stock Exchange. BNP Paribas Fund Services UK Limited, BNP Paribas Trust Corporation UK Limited and Investment Fund Services Limited are wholly owned subsidiaries of BNP Paribas Securities Services, are incorporated in the UK and are authorised and regulated by the Financial Services Authority.

www.securities.bnpparibas.com

54 | Money Markets

Custody

•••

The Value of Local

Expertise »Jonathan Calens talks to Paul Heffernan & Fearghal Woods

Introduction - The BoISS Value Proposition

How does BoISS differentiate itself from the competition? We operate in Ireland and Ireland only and that’s a conscious decision. We are a niche service provider and as such service a number of key clients. We provide a full administration, custody, and middle office service from our offices here in Dublin.

Although we are one of the largest financial institutions in Ireland we intend to develop a significant footprint in the UK. Internationally speaking we have skilled-based businesses dotted around the world rather than scaledbased businesses. It’s not our intention to set up operational environments across our businesses and compete locally in a lot of different markets around the globe. However, we will set up skilled based businesses where we can take advantage of certain local market opportunities. Hot Button Issues

Is service quality, above and beyond price or consolidation, the main reason clients switch providers? Well, I think it’s a combina-

tion of all three. Price is obviously a consideration. When reviewing outsourcing arrangements it’s one of the initial considerations. However, from experience, selection is based upon service quality. Decisions based purely on price tend not to be as effective over the long term because the approach tends not to be partnership based. The pure

“We will continue to expand our services in the hedge fund space. We will also focus on other areas, like private equity and collateralised fund obligations, which haven’t typically operated in the fund space but from an efficiency standpoint will potentially be important moving forward.” service provider/investment manager relationship can ultimately stymie the progression of services over the long term. The only occasion where price is the overriding factor is when you have a new asset manager who is moving into the fund space and putting together a fund structure. Consequently, they don’t have any experience of service providers. We like to work with reputable managers who don’t mind paying that little extra for great service. We are not the cheapest provider in the market. However consistency of service is of paramount importance to us, as is quality. One goal, and one of our strategies, is to try and exceed the expectations of our clients. The structure we’ve put in place in order Money Markets | 55

“It’s an interesting one because the cross-border pooling element is really a byproduct of the transportable Pan-European pension. That’s ultimately the goal when it comes to cross-border pooling vehicles.” to support the aforementioned strategy will obviously have an impact on the price. However, our clients can see the benefits.

slow to get in to the alternative space. That said many have now done so via acquisition.

We see ourselves as a business partner and not necessarily as an outsourcing provider. As such we are more than happy to develop new products and business lines with our clients.

I think the biggest challenge, and it’s an ongoing challenge, not one custodians have met readily, is the development required to keep pace with the changes in the industry.

Quite recently we’ve seen situations where asset managers have made a conscious decision to switch service providers because of service levels, or lack there of. It hasn’t been a price or consolidation issue, it’s been service quality. This has been the major driver behind the switching of providers.

Given the investment required to accommodate these asset classes and the types of alternative investments they make you need to consider a long term business model and profit & loss model.

To what extent has demand for securities lending increased?

A select few provide a full suite of solutions for funds of hedge funds with dedicated people, technology, and reporting. Is this likely to change in the short to mid term? I think the answer to that

We’ve always taken a very controlled and well managed approach to the process of securities lending and the collateral obligations that go on behind it.

is definitely, yes. I think the market has changed with respect to fund of hedge funds. Historically, investors have been high-net-worth and private individuals and the model has been one of high return.

It has been an educational process to get some asset managers, and in particular certain pension funds, more comfortable with securities lending. They’ve dipped their toe in the water over the past few years and are now engaging a lot more. Whilst they may have been a little bit nervous about securities lending at first they like our controlled approach, they also like the returns they can achieve over and above standard asset management activities. Consequently, we are seeing a lot more activity in the securities lending space. We really see it as a value added service.

In relation to institutional investors and pension fund type investors, moving forward, appetite for the alternative space will certainly grow. This will result in increased allocation to the underlying manager.

Given the importance placed upon value added services, are traditional services like tax collection being forgotten? That’s an

Hedge fund managers are increasingly outsourcing their core custody and fund administration services to third party providers. Would it be fair to say that universal concern over operational transparency is fuelling this trend? Do you feel that the aforementioned trend will continue to be an important driver of new business for asset service providers moving forward? I

interesting question. I don’t think our clients have forgotten about the traditional servicing model. Furthermore, clients will not even consider value added services unless the traditional services are working as they should be. Alternative Investments

In recent years interest in alternative asset classes such as hedge funds has increased significantly. What impact has the growth of the global market for alternatives had on global custodians? I think there has been a fairly significant impact on global

custodians. A lot of the traditional and global custodians have been very 56 | Money Markets

With respect to the aforementioned strategy, because the type of investor has changed, I feel the market will move in a different direction. So much so, we actually see managers, because of investor demand, changing the domicile of funds to better regulated jurisdictions such as Ireland.

think here again, investor demand is the driving force. I also think that managers want to focus on core activities. Consequently, activities they consider to be non-core are outsourced. This is certainly a trend we’ve witnessed and been involved with. We work with a number of mid-sized asset managers in both middle and back office services. They focus on research and investment management decisions and we look after middle and back office administration on their behalf.

Custody

•••

“We see ourselves as a business partner and not necessarily as an outsourcing provider. As such we are more than happy to develop new products and business lines with our clients.”

Things have certainly changed. The way the market has moved will be an ongoing trend. Finally, the lift-out approach will only be considered when it’s a very significant lift-out, perhaps in the region of $20-30bn worth of business. Will demand for fund of hedge funds continue to grow? I think there will be continued growth in the hedge fund space but it may be driven from different quarters. I think the requirement for transparency will focus more on the fund of hedge fund space though. Cross-Border Pooling

What benefits can be derived from the cross-border pooling of pension funds in Europe? It’s an interesting one because the cross-

border pooling element is really a byproduct of the transportable PanEuropean pension. That’s ultimately the goal when it comes to crossborder pooling vehicles. In relation to cost and efficiency, I can see significant benefits, both on the investment management side and on the custody side. How-

ever, sometimes, I feel that people overestimate the cost-benefits. It’s certainly an inventive structure to employ. I think the asset value that you have to contribute in order to make it efficient, and cost efficient at that, is quite considerable and far more than people possibly imagine. If you were talking about a $100-200m fund and employing these types of cross-border pooling techniques, you would not have a more efficient vehicle. When we looked at it we felt the $2bn mark would have been a breakeven point, a point where we could have started to realise certain efficiencies. It’s very much size driven. Looking Ahead

What does the future hold for BoISS? We will continue to expand our services in the hedge fund space. We will also focus on other areas, like private equity and collateralised fund obligations, which haven’t typically operated in the fund space but from an efficiency standpoint will potentially be important moving forward. As we progress we will certainly look to add to our product line whilst taking into consideration any changes taking place in the market.

We build specialist teams in order to service our product lines. They receive in-depth knowledge on how their respective product works and what the service requirements and expectations of the asset managers are. Our objective has always been, and will always be, to exceed the expectations of our clients. Biography Fearghal Woods and Paul Heffernan are responsible for business development at Bank of Ireland Securities Services.

Money Markets | 57

Outsourcing – Making Waves »Money Markets talks to Argyo Schoenberger Outsourcing banking operations has been a part of banking practice for almost thirty years, chiefly in terms of IT. Recently, however, Zurichbased Vontobel made waves when it announced that it would be offering transaction banking services to banks in Switzerland. One of the first questions that springs to mind however is why this announcement has caused this reaction in the usually conservative Swiss banking market. Part of the answer is that Business Process Outsourcing (BPO), though well established in the US, where it is embedded as a standard operational practice, has not made as much progress in Switzerland. According to Vontobel’s Agyro Schoenberger, “we believe that BPO is still in a fairly early stage in the Swiss banking sector. Insufficient cost pressures, the absence of a proof-of-concept and a lack of credible offerings have so far hindered small and medium-sized banks from outsourcing individual processes. However, due to the recent developments in the financial markets, BPO discussions might be more on the agenda of financial institutes.” Vontobel believes that continuing pressure on banks to concentrate on core competencies over the next few years will provide valuable 58 | Money Markets

“One important aspect of the Raiffeisen relationship” emphasizes Agyro, “is the fact that both partners are equally committed to the success of the partnership. This is crucial, not just for the success of VONSYS but for BPO projects in general.” opportunities. And it is good to get in early, as Agyro explains. “We expect to see a consolidation of the BPO market in the long term. ‘Bestin-class’ providers that offer a combination of banking processes and IT services from a single source and meet the requisite high standards of quality will be able to compete successfully in this market.” By highlighting its relationship with Raiffeisen Switzerland, one of the largest possible partners in the sourcing market, Vontobel claims to have a ‘proof of concept’ for a full-securities-sourcing-solution.

Custody

•••

“Crucial to any successful outsourcing system is the ability to tailor the offering to meet the individual needs of clients, or at least offering some degree of adaptation.”

In terms of the services themselves, Vontobel offers securities execution, settlement and administration, all packaged under the VONSYS brand. These requirements are some of the most time and resource intensive components in the value chain - and of course the areas where Vontobel believes it has considerable experience and expertise to offer. However, it is worth noting that the bank has no intention of becoming just another “back office” provider. Instead, Vontobel prefers to emphasize its total offering. Crucial to any successful outsourcing system is the ability to tailor the offering to meet the individual needs of clients, or at least offering some degree of adaptation. Alive to this, Vontobel stresses that VONSYS is modular: VONSYS - service modules are based on different market requirements; such as execution only, execution & global custody, a full sourcing solution as well as additional services such as development and product design, and service solutions for investment customers in the fields of investment funds, standardized asset management solutions and structured products. As Agyro underlines, “it is our aim to achieve scalability in services.” According to Vontobel, outsourcing tends to be cost -investments-, compliance and/or product driven. An additional reason which leads to sourcing is the split of the value chain and, therefore, the chance to focus on specific core competencies and/or strategic thoughts. The jewel in Vontobel’s outsourcing crown is the Raiffeisen partnership, which began in 1994 and was subsequently expanded to achieve important business objectives. The cooperation enabled both parties to achieve next to the BPO objectives, additional added value. Whilst the relationship enabled Raiffeisen Switzerland to drive forward the dynamic growth of its non-core business asset management, Vontobel received exclusive access to an expansive banking network that serves around three million customers via 1200 plus branches. Given the fact that the financial industry is moving increasingly towards specialization, the aforementioned cooperation model was designed to play to each company’s respective strength. Raiffeisen Switzerland builds its reputation for banking expertise and customer relationship

management, while Vontobel emphasizes its proven product and assetmanagement strength. In practical terms, this means that Vontobel develops and designs product and service solutions for Raiffeisen Switzerland‘s investment customers in the fields of investment funds, standardized asset management solutions and structured products -Raiffeisen Switzerland has also transferred the processing and administration of its entire securities business to Vontobel in order to benefit from economies of scale. “One important aspect of the Raiffeisen relationship” emphasizes Agyro, “is the fact that both partners are equally committed to the success of the partnership. This is crucial, not just for the success of VONSYS but for BPO projects in general.” As important as the Raiffeisen experience is for Vontobel, the company defines its focus as really being smaller or boutique banks able to benefit from Vontobel’s strengths explains Agyro. “After all, there are not many Raiffeisens around.” From a technology standpoint, the cost attached to the provision of custodial services is significant. Unable to sustain the scale of investment required, a number of smaller sourcing providers have fallen by the wayside. In contrast to that, Vontobel believes VONSYS provides potential client banks with a way of avoiding technology development and maintenance costs. Looking to the future, should the VONSYS concept expand it will of course attract competition. Vontobel does not see this as a particular problem. “To be efficient and competitive, as already mentioned above, an in-sourcing offering must have the right interfaces in the value chain within the banking processes as well as between the banking processes and IT. With its securities-sourcing-solution and the ‘proof-of-concept’ Vontobel is exceptionally well positioned in the Swiss market.” Biography: Argyro Schönberger was born in 1964. Since August 2007 she has been the Head of Distribution Transaction Banking Solutions for Vontobel Investment Banking; ‘Treuhänderin mit eidg. Fachausweis’ (Fiduciary with Swiss Federal Accreditation).

Money Markets | 59

The Changing Face of Greek Custody »Money Markets talks to John Avgoustis

“We have successfully promoted, standardised and harmonised a new process in the Greek community for dividend payments exclusively through a paying agent.”

and the Capital Markets Commission. We expect this to become law, and practice, in the local community some time this year. Regarding electronic pre-matching, we have been coordinating a binding agreement with local custodian banks which we hope will become market practice very soon through the Hellenic Bank Association. Kindly define NBG’s third party assets under sub-custody? What percentage of this figure is comprised of local assets? We have

about €60bn in third-party assets under custody, the majority of which are in local assets; a little over 95% are actually Greek stocks and bonds. Introduction

Although you are the oldest, and the largest, bank in Greece (founded 1841) with 569 branches, you continue to remain at the forefront of industry developments, both domestically and otherwise. Do you consider National Bank Greece (NBG) to be the spokesperson for the Greek banking community?bYes, NBG has

been the leading Greek bank, not only in terms of size but also in the quality of economic numbers. NBG has also been making the headlines, both domestically and overseas, with its acquisitions, Finansbank would be a good example. This has certainly enabled us to strengthen our regional presence in South Eastern Europe. Regarding the securities and transaction business, we do represent our community in a number of Pan-European initiatives, including the Target 2 Securities Group, a newly established group for the Eurosystems initiative. We are also involved in the Securities and Corporate Actions Group, which deals with the elimination of Giovanni barriers, and the European Payments Council to mention but a few. We have successfully promoted, standardised, and harmonised a new process in the Greek community for dividend payments exclusively through a paying agent. In addition, we have been actively pursuing the adoption of a record-date system and the abolition of the share blocking system for proxy voting in conjunction with the Hellenic Exchanges 60 | Money Markets

A number of domestic providers have started to make inroads in to South Eastern Europe. To what extent does the aforementioned territory factor in to your plans moving forward? According to the NBG

three year business plan, which was presented in London in February of this year, we will be “regionalising” services. This means transaction services and includes securities services, which will enable us to provide a regional offering. To this end we have already established custody services in Cyprus and are actively pursuing plans to expand into Bulgaria. The CSE-ATHEX Platform

Following the inception of the common trading platform between the Cyprus Stock Exchange (CSE) and the Athens Stock Exchange (ATHEX) on October 30, 2006, the daily transaction volume of the CSE increased by 150% in the first five weeks. The CSE’s general index also rose by almost 11% over the same period. Can these impressive gains be maintained, and if so, for how long? There

can be no doubting the results the common platform generated in its first month, they were very good indeed. Whether these results can be sustained remains to be seen. I will not speculate but, the numbers have been impressive. Thus far both exchanges, Athens and Cyprus, have benefited and we hope it will stay that way. Do you feel that the aforesaid endeavor will make it easier for the pool of investors who trade in Greek stocks to own shares in Greek Cypriot companies? Absolutely. Investors are taking advan-

Custody

•••

tage, and will take advantage, of the increased credit worthiness and strong service level agreements we’ve established over the years. It’s about creating a comparable environment with similar procedures that will facilitate and ensure easier and safer access to the Cypriot Market. Thus far the numbers have been encouraging. During the first six months of the common platform’s operation the average daily turnover of the CSE increased by almost 70%, while the remote members participation reached 18% from 0 levels. Looking ahead, ATHEX would like to create a common trading platform for South Eastern Europe’s bourses. To what extent does the common platform help to augment ATHEX’s broader strategy?

ATHEX’s common platform strategy proves that you can achieve higher revenues by enlarging the market. Second, you can reduce operating costs by sharing costs. Finally, by providing a better service you can attract the regional companies that operate in the South Eastern European region. Should Sofia join the Athens–Nicosia common platform, what will this do for transaction volumes etc? I think the Athens-Nicosia win-

win experience bodes well for an Athens-Sofia deal. I also feel that the aforementioned deal has all of the characteristics of the Athens- Nicosia deal, in terms of revenue, cost, and the attraction of regional companies. Some reports have claimed that the common platform has reduced the operating costs of the ATHEX and CSE exchanges by as

much as 10% and 50%, respectively. Is this figure accurate? What about the cost of participation for intermediaries and investors?

Yes, absolutely, it has reduced the cost of doing business, which has allowed us to pass certain savings on to our clients. As costs go down and efficiency goes up volumes will inevitably increase. New Legislation

The Eurozone’s TARGET2 Payments System

Vis-à-vis harmonisation and standardisation, how does the ECB’s TARGET2 securities (T2S) proposal fit in with other regulatory and market initiatives – e.g. Giovannini barriers, European Code of Conduct for Clearing and Settlement, ESCB-CESR standards and the Single Settlement Engine? The T2S initiative is yet another

push towards a harmonized Pan-European securities market place. It would further reinforce the removal of some of the Giovannini barriers. With all of these initiatives the political objective is to create a greater economy of scale, which should in turn create a more competitive European market against the other world markets. Harmonisation

Do you feel that the driving force behind these initiatives stems from the desire to achieve increased harmonisation with respect to the markets across the EU, thus reducing the barriers to ef-

Money Markets | 61

“Our pricing strategy is in harmony with the demands of our customers. They want simple, transparent, easy-tounderstand pricing, which results, most of the time, in more bundling.” ficient and safe securities clearing and settlement systems? Yes,

all of the initiatives that you’ve mentioned do point towards the same goal, one European market. Whether it’s Giovannini or T2S it’s about establishing common EU facilities, common EU platforms anywhere it makes market sense. Certainly some activities are easier to harmonize than others, i.e. settlement. The tougher ones, like corporate actions, will follow. The Service/Cost Equation

Can custodians maintain service levels despite shrinking margins? Despite price reductions in Greece, service levels are at their

highest. This has been acknowledged by our institutional client base. We are automating, whilst embarking upon new initiatives designed to reengineer processes at bank level and national market level. We have been growing, and scale always helps. The unbundling of fees has been discussed at great length, is this a strategy NBG will be following? Our pricing strategy is in harmony

62 | Money Markets

with the demands of our customers. They want simple, transparent, easy-to-understand pricing, which results, most of the time, in more bundling. Now, this does not mean that if a customer asks us to unbundle pricing we won’t. At the end of the day it’s about keeping things simple whilst trans parent to our customers. NBG – The Future

What can we expect from NBG in 2007? We expect higher volumes from the transaction business. We also expect portfolio sizes to grow. We want to continue to improve our technologies so that we can constantly provide better service levels at a lower cost. With the three year budget commitment we have from our chairman for automation, we are working on a number of projects with our vendor, TATA, in India to bring about new features and services to our custody product. Many of them are customer driven.

Finally, we will strengthen our business through the internal consolidation of business units that we have acquired. The leading Greek broker and asset manager, P&K, would be a good example. We will also strengthen our business regionally via our three year business plan. John D. Avgoustis is the Head of NBG’s Financial Institutions Services Division.

Biography John D. Avgoustis is the Head of NBG’s Financial Institutions Services Division.

Wherever you are â&#x20AC;&#x201D; with what you need

Direct custody and clearing

Wherever in the world you discover opportunity, you need

Global Banking

Global Capital Markets

Global Transaction Services

Please visit our website: www.transactionservices.citigroup.com

To contact us directly: Asia Pacific: Alvin Goh +65 6328 5292 Harle Mossman +852 2868 7002

Europe, Middle East, Africa: Marco Siero +352 4 514 14367 Richard Street +44 20 7500 2304

Latin America: Alejandro Berney +1 212 816 6448

North America: T. Andrew Smith +1 212 816 3832

Nordea Bank AB (publ)

Spot-on custody services. Do you need custody services in the Nordic region?

voting, securities lending and borrowing services,

Or are you looking to take advantage of market

issuer services and market information covering the

conditions in Denmark, Finland, Sweden or Norway

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

individually? Then it pays to talk to Nordea.

the Nordic region through a dedicated relationship

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

manager supported by a Nordic team of specialists. We currently have assets under custody twice

and custody services in each market as well as the

as large as our nearest competitor. If you want to

entire region.

capitalise on our experience, please contact

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

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

Making it possible

Custody

•••

Nordic Custody Overview »Jonathan Calens talks to Anne-Lise Kristiansen & Peter Dahlgren Competition 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? 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 between sub and global. In terms of sub-custody, 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 very strong franchise, with local capabilities in each country. We also have a “best-fit” system in each country, which is 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 subcustody 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.

“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.” Nordic Central Securities Depository (NCSD), especially if the scope of the project is ambitious and the 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 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. Norway is perceived by many sub-custodians to be the main obstacle in the creation of an integrated pan-Nordic market. Is this fair?

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.

An Integrated pan-Nordic Market The Nordic Single (NS) Project consultation paper (Nordic clearing and settlement model narrative) describing the implementation of a single market structure intimated that full implementation could be achieved in three to five years. Twelve months on, does this seem realistic? In order to achieve greater harmonization,

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? In order to achieve this, at the very least, you

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

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 the Nordic CSD, these savMoney Markets | 65

ings will be unrealistic. Although we support a Nordic CSD with full integration, market levels must be harmonized so that the Nordic CSD 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 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. The Norwegian market is the most 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 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? 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 Following the inception of the Norwegian tax authority’s [tax] exemption model for companies domiciled in the European economic

“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.” 66 | Money Markets

area, has there been increasing demand for your tax skills? 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.

The Future 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? Where will you be concentrating your efforts in 2007? What can we expect from Nordea next year? Given that Nordea is involved in each of the Nordic mar-

kets we are able to influence developments and forthcoming changes on a regional and Nordic level. We will continue to invest in our subcustody 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. Biography Anne-Lise Kristiansen is the Head of sub-Custody for Nordea Bank. Peter Dahlgren is the Head of Custody Services for Nordea Bank.

/PSEJD #BMUJD &YDFMMFODF SEB is the leading provider of custody and clearing services in the Nordic/Baltic region. Business is built on long standing partnerships with our clients. Our commitments are efficiency, reliability and providing the highest service quality. For further information please contact: Global Head of Custody Services: GĂśran Fors, goran.fors@seb.se. Head of Sub-Custody Client Relations: Ulf NorĂŠn, ulf.noren@seb.se.

The Changing Face of Nordic Custody »Jonathan Calens talks to Goran Fors Introduction SEB’s custodial practice has enjoyed a great deal of success over the years, what do you attribute this to? We have enjoyed

great success in building a Nordic/Baltic platform for our custody offering. We have also concentrated on deploying our products on a regional basis. Kindly define your AuC? Our assets under custody total some

€500bn. How much emphasis do you place upon technology? Custody

in general is technology driven. We concentrate on offering efficient processes and solutions, and place a great deal of emphasis on STP solutions for our clients. In addition, we have developed an IT platform which enables our clients to access their accounts, obtain information and send instructions to us. In an average year, we would expect to spend between €8-9m on technology. To what extent will the Baltic region factor into your plans moving forward? We have been a custodial provider in the Baltic region

since 1999. Our reach extends to all ten countries currently offering custodial services. This is one of the main reasons why we have such an integrated Nordic/Baltic custody offering. The Baltics are small markets, but also very important ones, and we put a great deal of effort into servicing our clients in this area.

“With respect to global custody product development, we have introduced an initiative which will help us to increase our reporting capability, and more specifically, the reporting needs for other asset classes.” 68 | Money Markets

We also service the Ukraine, and are currently looking at Russia in order to further develop our Northern/Eastern offering. We anticipate having Russia on board by the end of 2008.

Product Innovation OTC derivative and complex securities lending products continue to gain momentum. What steps has SEB taken in order to meet the growth and demand for these products? With respect

Custody

•••

“We currently have a fund administration business in both Luxembourg and Sweden, which runs alongside our custodial offering. This enables clients to outsource their fund administration to us.” to global custody product development, we have introduced an initiative which will help us to increase our reporting capability, and more specifically, the reporting needs for other asset classes. We also work very closely with the TCM (trading capital markets) area of the bank and prime brokerage, thus enabling a two-way linkage of complimentary services. Where do you stand on component outsourcing? We currently

have a fund administration business in both Luxembourg and Sweden, which runs alongside our custodial offering. This enables clients to outsource their fund administration to us. Additionally, in Luxembourg, we also act as a management company for funds.

Aside from Luxembourg and Sweden, we also offer fund administration in the Baltics. Over time we expect to grow this area of our business and expand into additional territories.

Consolidation To what degree has the consolidation of regional stock exchanges benefited the market? The consolidation process in the

Nordic/Baltic regions has been ongoing - OMX owns exchanges in all of the countries except Norway. However, the Oslo Exchange operates on the same IT platform. This means that investors and broker-dealers wishing to enter the Nordic market have a strong consolidated platform to connect to as members of the stock exchanges. This has had a very positive effect on the marketplace. Money Markets | 69

“Norway is one of the four Nordic countries, and even though Oslo’s volumes and market capital have increased, Sweden is by far the largest market in the Nordic region. ”

With Nasdaq coming in, we will have to wait and see how this affects the aforementioned market. The takeover of OMX AB by Nasdaq Stock Market Inc is expected to be cleared on Thursday by Mats Odell, the minister for financial markets. What impact, if any, will this have on the integration of the Nordic markets and, do you foresee Nasdaq implementing US rules in the OMX Market? I do not think they

Competition

will implement US rules, at least not for the time being. The Nordic exchanges have shown substantial growth, and success in attracting liquidity etc. So, on balance, the decision may be to leave things as they are. The general consensus locally is to carry on trading by our own rules.

What impact have US providers had on competition and technology in the Nordic region? The US providers are a very competi-

Has the aforementioned acquisition overshadowed the final purchase -November 29, 2007- of VPS Holding by the Oslo Bors?

How much emphasis do clients place upon local expertise? I believe that as a local provider, knowing the institutional clients in the region, being able to support them locally, and being able to look after them competently, gives us a strong competitive edge.

OMX is a large exchange; by comparison, Oslo is much smaller. Norway is one of the four Nordic countries, and even though Oslo’s volumes and market capital have increased, Sweden is by far the largest market in the Nordic region. The consolidation, which is occurring in Norway, is a silo consolidation. This merges the CSD and the Exchange. Are we likely to see further consolidation of the Nordic CSD’s in the near future? Surely the first step must be full integration of the NCSD? A couple of years ago, we had high hopes of seeing further

consolidation. Despite the fact that the Finland/Sweden CSDs have consolidated, they are still working as two separate entities. Things are not moving as quickly as I would have liked. The Target 2 Securities development is also a contributing factor in slowing things down, as participants wait to see how things will develop.

Market Trends & Drivers The Markets in Financial Instruments Directive, launched in November 2007, replaces and extends the coverage of the Investment Services Directive. Where does SEB stand on the aforesaid directive? MIFD in my world really makes a difference.

As a result of the changes in MFTs (multi-lateral trading facilities), it has created a plethora of competitive markets. To some extent this will change the environment. 70 | Money Markets

tive and significant part of the custody business here, and have been for a long time. Inevitably alliances have been formed, for example SwedBank and JP Morgan Chase. Nordea and Bank of New York.

As the market consolidates and competition intensifies, to what extent has SEB been affected by the decline in custodial fees?

This is a volume business. We will see the pricing and margins continue to change, and we will work on growing our volumes. This should then go some way to mitigating the effects.

Looking ahead Moving forward, how will SEB consolidate its position in the Nordic and Baltic regions? Naturally, we will employ our best efforts

in order to remain one of the leading Northern European custodians. We will continue our expansion plans into new markets, and we will endeavour to grow our services in conjunction with other parts of the bank: as mentioned earlier, the prime brokerage, derivatives, and reporting sides of the business. In summary, SEB will continue to develop its products and also grow geographically through expansion into new markets. Biography Goran Fors is the Global Head of Custody Services for SEB.

Custody

•••

Staying on top

in Germany »Susan Gault talks to Moritz Ostwald

Kindly define your current Assets under Custody. At the end of

December 2007, we had €303.5bn in assets under custody. The level of service offered by most local providers appears to be in decline, whilst BHF-BANK seems to be able to maintain the highest of standards. To what do you attribute this? I think

a clear and focused strategy is key to competing in this environment. BHF-BANK has certainly positioned itself as the quality leader in the German custody market. This is not our claim but our ethos. We believe that custody is a people business. Everyone is talking about STP rates and IT, which are important, of course, and vital for delivering excellent services, but we believe in the people employed by us and, similarly, our clients consider us to be just human beings trying to do our jobs better. Our objective is to improve our understanding of our clients’ needs on a daily basis. Another point worth mentioning here is that our shareholder structure is different to that of most of our competitors. We are a familyowned company. This has two implications: first, being independent of the stock markets and analysts means that we can act more freely than other banks. Second, our board members are really committed to this business – to custody, to what we are doing.

“As a German banking institution with a history stretching back more than 150 years, we are a member of the most important bodies and associations in the German market like the SWIFT user groups and Association of German Banks.” As a German banking institution with a history stretching back more than 150 years, we are a member of the most important bodies and associations in the German market like the SWIFT user groups and Association of German Banks. Participating in bodies like these is becoming an increasingly important factor, as clients are looking for providers with an influence on market opinions. With close to 2,000 employees, BHF-BANK is also a flexible organisation. Our lean structure and flat hierarchy enable us to respond quickly to new market trends. Here too, I don’t think we can overestimate the importance of our highly trained personnel. We Money Markets | 71

“As a relatively small institution, BHF-BANK’s custody team works very closely with colleagues in other departments. Consequently, we have a very keen awareness of cross-product relationships, which leads to innovative solutions.”

invest heavily in vocational training and staff development. This is reflected in very low staff turnover and allows us to offer consistently first-class services. We intend to continue along this path, and our clients trust us because of the expertise, commitment and continuity of our people. Last of all, it is important to mention the dedication of our management to custody business. Their constant investments in IT, infrastructure and new innovative products all reflect our flexible approach. Many providers have opted to centralise their client-relationship management activities via a central hub. BHF-BANK, however, continues to take a more “hands-on” approach. Why? We

believe that each customer and each issue is different and needs to be handled individually. Even though we’re talking about “custody clients,” you cannot pool them together. We consider access to be key and have therefore developed two possibilities that we are offering our clients. They can either choose to have a single account manager, who is then responsible for resolving any issues internally that might arise. In essence, the client has a single point of entry at the bank, besides their dedicated relationship manager. Alternatively, they can directly contact the specialist they require from our operational departments. Going directly to the experts can save time and effort on both sides. Our clients are getting more and more interested in taking up this possibility. What do your clients value most in terms of service provision? It is clearly our personal approach. We go to great lengths to understand our clients’ needs and offer them a tailor-made solution. The second thing is our flexibility. Thanks to our relatively small organisational structure, we have the ability to resolve any issues that might arise very rapidly. Third is technology. We have invested heavily in the latest IT systems and infrastructure over the past five years. Our state-of-the-art IT can now deliver STP rates comparable with the very latest standards of efficiency. I believe these are BHF’s USPs. To what extent has the growing adoption of alternative investment strategies by mainstream investing institutions assisted your efforts in generating new business? As a relatively small insti-

tution, BHF-BANK’s custody team works very closely with colleagues in other departments. Consequently, we have a very keen awareness of cross-product relationships, which leads to innovative solutions. We are 72 | Money Markets

known for our flexible organisation in the market that allows us to react quickly to new trends. Local Matters

CACEIS has taken over HypoVereinsbank’s securities and custodial business. What impact, if any, will this have on BHF-BANK?

Generally speaking, takeovers tend to cause disquiet in existing customer relationships and, of course, the HypoVereinsbank acquisition was no exception. This opens up opportunities for competitors to benefit from the situation and we have in fact already received some client interest. Whenever there is M&A or takeover activity, the parties involved tend to focus primarily on the transaction at hand and, secondly, on their clients. By and large, the German market remains in a state of flux and consolidation, and I am pretty sure that we will see a lot of movement over the next years. There are two issues: on the one hand, some of the smaller providers in the German market may discontinue their custody operations because, for them, other banking activities prove to be more attractive. On the other hand, interest from international banks, especially the global custodians, in the German market is huge. Vis-à-vis income derived from German securities, how do you deal with tax reclaims? Tax reclaims are really getting more and more

important in the German market. There are two ways of reclaiming taxes in the German market: traditional paper-based reclaims or the more efficient e-filing method. We offer our clients comprehensive reporting services which comprise regular information on pending claiming reports as well as immediate information on reimbursed taxes credited to the account of our clients. Target 2 Securities (T2S)

Some say that the T2S project is simply a thinly veiled attempt to create a nationalised monopoly in the settlement space. Do you concur with this? Generally speaking, there are very few, if any,

examples where monopolies have been able or willing to reduce costs and/or increase services for their clients in comparison to a truly competitive market. So I am naturally sceptical as regards such projects. On the other hand, if the ICSDs (International Central Securities Depositories) are considered a large oligopoly, the introduction of the T2S service would certainly make sense as the costs seem to be significantly lower than today. This might be a step in the right direction, particu-

Custody

•••

larly if you consider the CSDs (Central Securities Depositories) as the monopolies in their local markets. A pan-European market should be the goal in order to survive in the globalisation of financial markets and to remain attractive vis-à-vis the US market with its significantly lower settlement costs. Europe’s central CSDs have been understandably hostile towards a project that could see them stripped of their core business of securities settlement. Where do you stand on this? This

question should best be put to representatives from CSDs. In our opinion, it will become more difficult for national CSDs to make a living, as their bread-and-butter business becomes standardised through T2S. National CSDs might still be able to generate substantial income by offering add-on services like corporate actions, or securities borrowing and lending facilities. On the other hand, in recent years, national CSDs have been unable to offer sufficient service quality to lure customers away from the national sub-custodians. Given that T2S cannot get off the ground without the significant backing of Europe’s CSDs, who are essentially being invited to outsource their settlement functions despite the potential impact on their bottom lines, is the project likely to come to fruition? Although

Clearstream is presently working on the project in a “cautiously constructive” manner, Euroclear seems to be more sceptical. On the other hand, the pan-European settlement market is a declared goal of the European Union that will most certainly be realised in the not too distant future. As market-driven solutions normally work better than structures imposed by governments, everybody should work on the success of T2S. IT Systems

Many providers outsource the development of their custodial systems to third parties. What prompted you to develop your systems in-house? Again, it’s our absolute dedication to flexibility. There is no

way of maintaining the level of flexibility and process quality that some of our clients need by outsourcing these services. We have outsourced none of our core custody services, and the IT systems that are vital to our customers in the securities services field have all been developed internally at BHF-BANK. Our in-house development team is self-contained and made up of our own employees. Furthermore, the IT systems used in custody business are used solely by the custody department and are not shared by other departments in other areas of the bank. As a result, we are not dependent on third-party software and their project cycles. We have seen a few other market participants experiencing huge disadvantages in the past due to their inability to respond to market requirements - or client requirements, which is even worse - in a timely fashion. The Future

2007 was a busy year for the German market. The German Transparency Directive Implementation Act (Transparenzrichtlinien-

Umsetzungsgesetz) was implemented, and the German Bundesrat passed the Act on the Creation of German Real Estate Stock Corporations. What, therefore, does 2008 hold in store for the market, the business of sub-custody, and BHF-BANK in particular? Starting

with the markets: 2008 is only a few weeks old, and the stock exchanges have already experienced a great deal of turbulence, especially here in Germany. That said, the German DAX has performed very well over the past three years. Not only has growth been in the double digits, it has exceeded 20 percent p.a. over this three-year period. The decision on the T2S project is being eagerly awaited, as this will be a great step forward in the unification of the fragmented European settlement market. The Risk Limitation Act (Risikobegrenzungsgesetz) is planned for spring 2008. With respect to Germany, sub-custody providers will see further consolidation, if not in 2008 then in the years to come. And last but not least, I am very much looking forward to enhancing our client base with a few important new customers this year and adding volume to our subcustody business. We believe that 2008 will be even more rewarding than 2006/7, which were the most successful years in BHF-BANK’s more than 100-year history as a custody provider.

Biography Moritz Ostwald is the Head of Sales & Relationship Management for BHF-BANK’s custody business.

Money Markets | 73

Icelandic Custody Gathers Momentum »Money Markets talks to Gudrun Blondal

Introduction How does Arion differentiate itself from the competition? Arion prides itself in its personal and tailormade services for each client. Arion services financial institutions and by focusing on our service offering we are able to provide personal service to each one.

“It’s about responding quickly, efficiently and effectively in order to facilitate the desired outcome. We have all the advantages of a small company, in terms of reaction time and flexibility.”

With respect to service-quality, you’ve established an excellent reputation in a relatively short period of time. What do you attribute this to? Mainly to our highly motivated staff. Our clients require reli-

able, professional and prompt service. Our job is to ensure that clearing, settlement and subsequent custody responsibilities run smoothly on our clients´ behalf. This enables them to concentrate on their core business and minimises time and effort spent resolving custody issues.

try and between countries. Governments, regulators and market players will have to ensure that real uniformity is achieved before the full benefits of a single Nordic market can be realised.

Icelandic Update Do you consider this to be Arion’s unique selling point? Without

doubt, yes. We treat our clients’ problems as if they were our own. It’s about responding quickly, efficiently and effectively in order to facilitate the desired outcome. We have all the advantages of a small company, in terms of reaction time and flexibility. You offer both global and sub-custody, are you concerned that one might dilute the other? No, on the contrary, we have found that the

experience we have acquired in global and sub-custody has benefited us in both services. Being a global custody provider has enabled us to provide better sub-custody services and vice-versa. Given that you are the only institution in Iceland offering a onestop-shop custodial solution do you feel unaffected by the current wave of consolidation gripping the Nordic territory? No,

we never feel unaffected when it comes to progression in back office and custody. We view the ongoing consolidation taking place in the Nordic territory positively. We believe that our clients will ultimately benefit from the decrease in custody related expenses. We do not, however, envision consolidation into one Nordic market as something that will be happening quickly. Changes will take several years as co-ordination is required from different sectors in each coun74 | Money Markets

It was felt that the inception of SAXESS in 2000 would reduce the cost of access and trading in the Nordic and Baltic regions. Has Iceland realised the benefits? Definitely -the Icelandic market is ex-

tremely small-SAXESS has offered us technology advances that would have been difficult to attain on our own. In 2001, the Committee for Payment and Settlement Systems (CPSS) issued the Core Principles for Systemically Important Payment Systems. The Central Bank of Iceland has used these principles as a basis for developing payment systems in Iceland. What impact has this had on credit, custody, liquidity and operational risk? Two types of payment systems are in operation in Iceland, the

Central Bank’s real-time gross settlement (RTGS) system and the netting system operated by Fjölgrei_slumi_lun hf. (FGM). Settlements of securities transactions are also processed by these systems and I think in relation to that the system must be considered reliable and efficient. The RTGS system is fundamental to the implementation of Central Bank monetary policy. It is used in transactions by credit institutions with the Central Bank, and for gross settlements between credit institutions. The reliability of this system is therefore a prerequisite for the Central Bank to be able to realise its objectives for both price stability and financial stability. This in turn leads to increased liquidity and decreased operational risk on the market.

Custody

•••

Harmonisation and Integration – Northern Europe OMX has continued its push towards a single integrated trading model for the Nordic and Baltic markets with the acquisition of the Icelandic stock exchange and its securities depository. What impact has this had on trading volumes? Being the most recent addition to the

OMX markets we are able to observe first hand the impact this has been having on our clients. We foresee a huge impact on trading volumes as our clients prepare to enter, to begin with, the Nordic markets and then the Baltics. We are certain that we will see much higher trading volumes as a result of the access our clients now have to these markets through OMX, and OMX members have to the Icelandic market. To what extent has the aforementioned acquisition bolstered the region’s liquidity? Well, with

respect to foreign investors, access to the Icelandic market has certainly been made easier. The same is true for Icelandic investors and the Nordics. Consolidated marketplaces have a much better chance of maintaining good liquidity when it comes to blue chips. Although Iceland is very small, there are several large Icelandic companies listed on the OMX, for example Kaupthing, Glitnir, Landsbanki and Össur. It was hoped that the merger in 2004 between Sweden’s VPC and the Finnish APK, which formed the Nordic Central Securities Depository (NCSD), would be a stepping stone to a unified clearing and settlement environment. However, this has not been the case. Where do you stand on the single Nordic CSD platform conundrum? We have not seen many successful projects in this area over

the last decade. In the late 90’s VP in Denmark and VPC in Sweden started a common project which was named S4 (Scandinavian Securities Settlement System). This project failed due to complexity, high cost and politics. The Nordiclear project sought to create a common Nordic counterparty that would provide foreign investors with a single channel into and out of the Nordic region. This also fizzled out. Hopefully the NCSD project will succeed, despite the poor results which have preceded it. In our opinion, a truly unified Nordic trading and settlement infrastructure is attainable. Furthermore, we are confident that this goal

will be achieved in the next few years. A unified infrastructure would minimise the entry hurdle into the Nordic territory. One Nordic CSD, and one Nordic Stock Exchange, would eliminate the need for membership and connectivity. Do you feel that the European Central Bank’s proposed TARGET-2 Securities (T2S) platform could stymie the NCSD initiative? With

respect to T2S, it’s early days. However, T2S will not necessarily impact the NCSD initiative. For now it is not clear whether T2S will offer settlement in currencies other than the Euro. Within the Nordic region we have five currencies, EUR, DKK, SEK, NOK and ISK. The impact of T2S will become clearer after it has been implemented. Might we yet see a full blown merger, as was the case with Sweden’s CSD, VPC AB, and the OMX-owned APK, the Finnish Central Securities Depository (Suomen Arvopaperikeskus), which signed a letter of intent in April 2004 to establish a joint CSD for the Nordic area, the NCSD? There is considerable pressure for a merger to take

place. Almost all market players wish for, and anticipate, a merger as the benefits are obvious. Consolidating the CSDs will be a very complicated process; many different agencies will have to work together. In some instances legislation will need to be harmonised and this is always a lengthy process. Money Markets | 75

“We have around 60 funds in NAV at Arion. It’s our ambition to provide quality services to these funds and to add value to our clients wherever possible. Naturally, with this in mind, the transfer agency role, compliance and risk analysis are high on the agenda.” Industry Drivers Markets in Financial Instruments Directive (MiFID), otherwise known as ISD2 (Investment Services Directive), heralds a transformation in the structure of Europe’s capital markets. How will this impact sub-custodians in affected markets? We have to adapt

our systems to become MiFID compliant. However, this work is well underway. We are working closely with our clients to ensure that the added responsibilities are clearly defined. Given the lack of success with ISD, some say MiFID may go the same way. Is this a possibility? The reaction to MiFID is quite differ-

ent. MiFID has a higher profile and is being handled in a serious manner. Those who are not ready are definitely striving to become compliant. We do not anticipate that MiFID will go the same way as ISD. Will the costs attached to compliance outweigh the benefits? It is hard to say, but huge amounts of capital that would have been allocated to further enhance services will now have to be used to implement the requirements of MiFID.

Many of the stipulations are not required or asked for by the client. However, they should benefit from standardised financial services, greater transparency and a higher level of service. The ultimate goal in the financial market is to achieve efficiency, innovation and a secure market. We should never sacrifice these under any circumstances. Therefore, we have to be aware of the consequences attached to overregulation. MiFID was scheduled to be introduced in April 2006 but the European Commission announced that the implementation would be delayed. The deadline is now November 1, 2007. Is this realistic?

76 | Money Markets

We expect that there will be a further delay; the reality is that very few will be MiFID compliant in November. Most countries have yet to pass the legislation and will not have completed the legislation process by the deadline.

The Future In terms of product innovation, what can new and existing clients expect from Arion over the course of this year? Apart from

looking into enhancing automation within our operation, which is an ongoing project at Arion, we are constantly looking into new service offerings. We recently started securities lending and borrowing services for our clients, which is a new service in the Icelandic market. We have also been increasing our corporate actions services, and today we can customise this service to our clients’ requirements, which vary considerably. We are currently looking into new markets and will be expanding our custody network over the course of 2007. We have around 60 funds in NAV at Arion. It’s our ambition to provide quality services to these funds and to add value to our clients wherever possible. Naturally, with this in mind, the transfer agency role, compliance and risk analysis are high on the agenda. Finally, from a back office standpoint, we will continue to streamline our services in order to exceed the expectations of our clients.

Biography Gudrun Blondal is the CEO of Arion Custody Services in Iceland.

Money Markets | 77

Life after the Common

Trading Platform »George Yemenitzis talks to Susan Gault

Introduction

The acquisition of Marfin Financial Group and Egnatia Bank S.A. has helped to cement the bank’s position in both Cyprus and Greece. Domestically speaking, in terms of equity capital, where does Marfin Popular Bank rank? Now, Marfin Popular Bank (MPB) is the

to attract foreign institutional investors. The platform was modelled on the European Union and the developing international market system. It provides common standards and an effective environment for the execution of stock transactions on both exchanges. There has been a significant increase in the market capitalisation of the Cyprus Stock Exchange (CSE) since the implementation of the platform. So, one can say that the project was a success.

largest bank in Cyprus in terms of equity capital. Have the aforesaid acquisitions strengthened your position as a local custodian? Yes, of course, definitely. The strategy was to pursue

an aggressive, expansion plan that would enable the group to obtain the aforementioned status and, in so doing, become a leading financial services firm in South-Eastern Europe. Are you now better equipped to compete with Greek custodians for international mandates? Yes,

“Cyprus is a very small market, but we now have the means to compete with our peers and expand our global custody services, and this is what we plan to do.”

Cyprus is a very small market, but we now have the means to compete with our peers and expand our global custody services, and this is what we plan to do. You know that the custody business is directly linked to volume, and a financial institution of our size, with a significant international presence, can gain from both economies of scale and scope Aside from innovation and product development, what do you consider to be the main drivers of your success? In the local market, I would

add experience to the above. We have been in this business for over 10 years now. Therefore, we know the local market very well. We have also been able to build strong links with the local capital market authority. We have provided a comprehensive range of customer services for over a decade now, so I think that experience is one of the main drivers of our success. The Common Trading Platform (CTP)

Fifteen months on, what effect has the CTP had on MPB’s custody business and the market in general? The aim of the platform was

78 | Money Markets

However, subsequent to the common platform’s inception, the CSE’s activity has declined. This is mainly due to the dual listing of its two major stocks, Marfin Popular Bank and Bank of Cyprus; the two banks are listed on both exchanges. Consequently, foreign institutional investors wanting to trade stocks in financial institutions are tending to do so in Greece rather than locally. This may be a result of greater liquidity I the Greek market compared to Cyprus. Has competition increased?

Despite the large number of custodians with respect to the size of the market, one cannot say for sure that there has been an intense competition in gaining market share in the Cyprus market. The local market is a small one, total market capitalization stood at €20.7bn (September 2007) with an average daily volume of €7.6m (September 2007). Foreign institutional investors are interested mainly in the banking sector and specifically in the two biggest banking institutions (also listed in Athens Exchange) whose market capitalizations account for more than 68% of the total market capitalization. It was an easy step for Greek custodians to enter the local market, because the infrastructure was already in place and most of them did so in order to be able to provide services to their global custodian clients’ that requested custody services in both markets. Have trading volumes now settled down? Since the inception of

the common platform trading volumes have increased significantly. Of course this is related to the trends in the market rather than the common trading platform.

Custody

•••

Markets in Financial Instruments Directive (MiFID)

The implementation of MiFID, which took place in November of last year, heralds a transformation in the structure of Europe’s capital markets. What impact has this had on MPB? MiFID aims to

limit the existing differences between international regulatory regimes and harmonise investor protection rules across Europe. The directive’s main objective is to facilitate the integration of Europe’s financial market. Compliance with MiFID is an ongoing project for us, and we have invested significant resources. For us, MiFID represents an opportunity to gain a competitive edge. We have managed to put in place the appropriate provisions in order

“We have teams that are set up to examine best practice and research new technology, which enables us to improve customer service and technology trends in the industry.”

to manage conflicts of interest, and procedures to ensure that the assets we hold on behalf of our clients are protected. Are MPB’s systems fully compliant with MiFID in terms of best execution and reporting? Yes, we are fully compliant. We upgraded

our key applications to become fully compliant and provide new levels of regulatory reporting. The Marketplace Today

Investment vehicles, which custodians administer, are becoming more and more complex. You’re now expected to move information more rapidly and the environment in which you operate must be global. How have you embraced the aforementioned challenges? The fact is, insti-

tutional investors are now pursuing more sophisticated investment strategies than they were a few years ago. As a result, we have continued to evolve our service offering in order to deal with the complex demands of our clients. Several years ago we were just involved in the safekeeping of equities and bonds. Today we have to cater to more elaborate asset classes, such as derivatives, private equity, hedge funds, even real estate funds and structured products. The sophistication and complexity of such products requires a combination of custody and administration services supported by reporting, transparency and distribution. Money Markets | 79

â&#x20AC;&#x153;We have provided a comprehensive range of customer services for over a decade now, so I think that experience is one of the main drivers of our success.â&#x20AC;? technology trends in the industry. Our innovative approach to new systems development has established the bank as a pioneer in this market, whether that be through the implementation of ATMs or internet banking services. Technological innovations have helped the bank to achieve operational efficiencies and cost reductions, which in turn facilitate low-cost operations. Do you have any plans to upgrade your existing legacy system?

Yes, our systems are upgraded continuously to meet client and market demands. In fact, we are in the process of upgrading our existing legacy system. This will enable us to increase our efficiency and service more clients. The new system will incorporate databasing, imports/exports, consolidations and reporting construction. We are talking about a system that will be able to create and send hundreds of daily client statements via email, fax or SWIFT, according to the needs of the client. Are custodians becoming data warehouses? Yes. The need to re-

tain the details of trades for up to five years and the regulatory reporting obligations we have suggest the need for some kind of data warehouse capability. Looking Ahead

Is the role of the custodian more important today than it was say, five years ago? Yes, when you consider that, even five years ago, cus-

What can new and existing clients expect from MPB, in terms of product innovation, over the next twelve months? In terms of prod-

todians really werenâ&#x20AC;&#x2122;t recognised in the local market. Custodians really began to play an active role in the settlement and safekeeping of assets just after the implementation of the common platform.

uct innovation, as I mentioned earlier, we are moving into providing capital services for more complex investment vehicles.

There is no legislation in place that says a local investment company or pension fund must use a custodian, but many have realised the importance to have their assets under the custody of a reputable custodian bank... Our role is certainly more important and complex than it was five years ago. We are now required to provide real solutions

At this stage of your growth, how important is South Eastern Europe? Post entry into the European Union, the Eastern European

markets have performed exceptionally well. Many of our clients have expressed a great deal of interest in these markets. Being part of a group whose strategy and objective is to become a leading financial service provider to South Eastern Europe, we believe that expanding customer services to these markets is crucial.

Technology

Technology can be a key differentiator when it comes to service provision. To what extent do you invest in new technology? When it comes

to adding value, our bank has been a leader in the use of technology. We have teams that are set up to examine best practice and research new technology, which enables us to improve customer service and 80 | Money Markets

We have a strong presence in the aforesaid markets. By exploiting our local resources and knowhow, we will be able to offer high-quality services at a competitive price. Biography George Yemenitzis is the Head of Custody & Trustee Services for Marfin Popular Bank

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

PROVIDER, a t r u s te d AD V I S O R m o re t h a n a

Put Your T r ust In A Safe Place.

For over 150 years, Wells Fargo has provided the outstanding service that our customers have come to expect. The Strong Box continues to represent our financial strength and unwavering commitment to clients. 82 | Money Markets © 2007 Wells Fargo Bank, N.A. All rights reserved.

Custody

•••

Client Relationship Management

A Winning Formula »Bob Poferl talks to Money Markets

Introduction How does Wells Fargo differentiate itself from the competition?

We differentiate ourselves in three main ways: strategic relationship management, market focus and technology-driven solutions. Strategic relationship management is perhaps our key differentiator. In terms of client retention, satisfaction and feedback, it’s invaluable. Our strategic relationship management process works because of Wells Fargo’s geographic presence in the U.S. Having a presence in your client’s local community makes the process that muchmore real. What is Wells Fargo’s AuC? We handle slightly over a trillion dollars

in assets.

Technology What prompted you to launch an investment guideline monitoring solution? First and foremost, it was because of the increase in regulatory

and corporate governance pressure our clients were facing – primarily in the form of Sarbanes Oxley and other changes in the accounting rules and disclosures. These pressures forced our clients to better monitor their compliance with investment policies and view their role, to a greater extent, as that of fiduciary. Consequently, they look to us for assistance. How have new and existing clients responded to the aforesaid technology? The initial feedback that we’ve received has been very good. The

solution helps clients improve the overall management of their investments and oversight of activity, which is a huge benefit. In the past they had access to certain information, but not in the context of their overall program. In a single look, our product will let the client know if they have an issue or not. So, they get the information quickly and therefore can respond immediately. Is the development of said technology outsourced? Yes, in part. We use the Charles River development platform. However, we use the Wells Fargo CEO (Commercial Electronic Office) to package the information. This allows us to integrate it with the rest of our reporting. Integration also extends to processing as well. If we detect that a security has been purchased outside of the guidelines, the client will receive a post-trade, pre-settlement notification in advance of any report going out.

Would it be fair to say that custodians now differentiate themselves through greater and more focused investment in technology? In the trust and custody business most providers will point to

technology as a differentiator, but, in my opinion, it’s a combination of technology, people and service. These are the drivers that create a sustainable and competitive advantage. Technology alone will not provide clients with a satisfactory solution.

Securities Lending How does securities lending impact buying decisions in custodial services? It’s a big factor, and it has been for many years. The ability to

offset custody fees and other expenses with earnings and gain additional income for the investment portfolio is certainly still a factor. A number of buyers have considered unbundling securities lending services from custody services, which creates certain opportunities. However, it can also create certain risks, which need to be managed in the handoff of information. So, the buying dynamics have changed a little. Moving forward, I would expect this trend to continue. What do you consider to be the risk and market impact of securities lending? Securities lending is a pretty mature business. Consequently,

the risks are easily apparent and fairly well controlled. If you’re dealing with a tier-one organization, you can be safe in the knowledge that additional earnings will be forthcoming because of the supply and demand. Although you can make a securities lending program more lucrative by taking more reinvestment risk, there’s really no need to do that. A securities lending program is designed to provide incremental, additional income for your investment. If you look at it as incremental return, you should let it play out. There’s no need to be overly aggressive.

The Pricing Conundrum How important is transparency with respect to pricing? I think it’s

very important in custodial services. The client needs to be able to understand what they are paying for. At Wells Fargo we’ve always been very transparent with our pricing. In this business, transactional volume is far more important than asset size. You might have a very large client, in terms of asset size, with very Money Markets | 83

“Moving forward, continued emphasis will be placed upon client satisfaction and growth. Like any other provider in this industry, growth is important. The quickest way to grow your business is to hang on to what you’ve got, which is why client satisfaction is so important to us.” small transactional volume who really shouldn’t be paying that much. Conversely, a very small client with much larger transactional volume should be paying more because you’re doing more work for them. To what extent have providers embraced fee unbundling? Orga-

nizations vary when it comes to the level of unbundling they allow. At Wells Fargo we believe in full disclosure. Not all providers have the same mindset. I think this stems from the fact that they have other revenue sources, like securities lending and foreign exchange, which can tend to muddy the waters. I think it’s more than fair for the client to ask their provider how they derive their income. From a provider standpoint, I think it’s very important to understand your total cost and your total revenue and to expect a fair, not excessive, margin for your business. How can custodians guard against fee erosion? The erosion issue

is an interesting one. I think that if you’ve got a good relationship with your client you should be able to educate them about the drivers of cost. They understand that you need to make money but, if, as you continue to grow and transaction costs go down, everyone wins. If you’re proactive in sharing some of these cost savings with the client you should be able to eliminate the erosion issue, or at least manage it. It’s the providers that don’t have these conversations with their clients that have difficulty. In your experience, are clients prepared to pay for new products and services? I think the answer is yes, but it’s not a given. Clients will not

pay for things that don’t add value to their overall process. So, you need to be able to demonstrate some long-term cost efficiency or improvement. Sometimes you can add new features to a service that you’re providing and therefore charge a fee based upon the additional benefits attached to that service or product. Although the client may be paying us more, if they are able to manage their work load with less staff and achieve greater efficiency, this can often translate in to them spending less overall because they are no longer committing the same resources. It’s about helping the client connect the dots and understand the possibilities; that’s the key.

cant hurdle with respect to the evolution of straight through processing? I think that T+1 as a concept has been on the radar for a quite a while.

If you view T+1 in and of itself, it’s probably not worth the expense and time. However, if T+1 drives the industry towards greater STP, everybody wins -- the brokerage community, the investment management community, the custodial banks, their clients, everyone benefits from this scenario. Currently, there are a number of hurdles attached to achieving greater STP. We do not have a regulatory mandate in place and there is no industry momentum or interest in moving the settlement cycle forward. I think the initial cost involved in getting the requisite technology up to speed may be prohibitive for some of the investment management and brokerage firms operating in this space. Although, if clients wanted this to happen, I dare say it would happen. If you look at the markets globally, every country has its own set of issues. If you can’t get a market like the United States, or even some of the bigger European markets, to operate in a standard way vis-à-vis processing, we’re still a long way off. I think Wells Fargo, along with the other custody banks, would welcome more automation and STP. It would certainly help with keeping costs down and managing risk. However, there are a lot of counterparties in the equation and not everyone has the resources to invest in technology the way we do.

Wells Fargo – The Next Step What can we expect from Wells Fargo over the next twelve to eighteen months? We will continue to reinvest in all aspects of the

institutional business line, including technology, people and processes. You will continue to see a disciplined approach to the marketplace, focused on the areas where we feel we can add the most value, which ties in with our middle market strategy. We are not actively pursuing the $80bn+ fund, as I mentioned. We are committed to the middle market -$50m to $5bn in assets- which is where we do our best work. Remaining disciplined, working within this market, will facilitate success.

Operational Risk In your opinion, what are the main causes of operational risk? Kindly define the challenges attached to managing operational risk? Operational risk is one of the more apparent risks. It’s one of

those things that you really need to get good at from a control standpoint. Operational risk takes on an interesting dynamic when you have a third party lender involved, it creates one more hand off in the equation and other touch points which introduce operational risk.

STP Update – The Settlement Gap Is T+1 a goal worth striving for? How can outsourcing one’s back office improve STP rates? What do you consider to be the most signifi-

84 | Money Markets

Moving forward, continued emphasis will be placed upon client satisfaction and growth. Like any other provider in this industry, growth is important. The quickest way to grow your business is to hang on to what you’ve got, which is why client satisfaction is so important to us.

Biography Bob Poferl oversees relationship management activities for the Northern Plains region of Wells Fargo Institutional Trust Services, with an emphasis on large and complex Trust & Custody customers. He has 26 years of experience in the trust industry. Prior to joining Wells Fargo, he was with US Bank (formerly First Trust).

Supplement

Securitisation review

Money Markets | 85

The “Subprime Crisis” and the Future Challenges for the European Securitisation Market »Carlos Echave, European Securitisation Forum (ESF)

Securitisation is a financing technique whereby residential mortgages (RMBS), commercial mortgages (CMBS), auto loans, trade receivables, credit cards, insurance liabilities and other risk is transferred to special purpose vehicles (SPVs), which then fund themselves through the issuance of rated and unrated securities to capital markets investors. Securitisation provides significant benefits to European consumers, large companies, small and medium size companies, central and regional governments, utilities, and many others. In the residential mortgage area, it enables banks and savings institutions to provide more funding for homeownership at a lower cost, increases consumer choice and increases competition among lenders. It provides more funding than otherwise would be available by tapping the very large global capital markets base of cash. For investors, it provides a yield premium over sovereign and government debt of comparable maturities and ratings. It has enabled banks to transfer risk to third parties and to more efficiently allocate capital. To date, securitisation has reduced systemic risk by diversifying credit risk throughout the global financial system. As of 30 June 2007, the amount of term European securitisation and collateralised debt obligations (CDOs) outstanding was EUR 1.28 trillion (source: Bloomberg, ESF), with European issuance volume in 2006 of EUR 452 billion. These issuance data represent a spectacular growth from the beginning of this decade. However, the market conditions which have made such growth possible have suddenly changed within a very short period due to the so-called “subprime crisis”. The underlying problem is that the credit performance on pools of US Subprime mortgages originated in 2005-2007 has been worse than anticipated and house prices in many parts of the US have fallen at least somewhat. However, subprime mortgages only represent a small portion of the assets that have been securitised globally. The current market turmoil, though originated by a credit crisis in this part of the market, constitutes in reality a crisis of liquidity as investors have fled structured products generally to avoid contagion from US subprime. The securitisation 86 | Money Markets

market now faces the unprecedented challenge of restoring investor confidence in order to resume the previous growth trend. As the trade association that represents all securitisation market participants in Europe, the ESF has taken the lead in the industry effort to restore liquidity with a number of recommendations that were issued on 10th September 2007. The ESF will be working with its members and other associations in the coming months to implement the measures pointed out by these recommendations. .

Recommendations on Transparency and Standardisation of Certain Market Practices The industry, through the ESF, has already been very active on a number of fronts to promote greater transparency on portfolio-level information and the standardisation of disclosure practices. Examples of such initiatives are the ESF’s Securitisation Market Guidelines for RMBS published in May of 2006 and the ESF/CMSA-Europe’s Market Guidelines in relation to the Market Abuse Directive for European ABS and CMBS published in December 2006. The stated objective of such initiatives was, “improve the quality, uniformity and availability of pre- and post-issuance reporting for European securitisation transactions, as well as, promoting consistent trading practices for securitisation through a standardisation process of formulas and assumptions ultimately resulting in increased liquidity.” The current liquidity crisis has highlighted that there is much left to be done in this field. In relation to this, the ESF has issued the following recommendations:

Securitisation

•••

encouraged measures to improve accessibility to and consistency of modelled transaction data, possibly on a centralised basis. Recommendations on Structured Finance Ratings The downgrade of tranches in structured vehicles and CDOs with subprime assets in their portfolios has brought to the forefront issues concerning the “robustness” of such structures and the investors’ understanding of the ratings assigned to the structures. The ESF has issued the following recommendations in relation to these issues, on the understanding that the rating agency analytical processes must remain independent and, therefore, must not be replaced by a state-governed rating process: [a] C alibration and robustness of certain structures: The ESF has recommended that the industry, including the rating agencies, work together to maximise risk visibility across asset classes and investment vehicles. For example, mechanisms such as advisory councils could enhance investor involvement and input to rating methodologies and broader risk monitoring, particularly for the more complex structures. [b]

I nvestor education of structured finance ratings: The ESF has recommended that market participants work proactively to improve market education on the ratings and risks

“ESF has recommended that the industry develop guidelines for the consistent disclosure of methodologies used to value portfolio holdings.”

[a] I mprovement of disclosure by ABCP Conduits and SIVs The crisis of liquidity has severely hit Asset-backed Commercial Paper (ABCP) Conduits and Structured Investment Vehicles (SIVs). These vehicles invest in longmaturity asset-backed securities to fund their investors at shortterm maturities and they rely on an on-going injection of funds to continue to operate. During August of 2007, ABPC Conduit and SIV investors simply stopped rolling over maturing Commercial Paper (CP) fostered by the uncertainty of where subprime assets could ultimately reside. Given this shortage of liquidity, some ABCP Conduits have been forced to draw the liquidity lines committed by their sponsors and the SIVs to sell some of their assets in the market, which has translated into mark to market losses for them.

Although some ABCP vehicles distribute aggregate portfolio information to investors, certain vehicles provide less disclosure, or no disclosure. The ESF has thus recommended immediate and ongoing disclosure of portfolio holdings by ABCP conduits and SIVs. This will help identify where US subprime risk resides, including indirect exposure through CDO structures. [b]

Disclosure and standardisation in valuation methodology As market participants have encountered difficulties in valuing some of the asset-backed securities they were holding, the trading of such instruments has dried up significantly during the liquidity crisis, junior tranches in particular. In relation to this issue, the ESF has recommended that the industry develop guidelines for the consistent disclosure of methodologies used to value portfolio holdings. The ESF has also recommended widespread usage by issuers of standardised data reporting fields for RMBS and CDOs. This will facilitate investor understanding of transactions by providing consistent definitions. Finally, the ESF has

of structured products, the meaning of ratings, the difference between AAA ratings and market prices, the surveillance process, distinctions between various ABCP-funded structures, and breakeven quantification as to the level of pool credit change that would trigger a rating movement. Other Recommendations Lastly, the ESF has also issued other recommendations related to (i) the need to develop a common definition of “subprime” to prevent investors from confusing asset types with different characteristics; and (ii) the need to improve the quality of due diligence processes and the availability of audit information during the structuring process of securitisation transactions.

Biography Carlos Echave is a law graduate from the Universidad de Navarra in Spain. He joined the Madrid office of Freshfields Bruckhaus Deringer in 1999 where he specialised in Structure Finance within the Finance Department of this Law firm. In September 2003, Carlos Echave joined Linklaters where he advised on numerous securitisation and fixed income transactions. Since June 2005, Carlos Echave has been Director at the European Securitisation Forum (ESF), a trade association based in London and devoted to the growth and development of the securitisation market across Europe. He is the ESF’s legal and regulatory advisor to a number of Committees, including the Legal, Regulatory and Capital, the Accounting, the Spanish and the CMBS Committees.

Money Markets | 87

Capita – a partner you can trust When you appoint a trustee or corporate administrator you need to be sure that your provider can deliver the service you require. The professional, experienced team at Capita is committed to delivering an efﬁcient, ﬂexible and commercial service that meets all your requirements.

Service Information Corporate Trustee Services: Independent English law trustee services Successor and delegate trusteeships Debt related note and security trustee ABS, MBS, CLO, CDO, high yield, emerging markets Specialist trustee and intermediary services to the UK and international property market SPV Corporate Administration Services: Share trustee Provision of directors for the SPV (individual or corporate) Registered ofﬁce for SPV Accounting services Domicile and administration services Available in London, Dublin, Jersey and Amsterdam

Why Capita? Capita Trust Company Limited is a part of The Capita Group Plc, a leading provider of integrated professional support service solutions, which is listed on the London Stock Exchange and a constituent member of the FTSE100. Capita employs more than 30,000 people across a network of over 260 sites and has been providing professional support services to a diverse range of organisations since 1984. Capita Trust Company Limited is authorised and regulated by the Financial Services Authority. Registered Ofﬁce: The Registry, 34 Beckenham Road, Kent BR3 4TU. Registered in England No. 239726.

For more information contact: Sue Lawrence Business Development Tel + 44 (0) 20 7648 7488 Email sue.lawrence@capitaﬁduciary.co.uk

Orlagh Doherty Business Development Tel + 353 (0) 1 400 535 1 Email orlagh.doherty@capitaﬁduciary.ie

www.capitaﬁduciary.co.uk

Securitisation

•••

Business as Usual for Capita

»Susan Gault talks to Sue Lawrence Introduction

Given the fall-out from the subprime crisis, what steps have you taken in order to reassure clients? In any market where there is a degree

of turmoil, the role of the trustee and the SPV provider becomes more demanding. This is because more clients want to carry out amendments, clarify the extent of issues or they may require more information on a particular transaction. As such we believe that our best course of action is to ensure that we continue to deliver the service that our clients expect. We have made it our priority to have a team of experienced people ready to answer any queries both quickly and proficiently. Several of our clients have had bad experiences with other companies, where they have contacted a service provider in order to talk through an amendment, for example, and they have been put on hold, ignored, or in some cases forgotten about completely. This may be because the person dealing with their call, who may very well be their client service relationship manager, doesn’t really understand about the technical issues involved or is maybe out of their depth in terms of that particular transaction.

“The one thing you can be certain of is that the market, and the people who structure and put ideas together, along with those who move things forward, will be learning from every twist and turn in the market whether this be positive or negative.” I think that in this market the value of experienced people, and especially those with a variety of different experiences, cannot be stressed enough. After all, this is a people-driven market. Our aim is to make sure that we have the best people working with our clients and that all of their needs are met. What impact has the sub-prime crisis had on Capita’s business?

Although new debt-related transactions have become scarcer, we have found that we are now busier than ever dealing with the actions I mentioned before, such as amendments and so on.

Money Markets | 89

“I think that in this market the value of experienced people, and especially those with a variety of different experiences, cannot be stressed enough.” “After talking to various people in the market it is clear that there is a lot of activity currently happening beneath the surface, so as soon as the market turns around there will be a surge of issues that have been in the pipeline for some time.” When looking at large public transactions it would be fair to say that the market is relatively quiet, however, we are busy with a number of small private placements and other appointments.

There has been a lot of talk of investors being misled by the rating agencies and the investment banks. This I think is unfair on the investors. They are intelligent people and invariably know what they are getting into.

In addition, we are not solely focused on the debt market - we are trustees for a variety of esoteric transactions and structures. For example, we are busy working on various retail targeted structures, which have not been impacted as much by this market.

I believe that everyone has played a part in causing the current crisis. I don’t believe there is a single person or group who should put their hand up and take the fall.

After talking to various people in the market it is clear that there is a lot of activity currently happening beneath the surface, so as soon as the market turns around there will be a surge of issues that have been in the pipeline for some time.

Has the US subprime crisis now been contained or is there more to come? I would suggest that it is more a case of it being identified

rather than contained. I think there may be more to come, possibly in a different direction, and not to the same degree. Equally, some of the horror stories you hear about what is looming may not happen. So I would say that it has been identified to some extent, but not contained.

Issuance European Credit Crunch

Given that ABS issuance volumes were down by 30% last year, what does 2008 hold in store? I think that it will be fair to say that issuance will

still be down; this is purely because, for the last few months, very little has been issued. As a result the levels for issuance this year will still be low. However, I think that as the market changes new structures will emerge. Also, the nature of debt issues in the capital markets is to constantly evolve. Every time something changes, whether it’s internal or external forces it evolves bringing slightly different formats or structures. I still see this as a buoyant market, even if we are not reaching the levels we were in 2006 and at the beginning of 2007. It might take a bit of time to return, but I’m confident that it will reach that level again.

Eurozone borrowing by business posted record growth in January. With this in mind, and in spite of global financial turmoil, has the 15-country region avoided a credit crunch? Euro zone borrowing is

an interesting market. Some sources say it has gone up and some say it has gone down. Also, you cannot look at the Euro zone as one homogenous market; it is a complex group of differing countries. Have we avoided the credit crunch? Well, not totally. Will it have the same impact here as it has had in the US? Probably not as we don’t have the same financial structure and regulations. This also comes back to the point that Europe is made up of different countries all working together with one aim. You have to remember that we have different regulations, jurisdictions and lending requirements in each country.

Subprime Crisis

Who is to blame for the US subprime crisis? The central banks, homeowners, lenders, credit rating agencies, investors or a combination of the aforesaid? I don’t think you can attach blame to a

single group of people. There are a number of people involved at many different levels. Some people have a more in-depth knowledge than others. One of the key factors here is information and how people understand and gain access to it. 90 | Money Markets

Trends & Drivers

Securitisation is an excellent tool for the integration of capital markets with asset markets – hence, its basic economic rationale is beyond question. However, given the current climate, will there be some rethinking on off balance sheet and special purpose entities? The use of special purpose entities will continue, however, they

Securitisation

•••

may very well be used in a different way. The assets are always going to be different as they are always changing. The one thing you can be certain of is that the market, and the people who structure and put ideas together, along with those who move things forward, will be learning from every twist and turn in the market whether this be positive or negative. Has the proliferation of non-standard products impeded the development of a liquid secondary market for many types of securitisations? I think you need to look at the nature of non-standard

products. These tend to be structured for one particular investor, or a small number of investors with specific requirements. And if that investor then needs to take that investment off their books, for whatever reason, it is going to be very difficult to find another investor who has got exactly the same criteria in the secondary market. So yes, I believe that in some ways it is impeding the development of the secondary market but its existence is not necessarily a bad thing. Does securitisation create an agency problem by separating the originator from the ultimate holder? I think that a lot of what is go-

ing on has to do with access to information. You have a great number of intermediaries involved in all of these transactions.

Do they all have the right information, and is that information readily available? Whether it is readily available at the originator stage, and if there is information that they can’t share for whatever reason, then I think that yes, there is a problem. Does it create an agency problem? I’m not sure. Has the market been structured to cope with this? Yes, but there is still some way to go. Has the complexity of certain securitisation products led to investors relying too heavily upon third-party credit analysis? I have

already answered this question in part earlier on; however, I would like to reiterate the point. The types of transactions that are being sold to institutional investors are being sold to people who are knowledgeable about the market. I certainly don’t think that we should underestimate the intelligence of the investors who are buying these products. Do they rely on it too heavily? I think a lot of investors rely on it to a certain extent. I would hope that it is not the only factor in their decision making process and that they’re also looking in detail themselves. I think the risk is that, as with any market that grows significantly in a short space of time, you get repetition in the transaction structures. People are buying things on the basis that they are repeat transactions with the same structure. However, securitisations are never repeat transMoney Markets | 91

actions. The assets are always slightly different, this may be down to the jurisdiction, the type of assets, the tranching or any number of other differences, but there is always something different. Any investor who buys something on the basis of it being the same as the last deal needs to be very careful about what they are getting themselves into. But as I have said, investors are intelligent people. I don’t think we should underestimate their capabilities.

“I still see this as a buoyant market, even if we are not reaching the levels we were in 2006 and at the beginning of 2007. It might take a bit of time to return, but I’m confident that it will reach that level again.”

Growth Prospects

As we consider the outlook for the credit markets, has the dust now settled? I think that in some ways it has lessened, but not nec-

essarily settled. A lot of people I’ve talked to are planning for when things have significantly calmed down. There are still headlines now of people selling a substantial amount of their holdings – now, you must ask yourself, who is buying these? I’m not sure – there must be buyers out there. Has the subprime crisis stymied your growth? I don’t think it has

stopped our growth at all. We’ve always looked at ourselves as a niche market player. We are looking to grow the business in the markets that we service as trustee and SPV provider. Actually, what it has done is identified opportunities for us that maybe weren’t clear before – it has given us an opportunity to confirm our commitment to the market. I think it has also helped to highlight where our strength is – we are not purely focused on the debt market. As a trust company we have other strengths and abilities. You’ve opened an office in Dublin and acquired Nieuwenhuis Services B.V. in Amsterdam. How do the aforementioned activities factor into your expansion plans moving forward? As a result of

these developments, we now offer professional SPV services in a number of jurisdictions including the UK, Ireland and The Netherlands. We have a manned office in Dublin and manage various transactions already in the Irish market. Nieuwenhuis, now renamed Capita Fiduciary B.V., is an existing Dutch SPV provider with a variety of clients including funds and per92 | Money Markets

sonal clients. Prior to the acquisition we had mutual clients, so were very comfortable with the way they work and they are very similar to us in many ways. Capita Fiduciary Group will continue to look for development and growth in Dublin, Amsterdam and the UK. We also have a Jersey office covering the offshore market that has seen significant growth in the last few years and is continuing to develop a full suite of fiduciary services for the specialist offshore market. However, we are mindful that our parent company, Capita Group Plc, is a UK-focused outsource company and that core business and focus is not going to change. As such, we will continue to grow our core services in a measured way to enhance our existing successful business model.

Biography Sue has over 24 years debt capital markets experience having worked as an issuer, arranger and service provider on a wide range of debt products including securitisations, CLO’s, CDO’s, MTN programmes and stand alone debt issues. She has over 7 years direct experience of providing corporate trustee services and joined Capita Fiduciary as a Director in November 2006.

Securitisation

•••

Taking Workflow Solutions to the Next Level »Ira Keller talks to Money Markets Introduction When did Lewtan Technologies first enter the asset-backed securities (ABS) market? Lewtan has been in the asset-backed securi-

ties market since 1986. We entered the market with a product called ABS System, which automates securitisation administration. The ABS System still remains a core contributor to Lewtan’s growth today. Since then we have augmented our offerings to the issuers of ABS/MBS with outsourced processing (called Service Bureau), structuring capabilities (during the fourth quarter of 2007 we plan to launch our latest product, called Structuring Assistant, which will enable issuers to model deals themselves), web-sites, investor relations, and regulatory disclosure capabilities (ABS Discloser), and reconciliation services to handle and verify data produced and/or calculated by third parties (RECON). In addition to this and other product features, we also provide consulting and implementation services.

market trends and direction. Our clients are a great source of inspiration. They’ll come to us with business problems and we’ll try to come up with solutions that resolve the issues they’re facing. We also monitor and track the market through industry publications coupled with the industry experience of our implementation, sales & marketing and management teams, Regulatory directives provide us with an opportunity to participate in a variety of forums. For example, we participated in the SEC’s Regulation AB debate and provided assistance with the formation of said regulations. Finally, we also conduct formal market research on a regular basis to gauge a pulse for the market.

“We entered the marketplace as a software company with a large back-office system geared to securitisation administration. Now we do everything under the sun, not only for issuers, but for investors as well.”

A lot has changed over the last twenty years. We entered the marketplace as a software company with a large back-office system geared to securitisation administration. Now we do everything under the sun, not only for issuers, but for investors as well. We’re well known in the investor market for a product called ABSNET, an online ABS surveillance portal devoted to global securitisation information and data. We provide the aforementioned data to over three hundred clients worldwide through ABSNET online (www.ABSnet.net), and via direct-access to our database of securities information, which we will be expanding in 2008. You were the first to offer an automated reporting system for ABS issuers. How do you continue to anticipate the needs of issuers and investors? We actually do several things. We have a very

close relationship with our clients; we talk to them frequently about

Although you are headquartered in Massachusetts, you also have an office in London. How significant is the European market to Lewtan Technologies? The European market

is a major driver when it comes to the growth of Lewtan. Europe is responsible for 30% of Lewtan’s business globally, and we expect this percentage to rise.

We were the very first to launch a comprehensive surveillance data library of European deals, as well as the first to marry that historical surveillance data library to a set of deal models that covers the largest number of European ABS and MBS bonds of anyone in the industry. Our ABSNet product has become the standard for ABS performance data in Europe. Our London office gives us greater access of the rest of the European nations, as well as access to the rest of the emerging world. We took a chance on the European market in the early days when it was less mature, and the market has blossomed tremendously. What separates Lewtan Technologies from other work-flow solution providers currently operating in the securitisation space?

Money Markets | 93

Over the years we’ve gained a great deal of experience, working with a diverse cross-section of buyers and sellers of assetbacked securities. One of the reasons issuers come to us, in particular, is for our expertise, it’s not just about the technology. When you combine this with the large data sets we’ve acquired in asset-backed and mortgage-backed deals, it’s a very powerful combination that few can replicate. Secondly, we are really a hybrid of several different companies. As I mentioned earlier, we got our start in the software business and as such continue to offer software tools and systems that support the needs of our clients. Some of the aforesaid systems are installed, some are hosted.

Helicopter View: Evolution of the ABS Community and Cross Border Securitisation Kindly identify the commonalities inherent in emerging ABS markets? There are basically three commonalities that we have identified.

The first is a significant history of consumer debt/credit performance of

we source data from servicers, issuers, rating agencies, trustees and other market participants. Our job is to bring all of these disparate pieces of data together for the benefit our investors who expect a one-stop data and information source. As the industry’s leading source for assetbacked securities surveillance, ABSNET helps issuers and investors monitor the credit and headline risks tied to structured-finance deals. However, the database of ABS deal performance data attached to this tool also provides significant benefit. How do you ensure content levels remain current?

ABSNet’s database of collateral and pool performance data is, without question, the most comprehensive in the industry. We cover close to 17,000 deals worldwide, and that includes 150,000 unique bonds. We ensure that the database remains up-to-date via a combination of automated tools linking ABSNET to key issuers and trustees, together with a team of bond analysts, who are responsible for monitoring all sources of new issuances. These sources include the SEC’s EDGAR database for deal filings, trustee and servicer websites for new deal report-

“As the premier content aggregator in the securitisation space, even rating agencies subscribe to our service.” underlying assets. The second commonality is a regulatory environment that’s conducive to securitisation. Third, and final, is whether there is an accounting framework which provides remoteness for bankruptcies and off balance sheet financing. When a market demonstrates these qualities it tends to be conducive to asset-backed securities issuance.

ing, rating agency feeds, industry research for new deal pipeline reports and even personal contacts within the underwriting community.

In your opinion, which territories demonstrate the most significant potential for high yield and continued issuance growth? If I look at

Regulation AB

where we’ve done business, and where we’re starting to do more business, I would say that Eastern Europe, in particular the former Soviet block, is really the next assetbacked/ mortgage-backed marketplace. We’ve also witnessed some consumer, mortgage and asset-backed activity taking place in South America, Latin America, China, India and Australia as well. In terms of diversity, we’re working with our investors on asset-backed deals that have been issued in Kazakhstan and Russia. So, Eastern Europe, the Pacific Rim, Latin and South America are certainly the territories to watch.

How is the market coping with Regulation AB? It’s a great thing

What do you consider to be the motivations for securitisation in each of the aforementioned regions? The primary drivers tend to be

source of funding and cost of funding. Regardless of which market you look at, including the US, when the conditions favour better financing, liquidity and lower cost financing, securitisation activity will take place.

Surveillance Tools Your surveillance tool, ABSNET, has gathered significant momentum recently. How many news sources does the aforementioned tool draw upon? It’s a product that garners news and research

from hundreds of content sources and thousands of data sources worldwide. In addition to rating agency reports and research from leading investment banks, we collect and distribute market commentary and articles from the leading periodicals pertinent to the securitisation industry as well as hundreds of newspapers worldwide. On the data side 94 | Money Markets

As the premier content aggregator in the securitisation space, even rating agencies subscribe to our service.

and you’re going to see more and more of the world adopts the standards Regulation AB fosters. As I mentioned earlier, Lewtan was very involved in the inception of Regulation AB, especially when the regulations were being formulated. Regulation AB is a reflection of best practices, many of which were already taking place in the industry. However, it has codified and memorialised them, making them requirements. A year and a half down the line there is certainly a greater understanding of the rules. Some of the best practices that I referenced earlier have actually started to emerge across a wider demographic. The impact of Regulation AB has been positive. The adoption will be slow but steady. You offered a free Regulation AB Webinar on July 18, 2007. Did this receive the level of support you expected and do you have any plans to build upon this moving forward? We had a very suc-

cessful Regulation AB Webinar. The white paper that accompanies the Webinar will be available shortly. Having worked with about 40% of US residential issuers on their static pool reporting and disclosure requirements, we try to act as a shared source of knowledge on best practices. In my opinion, the issuers have struggled to interpret the regulations. Consequently, mapping out a path for their respective firms has been

Securitisation

•••

difficult. However, I believe Lewtan’s Webinars have helped with this, which is why we’ve had such high levels of participation. Regulation AB, effective January 1, 2006, is the SEC’s implementation of formal rules designed to improve investor insight into the nation’s asset backed securities market - estimated at more than $1.2 trillion in annual volume. What impact has this had on transparency? Transparency is the watchword, which is why,

as I suggested before, you’re going to see more and more of Regulation AB, not just in the US but elsewhere. Ultimately, the goal is greater transparency and communication. It’s about giving investors more comfort and knowledge. Indeed, our ABS Discloser clients have told us that they are achieving better margins and more basis points per deal because they are able to provide the market with better information. This has always been our goal; this is why we started this business. With respect to Item 1122, of Regulation AB, what do you consider to be the challenges attached to the CPA attestation process? Let us

start by defining what Item 1122 means. It’s basically compliance with applicable servicing criteria. The aforementioned Item 1122 requires servicers to assert and assess their compliance within the servicing function and report on said assessment of compliance setting forth the appropriate criteria. The servicer also has to obtain an attestation report from a PCAOB registered accounting firm, it’s like a comfort letter. So, in summary, Item 1122 requires two specific deliverables from servicers, an assessment of compliance, how they are doing against the regulations, and an accountant’s attestation report, an indepenent audit. In the case of deals which have multiple servicers, each servicer whose activities represent more than 5% of the pooled assets must comply with the auditor’s attestation report. This report includes disclosure of any non-compliance with the servicing criteria.

months? The next year and a half is going to be very exciting for Lewtan. We plan to introduce a number of new products in 2008 together with various product enhancements. We’re actually developing, as we speak, a next generation ABS System, the product that started the company. The product’s redesign is all but complete, and we are at the implementation stage with several clients who will go live before the end of the year.

As to the challenges attached to the CPA attestation process, the primary area of debate that still exists in the marketplace is the interpretation of what constitutes material non-compliance.

As I mentioned before, during Q4 2007, we plan to release the next version of our cash flow modelling software – Structuring Assistant. This version will enable end-users to model their own deals as well as to use the deal models that are in our library.

From a Lewtan perspective, Item 1122 has driven the need for systems, systems with better data and more output, systems like our ABS System, which can support audit reviews and regulatory reporting.

In addition to utilizing ABS surveillance data on-line or in an Excel or XML extract, as our customers do today, we plan to launch a more robust Bulk Data offering in 2008, as well.

How do you assist issuers with ABS disclosure? With the adop-

Finally ABSNET, which was launched in 1998, is in the process of being completely redesigned to more effectively identify outliers in credit performance so that our investor clients can take advantage of the data infrastructure investments we’re making. The timeliness of data, the comprehensiveness and quality of data, and the client’s ability to use that data will be significantly enhanced.

tion of Regulation AB, issuers have to provide static pool information as part of their data on public ABS/MBS transactions for the very first time. The data can be incorporated into a prospectus by reference or via a website, rather than in the prospectus itself. We custom-develop, host and maintain websites for our clients. The ABS Discloser product was created as a best-practices tool in order to improve the transparency and liquidity of securitised transactions by highlighting and illuminating deal performance. Again, as I mentioned earlier, ABS Discloser clients have been able to improve transparency, deal margins and basis points, because they have been able to provide investors with better information, which in turn facilitates and enhances the investor’s level of comfort.

The Future In terms of product innovation, what can new and existing clients expect from Lewtan Technologies over the next twelve to eighteen

Biography Ira Keller is the President & Chief Executive Officer of Lewtan Technologies. Mr. Keller oversees the company’s strategic direction and all operations. He also serves on Lewtan’s Executive Management Committee and was formerly Chief Operating Officer as well as Senior Vice President of Sales & Marketing. Prior positions include Senior Vice President & General Manager at Starpoint Solutions, Group Managing Director and Senior Vice President & General Manager at Thomson Financial and VP of Marketing for Sungard Financial Systems. Mr. Keller holds a BA in Economics from the University of Massachusetts and an MBA in Finance & Marketing from Boston University’s Graduate School of Management.

Money Markets | 95

List of Contributors A

Alpha Bank Arion Custody Services Australia and New Zealand Banking Group Ltd

Bank of Ireland BHF-BANK BNP Paribas

Capita Fiduciary Citco Group Citigroup Computershare

DBS Bank Ltd

EFG Eurobank European Central Bank European Securitisation Forum

96 | Money Markets

FirstRand Banking Group

Gulf Custody Company

Information Mosaic

Lewtan Technologies

Marfin Popular Bank

National Bank of Greece Nordea

SEB Standard Bank

Thomas Murray

UBS Union Bank of California

Vontobel Group

Wells Fargo

Swiss precision in Wealth Management.

As one of the few independent Swiss private banks, you can count on us for first-class, individual advisory services and the innovative thinking that comes from being active in international asset management. A unique combination of advantages from a single source. For performance of the highest standard. Vontobel â&#x20AC;&#x201C; The Financial Managers.

Private Banking Investment Banking Asset Management

Telephone +41 (0)58 283 71 11 www.vontobel.com

Zurich Lucerne Geneva Frankfurt Munich Cologne London Milan Vaduz Luxemburg Salzburg Vienna Madrid Marbella Dubai Grand Cayman Vancouver New York