ISJ44 Full Mag

8/14/2019 ISJ44 Full Mag

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THE GLOBAL SECURITIES SERVICES INDUSTRY MAGAZINE

Custody: GermanyUS: Transfer Agency

Executive Profile:Alain Closier, SGSS

Fund Administration - Middle East

Panel - African Custody

Analyse This - Technology

Nov/Dec 2009

Volume 6 No. 44

GBP 25 - UK, ROW

USD 45 - America

EUR 35 - EMEA

www.ISJ.tv

Progress of

the processCost and STP in todays DC funds

THE GLOBAL MAGAZINE OF ASSET SERVICING


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1

Directors understanding ofexecuting risk management

Managements capacity to define riskmanagement structure and processes

Unclear understanding of goals of riskmanagement process and structure

Risk information is not linked tostrategic and operational objectives

Editor-in-Chief:Roy [email protected]

Features editor:Ben [email protected]

Senior correspondent:Craig [email protected]

Reporter:Kimberley [email protected]

Contributing editor:Anthony Harrington

Account managers:Cicely Lewis

[email protected]

Eradat [email protected]

Senior account manager:Patricia De La [email protected]

Digital media producer:Peter [email protected]

Operations manager:Nicolette [email protected]

Managing director:Jon [email protected]

Chairman:Mark [email protected]

2i UK 16-17 Little Portland Street,London W1W 8BP, UKT: +44 (0) 20 7299 7700F: +44 (0) 20 7636 6044

2i USA 410 Park Avenue, 15th FloorNew York, NY 10022T: +1 212 231 8421 F: +1 212 231 8121

2009 2i Media

All rights reserved.No part of thispublication maybe reproduced, inwhole or in part,without priorwritten permission

from the publishers.ISSN 1744-151X

P.08 Executive Profile P.12 Transfer Agency P.19 Panel DebateP.16 German Custody

Heads upISJ Investor Services Journal

company.In the European market there

is in some ways a split betweencustody providers expoundingthe benefits of their single-market focus, and those whoseambitions are to establisheda pan-European offering. Inthis issue, the market profile ofGermany finds providers thatrepresent the former; whereasISJs interview with SGSSsglobal head, Alain Closier, findsa dedication to a multi-marketservice. Multi-market providerscan mean consolidation andacquisition something thatmay increase next year asfinancial stability gives groundfor ambitious providers to claimgreater market share, in morecountries.

Throughout these

developments this year, pensionfunds around the world haveseen significant upheaval.Volatile markets earlier 2009depleted trillions of dollars frombalance sheets. Securities lendingbecame a significant concern forsome, particularly in the US andthe UK, as the overhang of short

11 21 3102 03 13 23 2405 2607 27 2809 29 300601

selling bans from the previousyear was followed by a widerconcern with counterparty riskand the understanding of theexact constitution of the lendingprogramme.

In this issue we focus onthe administrative headache

playing out for ever-swellingdefined contributionschemes. Accounting andmessaging, involving somany parties including - asAnthony Harrington notes- scheme trustees, planadministrators, third partyscheme administrators andinvestment managers willcontinue to increase incomplexity for the middle andback offices, spurring the needfor enhancements to straight-through processing.

I look forward to helpingenhance the depth of coverageof ISJ and the team remainsopen to hearing your viewsand capturing the debates andchanges as they develop.

Roy Zimmerhansl,Editor-in-Chief

25

I take on my new role atInvestor Services Journal amid adynamic market environment incustody and securities services,not to mention the widerfinancial sector.

Though new legislationand government and centralbank intervention has aidedthe stabilising of the financialsystem to a degree, assuring thatassets are kept safe and correctly

administered has become ofparamount importance forthe wide and miscellaneousaudience of institutionalinvestors.

We have seen more hedgefunds opening custody accountsto achieve this aim, and thegradual institutionalisation thathas brought this sector closer tothe mainstream continues to bea very interesting development.

For the providers servingthese funds, it has caused arethink in the breadth of serviceavailable, and the line betweencustodian and broker dealer and the activities expected ofeach may continue to blur iftrading and safekeeping servicesare sought from the same

Editor-in-Chiefs letter

3220

New challenge

P.04 News

18

25%

28%

33%

51%

Top Challenges in Providing Effective Risk OversightSOURCE: Celent/Oliver Wyman

Month Winner Client Location Assignment Mandate size

November RBC Dexia VIA Rail Montreal Custody/sec lending CAD1.5 billion

November BNP Paribas SS Brevan Howard AM London Global Custody n/a

November RBC Dexia Georgian Capital Part. London Custody, administrat ion n/a

October CIBC Mellon Marrett Asset Mgmt. Toronto Custody n/a

Latest mandates

..................................................................................................................................................................................

10 151404 2208

P.17 Analyse This

12 16 17 19


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2

Contents

Letters

News The last month ofupdates in custody, clearing,securities lending, legal,regulation, prime brokerage

and technology.

News analysis -

Domiciles use art of

persuasionPlus, an analysis of the latest

catchphrase - custody plus

The European Dream -

Executive ProfileAlain Closier of SGSS talks

strategy with Ben Roberts.

Progress of the process

-STP in pension funds -Anthony Harrington analyses

the middle and back office

demands of DC pension plans.

US name for a global

service -Transfer

agency - Kimberley Fergusoninvestigates the growth anddemands in US transfer agency

Middle Eastern promise

- Fund AdministrationCraig McGlashan discovers theenhancements in the MiddleEasts fund administration

market.

Germany Uprising

- CustodyBen Roberts sees almostinnumerable opportunities forcustodians and administratorsas Germany continues its

resurgence.

Analyse This - European

CustodyGoran Fors of SEBgives his thoughts aboutservicing in multi-markets,and Robert Mattsson-Axenof Nordea discusses the

implication of CCP in the Nordicregion.

Custody services, Africa -

Head to HeadISJ brings together to industryexperts to discuss the Africansecurities services market.

Still on the fence -

Securities lendingPension funds are stillweighing the benefits with the

risks in securities lending.

Corporates in action- Shareholder services -Update and comment on the EU

Shareholder Rights Directive.

Directory of servicesISJ listing of key asset

servicing praticioners and

vendors.

Contents ISJ Investor Services Journal

01 11 21 3114 3203 13 23 2405 15 2706 07 17 18 2809 19 2910 20 3002

02

04

06

10

08

12

04 08 12

14

24

In this issue

Custody

Fund Administration

TO RENEW YOUR SUBSCRIPTION PLEASE TELEPHONE

+44 (0)20 7299 7700 OR VISIT... WWW.ISJ.TV/MEMBERSHIP

18

COVER STORY

People

16 25 26

COVER STORY

22

Letters

2009 has seen a numbero regulatory milestones in thepayments world including thePayment Services Directive(PSD). The PSD came into orceon 1st November and createsa new category o PaymentService Provider the PaymentInstitution (PI).

PIs are intended to embracebusinesses which are notcurrently regulated as eitherCredit Institutions (banks,building societies etc) ore-Money Institutions (pre-paycards, certain mobile paymentservices etc) and shouldencourage the growth o new,innovative payment services,providing an alternative to thetraditional bank services.

While industry opiniondiers as to whether banksshould be concerned about thethreat o PIs entering the marketand aecting their traditionalpayment business, the PSD

does mean that payments canno longer be regarded as theexclusive preserve o the banks.PIs will compete or this businessand create new payment services,particularly in the mobile andonline world.

While or the banks,payments are a core competencyand they enjoy a long-establishedpresence within their markets,PIs represent a new and arguablyattractive option or consumers.PIs may also be able to develop

simpler products and bring themto the market more quickly thanthe banks. O course, some banksmay seek co-operation with PIsor could even set up their own.

However, whatever strategy thetraditional payment institutionsdecide to ollow, 2010 will see ashake-up o the entire Europeanpayments market and hopeullyalong with it urther innovationand healthy competition.

Martin Wilson,COO, VocaLinkn

Your recent article Got themessage? seemed enthusiasticin garnering criticism orSWIFT and I believe it lostsome perspective o theimportance o SWIFTs coreservices - to provide sae meansor institutions to move moneysecurely and transmit back ocemessages, as, indeed can BT.

As I see it, the mutual unddebate should not ocus onSWIFT or BT, nor their businessmodel. Nor should it ocus onmessages or ISO standards, asseems to be the editorial trend.Instead, the debate shouldocus on industry demandor interoperability. How canthe players collaborate to helpthe mutual und industryachieve its business objectives?Distribution, growth, processimprovement, cost reduction,risk management improvement.

As SWIFT moves intoproviding ront oce services

specically the executiono mutual und transactions and oering their servicesor Tier 2 and Tier 3 rms,is such a complex solutionbest or the industry? Theinrastructure expenditure couldbe cost prohibitive or what isa straightorward approach totransacting mutual unds. Myconcern isnt competition, wealready collaborate. My concernis ull industry STP. I, say, 20%o the market cannot automate,

80% o the industrys eorts willbe unnecessarily orced to serve20% o the community. Thisrestricts the benet or everyone.

Calastone and SWIFT alreadyinterconnect to interoperate.Whatever the size o the mutualund rm, it can choose howbest to achieve automation and100% STP. No-one need beexcluded.

Kevin Lee,Managing Director,Calastone Ltdn

Dear ISJ Dear ISJ

To express your views, write [email protected] blog atwww ISJ.tv

19

22

Progress of the processSTP in administration,page 10

16

20

Securities Lending


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4

News ISJ Investor Services Journal

01 11 21 3112 22 3203 13 2314 2405 15 2506 16 2607 17 2708 18 2809 19 2910 20 3002 04

Custody

Fund Administration

Roy Zimmerhansl, principalat FinTuition, the securitiesnance training provider, wasappointed editor-in-chie oInvestor Services Journal (ISJ),

Global Securities Lending (GSL),GSL.tv and ISJ.tv. In 2010 Roywill celebrate 30 years in thesecurities services industry inareas such as custody, primebrokerage, investment bankingand lending platorms.

Northern Trust updated itsCustody Made Simple industryguide. The 16 page guide, aimed

at trustees, pension schememanagers and other scheme-related parties, is availablethrough the UKs NationalAssociation o Pension Funds.

The custodian also boosted itstransition management servicewith a pre-trade analysis reportthat helps clients evaluate thepotential costs and risks oswitching investment managers orchange asset allocation policy.

BNP Paribas Securities Services

Singapore is to provide globalcustody and und administrationto Aberdeen Asset ManagementAsiasselect and South East Asiaunds. BNP Paribas Trust ServicesSingapore Limited* is the newTrustee or theSelect unds.

State Street won a CAD2.2 billionmandate rom the SaskatchewanTeachers Federation in Canada.The collection o pension andgroup benet unds will receivecustody, und accounting andsecurities lending. Last monthRon Logue, chairman and CEO othe bank, announced he wouldstep down next March to becomenon-executive chairman. JayHooley, president and COO oits global investment servicinggroup, will assume the role.

Kevin ONeill and Samina Vernonjoined State Street GlobalMarkets London transitionmanagement team.

Ken Lewis, CEO oBank ofAmerica Merrill Lynch,announced his retirement.

News

Securities Lending

RBC Dexia Investor Serviceswas re-appointed as custody,securities lending and investmentanalytics provider or VIA RailCanada Inc.s CAD 1.5 billionpension plan. The bank was alsoappointed sub-custodian inCanada by Clearstream BankingLuxembourg.

CIBC Mellon Global SecuritiesServices completed its buy-out othe und administration and unit-holder recordkeeping business oFelcom Data Services. Felcomsclient contracts and most o itssta will move to CIBC Mellon.

The level o assets under

management in the undadministration industry droppedby more than a quarter over thepast year, according to a study byCarbon360 Research.

Bank of New York Mellon sawits assets under custody andadministration reach USD22.1trillion at the end o the thirdquarter o 2009, an increase o 7%over the previous quarter.However, the gure was still 1%lower than during the same periodin 2008.

Caliornias two largest employeepension unds - the CaliforniaPublic Employees RetirementSystem (CalPERS) and theCalifornian State TeachersRetirement System (CalSTRS) led a USD200 million lawsuitagainstState Street Corp. orallegedly infating the ees itcharges or oreign currency

trades. The pair claim theyhave been overcharged nearlyUSD57 million in ees. StateStreet categorically denies anyallegations o wrongdoing.

The Payments Services Directive(PSD) came into eect on 1stNovember to mark the latestmilestone in the levelling o cross-border payments in the Eurozone.The directive, created by the

European Commission and

implemented by nationalregulators, aims to create a singlemarket whereby every non-cashpayment is eectively domesticalong with SEPA Direct Debit, alsolaunched on the same day.

Euroclear Bank, the depositaryarm o the Euroclear Group,the trade settlement giant,processed the rst ever cross-border tri-party repo transactionusing Korean government debtas collateral or DekaBank andMorgan Stanley. The chairman othe Groups Finland and Swedenoces announced he is to leavethe group in the second quartero 2010. Kjell Ar vidsson, 57, aormer chie executive ocero the Nordic Central SecuritiesDepository (NCSD), played a keyrole in the integration o thetwo Nordic operations into theEuroclear Group, ollowing theacquisition in October 2008.

Trayport and Percival Softwarepooled their respectivespecialisms in trading and post-trade with the integration o twoo their key systems.Trayports Exchange TradingSystem, sotware with a particularclientele in commodities, hasintegrated Percivals Depend,which provides clearing,settlement, depository, and

registry system or equities andbonds, to connect seamlessly andin real time to a ull clearing andsettlement service.

The US Federal Reserve mayincrease its reverse repo activityollowing a conrmation that itwas testing such trades to alterliquidity and cash levels in themarket.

The central bank conrmed to

the Financial Times that it wasexperimenting with reverse repo selling assets to traders or cashto repurchase later at a higherprice to soak up some o thebillions o reserves in the nancialsystem ater two years o ederalsupport.

KAS BANK, the Dutch custodian,suered a steep decline in itssecurities lending businessthough was hopeul o a reboundin 2010, according to a release tosupplement their third quarter

results in mid October.

J.P. Morgan Worldwide SecuritiesServices upgraded its securitieslending dashboard to allow clientsto monitor their lending activities

in a customised view withreal-time inormation availablethrough the banks web-basedportal or treasury and securitiesservices, ACCESSSM.

MAG Group, the Moaaq AlGaddah Group o Companies,based in Sharjah, United ArabEmirates, selected IT2, the keytreasury management system oT2 Treasury Solutions, to satisy itstreasury best practice objectives.

Schroder Investment

Management implementedSimCorp Dimension unctionsacross our countries within itsAsia Pacic operation.

The European Central Bankadded its voice to the growingconcern over the proposedEU directive on alternativeinvestment und managers. Whilethe ECB welcomed proposals toimprove regulation, it warnedthat unless a level playing eld

was created, Europe could losebusiness. Meanwhile, the majorityo the members o the the CFAInstitute Centre or FinancialMarket Integrity, supported themandatory requirements set bythe proposed directive in a survey.

The US Securities and ExchangeCommission voted unanimouslyto improve the transparency odark pools through a series o newmeasures. According to the SEC,the number o active dark poolstrading on US stock markets hastripled since 2002.

Daiwa Securities Group is to berenamed as Daiwa Capital Marketsrom 1st January 2010.

Dean Backer was appointed globalhead o prime brokerage sales andcapital introduction atGoldmanSachs.n

For more news, as well as eatures,events and video interviews, visitwww.isj.tv

Regulation

Technology

Prime Brokerage

Settlement

Legal


7/36

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6

News Analysis ISJ Investor Services Journal

01 11 21 3112 22 3203 13 2304 14 2405 15 2516 2607 17 2708 18 2809 19 2910 20 3002 06

Domiciles use art of persuasion

Custody-plus has becomean increasingly popularterm o late - but what is itexactly?

The concept can bedescribed simply: a bankscombination o custody andprime brokerage services. Someo the big custodians have seenand acted on the opportunity.

J.P. Morgan and HSBCrecently created teams whichbrought together custody andbrokerage, while NorthernTrust teamed up with primebroker Merlin Securities.

Lee Waite, global head odirect custody and clearingat Citi, told ISJ that while hehad not heard o custody-plusbeore, he recognised the trend.

Post Lehman Brothers,hedge unds ound a lot o theirassets were tied up, he says.Weve seen hedge undslooking to put unencumberedassets in a segregated accountwhich has generally been inone o two orms: a custodyaccount or a trust account.

Waite believes the trend

may become permanent: I

What do you do whenyouare a small jurisdiction and ndyoursel the object o wrath osome not so well inormed butvery important persons in verybig jurisdictions?

Ideally you engage indiplomatic reaching out andeducating things. You arrangevisits. You make sensibleadjustments. You get as many(large) riends to communicatethat you are all about goodbusiness.

This is the plight o oshoretax havens specically theChannel Islands, occasionaltargets or those seekingto uncover what happensoshore.

Jerseys nancial centresupremos enjoyed a verysuccessul visit to China a ewweeks back and the islandnow has a number o Jerseycompanies listed on theHong Kong Stock Exchange.Guernsey, or its part, recently

sent its chie executive inBeijing to wave the islands fag,doubtless with similar success.

On the other hand, theword is that HM Treasuryhas inormed the two CrownDependencies that someEuropean countries who do notbelieve that the islands zero-ten tax policy is in the spirito the EUs business taxationpolicy, and who are sharpeningtheir knives to make their point

more keenly.However, the islandshave the deence with anexceedingly clean bill o health.Mike Rothwell, Jersey FundsAssociation spokesperson,points out that 2009 has seenmany independent reportsproclaiming Jersey as theworlds anti money launderingleague tables. The OECD inits White List, published aterthe G20 said that Jersey metthe requirements in ull with

no urther work required to

be done on its anti moneylaundering provisions, andwas in act, top o the list oo-shore centres or goodpractices, Rothwell says.

The International MonetaryFund (IMF)s review o theisland two months ago alsoput Jersey at the top o theregulatory league tables. Theirconclusions on our anti-moneylaundering ramework scoredit as the best jurisdictionglobally, he points out.

A report by the City oLondon, which produced areport ranking global nancialcentres, placed Jersey at 14th,ahead o Dublin (23rd). Mostrecently, there is HM Treasuryspublication on 29 October oMichael Foots Review o theopportunities and challengesacing Guernsey, the Isleo Man and Jersey and sixOverseas Territories, includingBermuda and Cayman Islands.

In this report, the

Dependencies andOverseas Territories (OTs)are oered benchmarkrecommendations on topicssuch as tax transparency,nancial sector regulationand tackling nancial crime.The Treasury also publishedDeloittes submission to theFoot review, on the theme:Why do corporates use theCrown Dependencies andOTs.

Deloitte ound: Funds areattracted to these territories bycertainty o tax exempt status,and by the established legal,regulatory and proessionalinrastructure. Luxembourgand Ireland are the maincompetitors in this market.

For Rothwell, what givesJersey (and Guernsey) anedge over established onshoreregimes like London areregulatory innovations such asJerseys expert unds regime. A

sophisticated und targeted at

knowledgeable investors andinstitutions can get regulatoryapproval in a matter o days, asopposed to weeks or months.

Flexibility and speedhave been a key theme in thegrowth o these jurisdictions,Rothwell says. The report isin eect saying that not onlyis Jersey very well run, it isa net contributor to the UKeconomy and a very positivething to have. A similar casecould be made or our impact

on the US, Rothwell says.That said, there is a

recognition on the islands thatthe zero-ten tax regime willneed to be adjusted to refectthe new, post-crash eelingo what constitutes air playacross the developed world.Jersey has acknowledged thatwhat used to be consideredcompliant ve years ago interms o the zero/ten proposalsmight not be compliant in thisnew era.

We are looking at it areshand we will move to another

regime that might be morecompliant, he concludes. n

Top marks rom research bolster reputation o Crown Dependencies

Does Custody-plus add up?

think this whole concept orisk management and riskmitigation is here to stay. Thislast experience was so painul

that the lesson is not going togo away quickly.

While no structuraldecision has been made tocombine the two organisationsas some o our competitorshave done, our custody unitalready works extremely closelywith our prime brokeragedivision, he adds.

Other sources suggestthe name is all that is new,however. With some primebrokers being orced to

organise themselves as bankholding companies andtraditional custody bankshaving other services... theresalways been uzziness to whenyoure a bank and when yourea prime broker, explains one.

I dont know i itsanything new, other thanmaybe just a new wrapper.

Whatever it is called,custody-plus is here butwhether it is really adding

anything is open to debate.n


9/36

Europe is working towards the realisation of SEPA.

The implementation of standardised payment

products and systems will lead to greater efficiency,

but also calls for extra attention when it comes

to specific local market demands. Equens clearly

understands this. We offer a variety of SEPA solutions

and also facilitate global payment services, based

on the International Payments Framework (IPF).

Whats more, unlike other European payment

processors, Equens is deeply rooted in a number of

European countries. We use our profound knowledge

and expertise concerning local markets to apply the

strengths of local payment systems to European

payment systems and beyond. Do you want to be

sure that your specific local needs will be catered for?

Then Equens has the solution. www.equens.com

nothing

equals

Everyone thinks globally.

We also differentiate locally.


10/36

8

Executive profle ISJ Investor Services Journal

01 11 21 3112 22 3203 13 23 3304 14 24 3405 15 25 3516 26 3607 17 27 3708 18 28 3809 19 29 3910 20 30 4002 06

The European dream

Alain Closier has played a signicantpart in the swit emergence o SocitGnrale Securities Services as a globalplayer in custody. The arm o the Frenchbank is the second biggest such provider inFrance, and the seventh in the world, andMr Closier has been developing the bankas an international custodian since 2003.

The philosophy is to provide thebest pan-European service, and whetherthrough acquisitions or organic growth

there has been a domino eect o countriesin which SGSS has entered and claimedmarket share.

France is our domestic original marketand Italy is now the second market aterthe acquisition o Unicredit. But we wantto more and more be a pan-Europeanplayer proposing to our clients a pan-European oer, he says, adding: I saymore and more because Europe is not onecountry under consolidation.

The choice between acquisition and agrass roots set up is oten down to specicsituations. The purchase o Unicredit in

2006 arose rom a rare occasion in whichan Italian rm was up or sale, he explains,and the entrance into the German marketthrough buying a und administrator wasequally opportunistic.

As a counter example, he says SGSShas around EUR50 billion under custodyin Spain an interesting unit withoutacquisition. Still he appears to relish thebuying mentality to continue to grow.

Such a strategy is also visible in thebanks entrance into emerging markets,though Closier explains that the companyis selective. Egypt, the Czech Republic,Russia and Morocco are just our o thecountries that the Socit Gnrale retailbank has entered the abric o commerciallie, with SGSS providing a key localpresence or international clients. Weare proposing a comprehensive packageto access to this market in the same way,it has been successul and we have strongdemand in Egypt and Morocco - we wantto do that in a number o countries, thosewhere we can use the leverage providedby the existing presence o the SocitGnrale Group.

Closier joined Societe Gernerale in

Alain Closier, global head o SGSS, tells Ben Roberts about strategy,

acquisitions, and the drive to oer a true pan-European service.

1977 as an economist ater graduatingin this discipline and completing postgraduate studies at the Ecole Nationalede la Statistique et de lAdministrationEconomique in Paris. He moved to theinternational division o the bank inoreign exchange and treasury, beorespending 10 years developing the FIMATGroup, a derivatives broker now NewEdge where he was chairman and CEO.

He then served in the bankingservices division o securities services asdeputy head and then head o cashmanagement, credit cards and retailcustody. Then in 2003 he took the reinsdeveloping the international custody,moving rom a support unction to abusiness.

With multiple mandates won at the endo summer 2009, what are the secrets tothe swit growth o SGSS?

The secret is rstly that SocieteGenerale had a lot o expertise, heresponds. I started ve years ago with2,000-3,000 experts in securities services,and the idea was to put these peopletogether with a clear project along withgood commitment rom your bank andshareholders.

Second, you must have the ambitionto grow. In Europe you cannot develop alocal strategy even i you are big in yourcountry. Your strategy has to be at theregional level, at the European level.

He says Europe is very much a marketo tomorrow considering the signicantchanges to its inrastructure are still in

transition or yet to be implemented.

Target2 Securities the initiative or acentralised public securities settlementplatorm is perhaps the best example othis; it will not come into eect until 2013,and even then, he says, the migration osome countries will not happen just in oneday.

The UCITS IV und structure will bea very important driver or the evolutiono the industry, however, and the acilityor distributing unds neatly complementscustodians with a pan European outlook.

Looking back over the decade, Europehas seen nine years o projects and variableimplementation. The disharmony insettlement has met with policies such asMiFID that have divided and democratisedtrading liquidity. The result has been asustained ragmentation in both the rontand back oce, and the continent overall.

Closier points out that EuroclearsESES countries France, Belgium, andNetherlands provide a model or utureinrastructure harmony. But he adds thatpost-trade systems nevertheless ully

played their role during the nancialcrisis.Now the issue has changed on clearing

and settlement. Beore the crisis withthe consolidation o Europe, we spokeabout decreasing the costs o settlementactories and create one actory, or toorganise a competition between actoriesto decrease costs. Then rom time to timeyou have US players such as DTCC lookingto provide inrastructure or centralclearing.

Now, its a little bit dierent. Nowweve got to consider regulation, systemic

risk, and the decision as to who is theregulator or the inrastructure. Is itpossible to have an inrastructure thatis regulated by a body outside Europe?Is it possible to have a regulator locatedin London with rules which applythroughout the Eurozone?

Dierent regulation is a barrier to suchharmony, he adds. There are projectsto improve the regulation, but you haveno project to create one regulator. Forour industry the key point is to avoidany competition between the dierent

countries on regulation.n

Watch a video interview with Alain Closieron ISJ.tv.


11/36

A Stable Market?

Stock-loan in Stockholm

The Nordic securities lending

industry faces opportunities

and challenges in 2010.

GSL presents an

opportunity for knowledgesharing and networking.

Register online at gsl.tv/nordic

The Nordic SecuritiesLending Summit

GSLGlobalSecuritiesLending|

Presented byLending in 2010

Location: Stockholm, Sweden

Thursday 28th January 10

gsl.tv/nordic


12/36

10

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STP Fund Administration ISJ Investor Services Journal

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The world o dened contribution(DC) pension plans in the UK is smallcompared to the long established worldo nal salary pension plans perhapscomparable in sizes to a pea and apumpkin.

But more nal salary, or dened benet(DB), schemes are being wound down orclosed to new members - with existingmembers being transerred to DC plans.Further, the introduction o mandatory

auto enrolment or employees, into eitherthe new Personal Account style pensionscheme or a suitable alternative DCscheme run by the sponsoring company, isalso on the horizon.

This transormation o DC schemeswill have important eects on their middleand back oces.

As Ed Evers, director o DC Investmentsat Fidelity observes, the average employeetake up o an employers DC schemeprobably stands at around 35% to 40%.Ater auto enrolment, that number willleap to 100%, bar the ew who actively opt

out which traditionally has been a verysmall pool.

In other words, we are talking aboutDC scheme third party administrators andund managers having to cope with triplethe current number o daily transactions assoon as auto enrolment arrives and thisis not taking any account o the rapidlyrising trend to DC membership, he says.

This means that a cumbersome, manualchain o messaging between schemetrustees, plan administrators, third partyscheme administrators and investmentmanagers - based almost entirely today

on axes - is soon to hit an operationalmeltdown. GBP1000 wrongly invested in2009 because o a garbled message or asimple human error can add up to an eyewatering sum o money lost by 2049.

Increasing sta numbers hand-crankthe instructions, investments and reportingprocess as the work load increases wouldadd up to very signicant cost increases orthe administration o DC schemes, whichare already substantially more expensive toadminister than DB schemes, according toEvers.

Instead, the coming changes in the

pensions landscape means humans haveto be taken out o the loop and straightthrough processing (STP) must beenhanced.

Already the problem is beinghighlighted by pension administrationhouses. Mercer, the employee benetsconsultant and und administrationhouse, red out a press release at the endo September headlined: Trustees shoulddemand STP or pension administration.

Their point? Since STP reduces the risk ohuman error, speeds up transactions andreduces the overall cost o pension schemeadministration it is not a nice-to-have, itis a must-have!

Wade McDonald, State Streets head ocustomer management & sales, says thatincreasingly investment managers canexpect trustees to look at a und managerslevels o STP, and not just its perormancetrack record.

Clare Ross, head o serviceimplementation at Mercer, says one o therst requirements in implementing STP is

or the und administrator to link directlyto the investment managers dealingsystem, or buying, selling, switching andpricing inormation. All o this can beripped directly and automatically romthe dealers system as the dealer executesthe trades instructed by the schemeadministrator.

Ross explains that currently, thescheme administrator will either draw orhave the unds electronically sent romthe sponsor company, together with an

investment plan comprising instructions,in accordance with the scheme investmentstrategy as to how the monthly (or weekly)contributions are to be invested.

In many administration arrangementsthis inormation is then sent by ax to thedealer. The dealer makes the trades thenaxes back the price and trade inormationto the administrator and the inormationhas to be rekeyed into the administratorssystem. Simply updating prices on theadministrators system by hand can takeup to three days. With STP, the updatingis automatic, she says. Reconciliation canbe automated and any exceptions reportedand claried or resolved.

From the scheme trustees standpoint,Ross points out, STP massively reducesoperational risk. In the not so distant past,there have been compensation claims inthe six gure region where trades have notbeen done appropriately.

All it takes is someone misreading aax, or keying in the trade incorrectly, orputting money into the wrong und orthe wrong asset class, she comments. DCassets are now growing rapidly, so the risks

are growing in proportion to the volumeincrease.State Streets McDonald says his

organisation has a pivotal role in STP. Weget the fow o requested trades aggregatedrom the plan administrator. We placeand settle the deals and carry out periodicrebalancing o the portolio based on thetypes o unds in the scheme and deal withany multi currency dimension.

I we are servicing the scheme we dontdecide what to buy and sell; we work undereither dynamic or standing instructions,and we have been developing some very

Progress of the processChanges in the world o dened contribution pensions reestablishes the

ocus on STP in the adminstration o unds, nds Anthony Harrington.

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good levels o automation, using availablemessaging providers such as EMX andCalastone, he explains.

The other end o the process is howexternal und managers receive theinstructions rom State Street into theirsystems. I the managers still use axedsubscription and redemption orms then

the bank can handle this to scale andvolume, using well developed manualprocess control systems that it hasdeveloped not just or the DC market,but also or the long term savings marketencompassing lie and pension undwrappers.

I und managers are interested in howto engineer more automation into their ITsystems to acilitate STP, State Street hasa range o proprietary technologies thatit can use to link its systems to the undmanagers in house dealing systems.

The downstream und managers

will have their own transer agencyenvironments to receive and processorders, he says. There are dierentenvironments depending on the managersselected to serve the scheme.

Most managers will consider themarket developments available and willhave made decisions on whether to useSWIFT, EMX and in some cases theymay have outsourced the unction tothird party providers who have theirown inrastructure. We work closelyand consultatively with the managerson behal o the schemes we serve.The important step orward is thatwe leverage our expertise and scale inmanaging operational risk and reducingadministration costs or the schemes, hecomments.

There are dierent ways to do this. Wehave already seen Mercers insistence that itis up to trustees to see that when they addmanagers to their unds panel, they ensurethat the company in question is at leastcommitted to automating its systems, eveni it hasnt actually got there yet. There arealso opportunities here or third parties

to provide gateway type middlewaresolutions that will sit between the undmanagers dealing systems and the pensionadministration layer and translate betweenthe two.

We have an open mind on how allthis is to be achieved. We always lookor standardisation. We dont wantragmentation here because we haveto manage the end to end process oraccurate and timely valuations, McDonaldsays.

His problem, and the problem orall pension administrators, is that there

ISJ Investor Services Journal STP Fund Administration

are any number o dierent proprietarydealing systems out there. The universe osystems that they have to connect to andautomate to achieve STP, changes everytime the trustees add a new und managerto their panel.

We would love to see an industrystandard transport mechanism, but we are

a long way rom that. We have to realisethat axes are going to be around or sometime, he says.

Ed Evers says that Fidelity is out inront o the pack when it comes to STP.The point is that STP makes our dealingprocesses much more ecient and speedsup the process. It is a real win win or us,which is why we have invested a great dealin it over the years, he notes.

Fidelity uses SWIFT messagingprotocols as its basic transport engine. AsEvers says, With some 20 years o historybehind it, SWIFT is ast becoming one o

the key systems that pension providers are

using to execute STP. For us to pick it upand run with it in the pensions world wasquite a natural thing to do. He points out,however, that many insurance companiesare quite new to SWIFT and will nd itdicult to grapple with as they try to ndways o implementing STP.

The thing to realise about ax-baseddata transmission he says, is the sheeramount o time it takes to process. Thethird party administrator (TPA) willlook at all the instructions received rommembers throughout the day. Then theTPA will send a ax to the investmentmanager saying: sell these unds, buy thoseunds.

The next day the investment managerwill send a ax back saying this is what wedid, or they will make a web site availableto the TPA or them to download theinormation o. From there the TPA will

take probably another three days to updatethe individual member accounts, heexplains.

The whole process could take a weekand the plan members would only be ableto see the results o the instructions theyhad given to the TPA at the end o thatweek i they had web access to the TPA. I

they were waiting or a printed report itcould be two to three weeks beore theysaw an update. This is worlds away romreal time, and in volatile markets theresults could well and truly be history bythe time the members get to see them.

SWIFT also provides the backbone orthe biggest pensions industry collaborativeinitiative so ar on automated messaging,with the ViaNova standard. However,ViaNova is very much a starting point, a seto agreed market practices, rather than anSTP solution.

Ben Cocks, products director at Altus,a third party provider o STP solutionsto both pension administration and undadministration houses, points out thatimplementing ViaNova, which runs ontop o SWIFT, can be a long and expensiveproject, with deployment costs runningor many months. The perceived cost andimplementation complexity have made theViaNova/STP business case a dicult onein the current nancial climate, he says.

Instead, Altus oers clients a hostedsolution which it has build and which itcan implement, doing all the APIs to the

client systems, in very short time scales.The market has been waiting or acomprehensive, o-the-shel solution orSTP and the Altus Instruction Gatewaydoes exactly this, he says. It can oer ajoined up approach, he says, at all pointsrom the plan administrator through theTPA to the investment manager and backagain or settlement, reconciliation andreporting.

For his part, Ed Evers points out thati scheme trustees pick the right TPA,which means either using Fidelitys undadministration services or picking a TPA

with STP capabilities and with Fidelityinvestment management on their undspanel, they can have all the benets o STPtoday.

Ultimately, we can only progressas ast as the other parts o the chain,so we are working with our clientsto do this and we are putting somepressure on administrators to do this.But they have massive pressures on theirdevelopment programmes anyway so ittakes time. However, this is starting to bea dierentiator amongst providers, heconcludes.n

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We would loveto see an industrystandard transportmechanism, but weare a long way romthat

Wade McDonald,State Street


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12

ISJ Investor Services JournalTranser Agency

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The transer agent is the partyusedto manage und registers and to executeall shareholder transactions. With anessentially important role, it seems oddthat the unction oten requires denitionoutside the United States - home o thephrase transer agency.

Julian Rice, director o globalcommunications and marketing atInternational Financial Data Services,explains that this could be because theroles o a transer agent outside the US,and perhaps to a lesser extent, the UK, aredierent.

I you buy a und in the US, youtypically go through a und manager, andthose und managers will use externaltranser agents. However, i you buy aund in continental Europe, or example,France, the concept o an external transeragent is airly alien, because it is all donethrough a central register. Buying a undin continental Europe, you will go througha bank, where they will have a recordkeeping unction working in conjunctionwith the banking.

Because distribution is all donethrough a bank, the role o the transer

agency is very much institutional. Isuddenly the banks stopped selling unds,and suddenly everything went throughnancial advisors, then there probablywould be a requirement or a separateunction, as there is in the States, Mr Riceadds.

So despite transer agency being aninternational operation, the trend totreat it as a separate entity is not quite soubiquitous.

But in a globalised, competitive world,Richard Willis, global product manager orBank o New York Mellon Asset Servicing,emphasises the importance o having aglobal oering o transer agency servicingavailable.

We see our clients looking to leverageour ability as a service provider to providesingle solutions regionally as well asglobally. That said, the domestic elementis particularly sensitive, as oreign unds,including the UCITS brand cannot beimported into all countries. So, it isimportant or service providers to beable to continue to expand local marketsupport as well as the cross border

distribution into new markets as part o a

global transer agency oering.As a global asset provider, any

expansion o our geographic reachwill typically refect how our clientsare growing their own ootprint eitherorganically or via consolidation, Mr Willis

continued. The transer agents role in thesupport o global distribution accordinglyevolves with each new jurisdiction.

At the Bank o New York Mellon,transer agency is viewed as sitting at thevery ront o the back oce. We providea variety o services, rom standard datamaintenance, to ull shareholder servicingto support the non-commoditised elemento asset servicing, Mr Willis says.

The ocus remains very rmly onexcellent client service and risk aversion,as we interact with the end-investor andthe distribution community as well as our

direct client, the asset manager.Global distribution presents a number

o interesting challenges or both the assetmanagers as well as the transer agent.BNY Mellon aims to support and simpliya clients entry into new markets bymaximising existing relationships as well asoering supporting technology.

By establishing hubs operating in thethree major time zones, we have all butnegated the time zone challenge and takena signicant step towards making globaltranser agency a reality, explains MrWillis.

US name for a global service

The US markets needsrom transer agencyare changing, writesKimberley Ferguson.

12 13

So how important is the transer agency

unction in und servicing overall? MrWillis explains that transer agency neednot be viewed a necessary evil, bedevilledwith inherent operational risks, but rather,as a unction which maintains a dedicatedocus around the underlying investors andinvestments into und related products.

Whilst the order routing process willkeep being enhanced, the core role oregistrar and the keeper o units in issuedatabase will o course remain he says.

According to Mr Willis: The nancialcrisis has sharpened everyones awarenesso risk and nowhere more so than in thetranser agency sphere. There is certainlytension: we strive or more eciency andhigh rates o straight through processing inthe ace o ongoing consolidation, but thispotentially gives rise to less transparencyaround the ultimate ownership oshareholding accounts.

We view transer agency complianceas a highly specialised unction where wedeploy highly trained experts to protectthe bank against any unwanted suspiciousactivities or investors. This level o scrutinyrequires procedures and technology to be

continually updated and enhanced to meetthese evolving risk-based needs.Faced with nancial constraints and

a thriving population o sophisticatedinvestors and products, Americanmarket practitioners have to decide ishareholder services should be outsourcedto a third party transer agent. Advisersand management companies alike arebeginning to realise the benets thatexperienced transer agency providers canpotentially oer.

Boston Financial Data Services, amarket leader in third-party transer

agents based in Boston, has recentlyexperienced a heightened interest in itstranser agency outsourcing services. TerryMetzger, president and CEO, attributes thisto investment management rms ocusingon their core competencies and lookingto manage expenses, improve eciencies,mitigate risks and ensure customersatisaction.

Because o our ocus on best practicesand automation, and the act that being atranser agent is our business, we are ableto deliver highly scalable, ecient andhigh quality operations that allow our


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ISJ Investor Services Journal Transer Agency

13

There is a move

towards leveraginglower costlocations, utilisinga non-traditionalworkorce

Terry Metzger, BFDS

customers to rethink their service modelsand expand their business relationshipswith us, Mr Metzger said.While most rms usually outsource allo their transer agent unctions, someelect to retain certain unctions such asinvestor contact centres in-house. Becauseo the scalability needed or investor and

intermediary servicing, this hybrid modelis typically only used by rms with thescale to create operational eciencies saidMr Metzger.

The best transer agency systemsencompass growth, are web-based andare fexible enough to grasp dierentlanguages, business models and currencies.In expanding markets, the manual aspecto cash processing and settlement canleave room or error, so it is important to

automate processing rom order to cashand settlement, and nally, to the postingo activity to the und.

Keith Parker, sales and marketingmanager at Koger, a technology providerwithin the und administration industry,including transer agency sotware, says:Prior to the global nancial crisis, mostund managers, certainly hedge undmanagers, outsourced their transer

agency, and thereore outsourcing wasalready a well-developed industry practice.Now with the onset o the nancial

crisis, and events such as the BernieMado scandal, those und managers thatdidnt outsource their transer agency nowhave even more motivation to do so. Therealso seems to be a greater emphasis on thering encing or segregation o expertise.

The last two years have been verychallenging in terms o selling complexsotware products, owing to budgetaryconstraints driven o asset valuereductions. This is true or the und

manager and administrator alike. Wherethere has been appetite, there seems tohave been an emphasis on nding a singleproduct or application that can replacea number o products or applicationsthat are oten dicult to integrate on aseamless basis.

Buying behaviour has also been a lot

more intensive in the sense that buyerswant to maximise what they get out oa product, and also spend more timeattempting to quantiy what type o long-term savings can be generated throughthe increased usage o systems andautomation.

Tricia Riddell, head o product EMEAor Bravura Solutions, acknowledges therecent changes, and suggests potentialroom or improvement. The ocus on thestandardisation o basic transer agencyprocesses both within an individualtranser agency service and across multiple

transer agents, or example, the re-registration o assets across platormsmust continue. This standardisation alsolends itsel to integration with the otherindustry bodies such as custodians andund accountant.

Riddell adds that the ability to supportthe emerging technologies or investorand distributor access is another area orimprovement. There is a minimum o PCaccess today or trading, but it will be theiPhone tomorrow, she says.

According to Mr Metzger, the USmutual und market has experienced

unprecedented changes over the last twoyears. The primary trends have been lowor no growth or many asset managers,a decoupling o manuacturing anddistribution, and widespread industryconsolidation or both asset managers anddistributors.

These changes have orced rms to re-evaluate business models to ocus on thoseareas that can deliver dierentiation andopportunities or uture growth. Becauseo the expense challenges, historic stangmodels have shited. There is a move

toward leveraging lower cost locations,utilising a non-traditional workorce andscheduling structure, and driving to morevariable costs.

The pace o regulatory change seenover the last two years seems set tocontinue. There are our primary driversto this regulatory change: the reactionsto the 2008 and 2009 market contraction,including Money Market Reorm andheightened oversight; signicant changesbrought about by the US governmentrestructure; ongoing activity at both theFederal and State levels with Privacy

legislation and the ongoing reorm okey issues like 12b-1 o the InvestmentCompany Act o 1940 (the rule whichpermits mutual unds to use und assetsto nance the distribution o theirshares); summary prospectus (the rulestipulating the way Open-end MutualFund companies are to prepare their

prospectuses, ensuring all key inormationis on display) and Cost Basis Reporting- the rule that ensures brokerage rmsand mutual und companies report theircustomers cost basis when securities aresold.

However, as Mr Willis points out, manyo the recent proposals or legislativechange have yet to be ully digested, andare still in drat discussion state.

The drat Investor Protection Act o

2009 ocuses on some key areas whichwill potentially impact transer agentsand their interaction with the investmentcommunity. For example, should thisact come to ruition, it will mean thatsubject to the relationship with the assetmanager, the transer agent may berequired to urther acilitate the provisiono disclosure o inormation to the investoron behal o the asset manager.

It could also mean that changes tothe requirement or benecial ownershipreporting would require the transer

agent to report more regularly andhold additional inormation, includingadditional data pertaining to the advisorycommunity, and the potential revision othe record keeping rules.

Transer agency is a highly specialisedunction, enriched by highly trainedexperts, brought in to protect theorganisation against unwanted suspiciousactivity. This level o scrutiny requiresprocedures and technology to becontinually updated and enhanced tomeet new and evolving, primarily risk-based, needs.n

The fnancial crisis

has sharpenedeveryonesawareness o riskand nowhere moreso than in transeragency

Richard Willis,BNY Mellon


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14

ISJ Investor Services JournalFund Administration

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Middle Eastern promiseFund administration in the Middle East is growing in competition

along with a new emphasis on transparency, nds Craig McGlashan.

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Record oil prices over the last ewyears have boosted the Middle Eastssovereign wealth unds, traditionally theregions most well-known investmentpools. But the area has also been hit bythe worldwide nancial crisis, so are thelessons learned in more economicallydeveloped countries being implementedin the cradle o civilisation?

Ramy Bourgi, head o emergingmarkets at Socit Gnrale SecuritiesServices (SGSS), says that the Middle

Eastern market has recently seenexpansion. The higher oil prices overthe last ew years have contributedgreatly to the increase o sovereignwealth unds; this has contributed tolarger investments home and abroad, hesays.

The growth o investing regionallyhas been spurred by better opportunitiesat home, especially in the ace o theturmoil o international markets overthe last year.

Rod Ringrow, senior vice presidentand managing director o State StreetsDoha oce, suggests that the market isrecovering rom that turmoil. Therewas a growing international interest inGCC unds that withered away over thelast 18 months and is beginning to re-emerge, he says, adding that some o themarkets have moved rom rontier toemerging status.

David Morrissey, director o businessdevelopment or Europe and MiddleEast in SEIs Investment ManagerServices division, believes that it isimportant to consider the Middle East

as a collection o distinct countries, notone entity. There are a considerablenumber o dierent markets anddierent aspects o the industry, somemore mature than others, he says.

SEI has experience in these dierentmarkets, servicing 12 clients acrossthe GCC and administering assetso roughly USD28 billion. Morrisseysuggests that while Bahrain hashistorically been the main nancialhub or the region, Dubai has recentlyemerged as a regional player in the undsbusiness, riding on the wave o its

other economic successes.

A lot o European and US providers- be they administrators or law rms orother service providers - have viewedDubai as the gateway to the region,whereas some o the older existing and/or domestic players who have alreadybeen established would have been set upin Bahrain, he says.

Ringrow adds: Bahrain has tendedto ocus on the Islamic nance market.Dubai is a much more trade-drivenenvironment, while Doha has triedto ocus on the insurance and assetmanagement sectors, so dierent centres

are beginning to emerge as areas ospecialisation.Saudi Arabia is an area to watch,

according to Morrissey. The country hassignicant levels o assets held throughamily oces and domestic bankinggroups, in addition to its sovereignwealth unds, but the und industry isnot as developed as perhaps it ought tobe, given its signicance in the region asa whole - partly because o regulation.

Currently, there are a number orestrictions on the way non-GCCinvestors can access the local equity

market. Several o SEIs clients haveconsidered the options available toresolve this diculty with a numberselecting equity swaps.

From an administering andaccounting perspective, using equityswaps is not problematic or us, hesays. However, it does add an extralevel o cost as ar as the und manageris concerned, because obviously theyhave collateral issues and the associatedexpenses in relation to the underlyingswap.

What o the local und administration

business? SGSSs Bourgi explains: Localund administration is concentrated inBahrain and Dubai, with Qatar joiningin over the last year as an alternativedomicile. Although major playersdominate the scene, there is a big eortto attract boutiques, which is lesseningthe impact o the larger players.

Dubai-based Ryland Gray has beenin operation or 14 years and has oeredund administration services since 2000.The company now has nearly 50 unds

under administration, handling assets oUSD1.1 billion.Managing director Simon Fielder

believes that competition or small, localplayers comes not rom larger rms,but rom a culture in the Middle Eastwhere asset managers are neither in thehabit o, nor required by law, to separatetheir und management rom theiradministration.

The smaller unds and institutions,with unds o a size o USD100 toUSD150 million, are ghting against theact that asset managers can keep their

own internal records, he says. Thatswhere the market has been so ar, butbecause o the issues o insider trading,insider dealing, lack o transparency, andno segregation o reporting duties roman asset management structure and theissues that have come rom that, we dosee that there is a better potential thanthere has been in the past.

This shallow understanding othe separation o administration andmanagement has hindered the business.Since the DIFC [Dubai InternationalFinance Centre] was launched, a numbero oreign administration companies particularly allied to trust businesses have popped up, says Fielder. They notso much dipped their toes but plungedtheir heads into the water, ound itstoo uncomortable and have gone backhome again.

The problem o separation goes intothe regulatory sphere in many cases.I you look up the Capital MarketAuthority rules in Saudi Arabia, theyskirt over administration in a couple oparagraphs, Fielder explains.

Technically speaking, there is not a


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requirement or registration as a undadministrator because they do not seemto recognise it as a separate activity androm my experience that is exactly thesame in the central bank o the UAE.

SGSSs Bourgi believes this light-touch regulation is changing in light oMado and the wider nancial crisis.From a regulatory perspective, we havedierent levels in each market, but thedirection is clear in that transparencyand adherence to sound practices areo paramount importance in attractingoreign investors to the region.

State Streets Ringrow cites aBritish infuence on this new desire ortransparency and standards. He saysthat a number o centres have modelledthemselves on the London market andhave brought in ex-Bank o England andex-FSA people.

But this drive is not happening astenough, according to Fielder. Thereason Ryland Gray hasnt grown asteris because there is no necessity ormost o the domiciles to segregate thatresponsibility.

Fielder thinks his marketplace willgrow as the regulation is imposed. Buthe adds: The DFSA [the regulatorybody or the DIFC] has probably gonetoo ar in the opposite direction, andhas stunted any potential or und-based business within the DIFC witha regulatory regime which is overly

restrictive.There are other diculties or

administrators in the region toovercome.

The Middle East, in spite o its majoradvances in sophisticated investing,remains an area with strong culturalvalues, says Bourgi. Relationships aredeveloped and nurtured over the yearsand trust and honesty are valued indeveloping relationships.

SEIs Morrissey cites the exampleo anti-money laundering practices.While people in Europe and the US

may take that as standard, the individualrequirements that are required do notchange and you need to make sure that

your client understands that this is notsomething they are being singled out or,but rather that it is a standard industryrequirement worldwide.

Fielder believes that local playerscan have an edge in these areas. Wehave a lot o Islamic unds and aair proportion o our assets undermanagement are Islamic, he says.

We know how to administer those.You have to be sympathetic to how those

unds are run, and you have to have anunderstanding o how some o the assetswithin a und are going to be valuedand the risks that are inherent in thosealling apart between valuation dates.

Islam orbids the payment o intereston a loan, which results in the creationo unique nancial instruments.

One example is Murabahah unds,which are in the orm o a loansecured against real assets, usuallycommodities. This loan will be repaidat a set point and at a set amount. Aperson may borrow USD1 million andrepay a capital sum o USD1.1 millionin six months time, resulting in aUSD100,000 prot or the lender. Theseinstruments present new challenges toadministrators, says Fielder.

During the term o the loan, do weadd that USD 0.1 million on an accruingbasis to refect the und value, or dowe lump it on at the valuation point?That really depends on the terms o theunderlying assets being made and theoering document o the und itsel, andso the pricing methodology we adoptrefects both the Islamic nature, andthe value o the transaction, within theterms o the investment itsel.

State Streets Ringrow says local rmssometimes have an advantage, withmany ront ends in Arabic script.

However, he adds: The internationalrms can deal with the Sharia issues as

long as they have a screening processin place with regards to investmentselection. I think some o the localrms have more experience andexpertise in terms o dealing with theAAOIFI [Accounting and AuditingOrganisation or Islamic FinancialInstitutions] process. It is an addedlayer o complexity but it is not aninsurmountable barrier or doingbusiness.

Flexibility is also key, accordingto Ryland Grays Fielder.The Arabicand Bedouin tradition o the Majlis is

still strong; the Majlis being both thelocation o a meeting and the actual acto sitting with a tribal or governmentalleader to discuss matters o the day, heexplains.

This practice trickles throughthe commercial strata o society: thechairman o a bank or example may sitand meet his riends and other people,many o whom may be customers, andi someone says, Ive signed up to one o

your unds or a xed term and I reallyneed my money now, I can guaranteethat we will have a request saying I

know this is not within the rules butcan we let this customer have his moneyearly.

Time keeping also requires fexibility.Dierent areas o the Middle Easthave dierent weekends some takeThursday and Friday o, others Fridayand Saturday. This could make it

impossible to price a stock quoted onboth regional and international stockmarkets rom Thursday to Sunday, orinstance.

SEI deals with this through itsinternet-based service oering. Whatwe try to do is ensure that transparencyand inormation available to clients isaccessible via the internet 24 hours aday, seven days a week. Giving round-the-clock access to inormation, not justdata, is very helpul to our clients, saysMorrissey.

He sees a glowing uture or theMiddle East und industry and believeslocal players may soon branch outinternationally by providing UCITSunds. With a wealth o local knowledgeand expertise, some o the leadinginvestment managers in the regionbelieve that they are ideally positionedto market successully to internationalinvestors. I believe that this is going tobe a very popular area or internationalinvestors in the uture and one in whichwe are expecting to see signicantgrowth.

However, Fielder points to the oldsystems o local standards and airlylax regulation as a potential bar to thisuture growth and warns o anothercultural nuance that could act as abarrier to Saudi Arabia taking its undindustry to the outside world.

The Capital Market Authority doesnot appear to have any specic ruleson this, but it seems not to like databeing held outside the boundaries o theKingdom, he explains. When we openin the Kingdom we will have to workwith a regulated custodian and we would

carry out the administration duties butwed have to make sure the data was heldwithin the Kingdom, not exported andprocessed in our Dubai oce.

Few would argue that the MiddleEast und market is maturing, butquestions remain as to just howquickly. In particular, rms are lookingor the industry to establish a clearboundary between management andadministration. Lessons are beinglearned, but cultures are oten slow tochange, so a regulatory push may well berequired to get the market moving.n

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Custody ISJ | Investor Services Journal

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ISJ Investor Services Journal

Germanys uprising

Germany returned to growth lastAugust, with a 0.3% increase clearlyoutstripping the 0.1% decline in theEurozone overall.

This occurred within a sharp inclineon the DAX, the countrys main exchange,

dispelling the ears or the export-ledeconomy that seemed to be heading thesame way as Japan 12 months ago.

The rise in the markets - as well asthe political stability rom a re-electedChancellor Merkel and her coalition withthe business-riendly FDP - has donewonders or the holdings o the countrysinstitutional investors, partly easing thepressure or all concerned, includingits custodian, Depot bank and undadministration industries.

The country remains a hyper-competitive market or its internationalcustody banks, Sparkassen institutions andstate-owned Landesbanks.

But as Evert van den Brink, managingdirector o CACEIS Bank DeutschlandGmbH points out, a buoyant stock marketis bolstered by low interest rates, which isnot the best news or custody. Extremelylow interest rates have a negative impacton the banking industry revenues suchas with global custody activities as withclient assets you have the possibility tooptimise your earnings out o the interestspread created.

It both is, and is not, business as usual

or these investors and their relationshipswith their service providers. Uwe Dreger,head o domestic custody Western Europeat Deutsche Bank, tells ISJ that currenttrends or the risk-averse investor such as asset segregation - was already

an established practice in the country.Theres a long history o segregating andsecuring client assets. I you look at thelegislation in Germany there were not

many changes - so what other marketshave developed in the area o assetprotection was never a new issue in theGerman market, he says.

Jorg Sittman, managing director orGermany at KAS BANK agrees, and saysthe Depot bank system which oversees

the activity o both asset managers andund administrators is an example othe high levels o duciary scrutiny in themarket.

Investor priorities have shited, andthe transparency and perormance o theunds in which they have invested haveclimbed the agenda in the mandate givento custodian banks.

CACEIS, a custodian and depositorybank in the country that is in the processo developing its business line in undadministration in Germany, has a marketshare o around 10-15% in some areas.Mr van den Brink says that o all emergingclient demands, reporting is near the top

o the list. There is absolutely a marketto increase the reporting possibilitytowards the client as they wish to see moretransparency.

He explains that the undadministration side is in development tocomplement custody and the depositarybanking as the assets are oten directlyrelated. The company has two othersignicant business lines in the country:the transaction banking services andclearing.

Its clearing oering came rom a three-old recognition that there were ewer

competitors in this space than a year ago,more companies looking to outsource,and that it was worth the risks as a directclearing member to the exchanges.Competitors in 2008 are perhaps nolonger competitors in 2009, he says. Wesee huge players looking to reduce thecomplexity within their IT environment sothat they might, or example, reduce theirstatus rom a direct clearing member toa non-clearing membership. So they canthereore outsource this to a companylike CACEIS.

Acting as clearing agent means taking

on the counterparty risks o clients, andentails the ability to monitor transactionswith several counterparts coming romdierent sides o the market. Mr van denBrink estimates that CACEIS processesaround 100,000 transactions each day,emphasising the need or high levels orisk management, despite the reductionin risk rom Europes central counterpartyclearing systems.

The inrastructure or Germansecurities and unds is rmly nestledwithin the abric o a Europe increasinglydissolving its borders. Clearstream a

Europes biggest economy looks orward tosignicant custody opportunities next year,nds Ben Roberts.

What other marketshad developed inthe area of assetprotection wasnever a new issue

Uwe Dreger,Deutsche Bank


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custodian, domestic and internationalcentral security depository, and settlementprovider has Germany as one o itsbiggest markets on its Link Up Marketsinitiative to connect central securitydepositories which launched last March.Clearstream Banking Frankurt is the CSDor the local market, and Martina Gruber,regional director or Germany, said theresilience o the market has made it abrilliant year.

Despite a decline, as seen elsewhere, incustody asset values and transactions, a allrom EUR10.8 trillion to EUR10.6 trillionwas in relative terms a very light decrease.The all in transactions is perhaps moresignicant to transaction banks, shebelieves.

Its typical or Germany to haveback oces or securities businessesconcentrated in transaction banks

providing these service to other banks, shesays. I think they suered quite a lot asthey charge per transaction and, o course,the number o transactions went downsignicantly.

She expects there will be urther

consolidation within the Landesbanksector as rms seek to shed daughtercompanies and ocus on core activities.

The company has seen signicantopportunities as counterparty risk hasbecome prominent in the market.

This year it launched Euro GC Pooling,a collateral service or money marketloans. Two counterparts agree on the EurexRepo platorm and agree on the collateralbaskets, or securities to be pledged or theloan. The trade goes directly to the wholevalue chain to Clearstream, where thetrade is collateralised by securities assessed

by the European Central Bank.Gruber says this was a well timed

addition to the market as more shortterm money lending let the relativelyunsecured money markets to ully coveredloan systems. It allows custodians acting asagents to benet rom hubs o liquiditythrough a centralised collateral account.

When the crisis was at its peak it wasvery important or our customers to havea good valuation o their securities thatact as collateral to other counterparts.This will be a topic or the next year the extension o collateral managementto have collateral in one place, that is aliquidity hub, where you can collateralisedeals without shiting your securities romone country to another.

KAS BANK, the Dutch custodian andund administrator, has also acted onopportunities to expand in the Germanmarket. Its und administration businessentered the country last year with thepurchase o a KAG a German undadministrator - rom a Dutch insurer.Then in July last year it bought the undadministration arm o Deutsche Postbank.

Jorg Sittman at KAS BANK told ISJ thatan acquisition in the German market wasa more viable option than organic growth.The Postbank deal immediately gave thecompany 12 mutual unds to administer in Germany unds must be connected witha legal entity.

Mr Sittman says the act that it simply

provides administration rather thanbeing part o a large local bank - givesit a unique selling point to unds. It alsosecured the deal with Deutsche Postbank,who would have been loathe to sell thearm to a rival such as Commerzbank, hebelieves.

He sees two particular growthopportunities or next year. Firstly, assetmanagement rms that are consolidatingwill look to reduce the costs incurred rominternal administration.

Secondly, he sees potential clients inthe insurance sector that make direct

investments. Insurance rms take indeposits with the intention o oeringinterest on the deposit. To providethese yields the insurance rm willeither derive the return rom undsor direct investments such as buyingbonds. These direct investments on thecompany account, he explains, need tobe administered, and small insurancegroups in particular might be open to anoutsourcing arrangement.

On the custody side, Mr Sittmanbelieves there will be necessary reorm in

I we go back some 15 years and lookat European custody we nd more than ahundred global- and sub-custodians.

In some markets you could nd morethan 10 banks acting as sub-custodianand/or as a global custodian. With a ewexceptions all these providers were single-market providers that specialised either inlocal domestic institutions or in servicingthat specic market as a sub-custodian.

Over the years demand grew, and thelevel o service became more important.This development very quickly triggeredconsolidation and more institutions

became multi market providers.Today we have a number o institutions

that oer 10 or more markets. Singlemarket providers will over time disappearas the demands or coverage increases. Thedevelopments in Europe today are movingtowards a single market at a great speed,meaning investors will look or providerswith a good geographical coverage.

Trading has changed with theintroduction o MTFs and consolidationo platorms becoming more European,with the domestic presence less important.Following that, investors need to eel saeconcerning counterparty risk and theoperational set up, including cost. Assetservicing, including corporate actions, is ogreat concern or all investors.

To achieve a high comort level theinvestors will choose providers that canservice them in multi markets acrossEurope. In the uture we will see a ewproviders that have ull coverage in Europecombined with a couple that cover largeregions o Europe. In the more distantuture we will see a limited number oproviders that cover the whole integrated

nancial market o Europe.n

AnalyseThis:How have theservices of acustodian with a wideEurope network in-creased in importanceover 2009? GoranFors, global head,custody sales, SEB

ISJ Investor Services Journal Custody

17

It was veryimportant for ourcustomers to havea good valuation oftheir securities usedas collateral. Thiswill be a topic for

next year

Martina Gruber,Clearstream

Continued on page 18


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ISJ Investor Services Journal

AnalyseThis:

On October 9, 2009, Denmark,Finland and Sweden entered into a newera o post-trade securities processingwhen CCP clearing or equities throughEMCF was introduced. Oslo Bors willimplement CCP clearing in March 2010,although they have chosen a dierentroute with an in-house solution. Allmarkets are also planning to add moreCCP providers through interoperability inorder to secure competition and reedom

o choice or clearing members.This has a major impact on all

individual service providers in the region.The Nordic markets will now have a moreharmonised post-trade environment whichis in line with the major European markets.CCP clearing is particularly welcomed bythe oreign brokers trading on the Nordicmarkets as it will in addition to reducingthe counterparty risk also reduce the costsor clearing exchange trades.

New market practices and procedureshave been introduced which are to a largeextent harmonised with other European

markets. As a starting point this is positiveor the Nordic service providers as itmakes it easier to operate on multiplemarkets. CCP clearing also opens up ornew business opportunities or serviceproviders to provide General ClearingMember services as well as services neededor collateral and liquidity management.

For the more traditional clearingand settlement services the CCPimplementation does o coursedramatically reduce the income orservice providers. At the same time the

CSDs are reviewing their prices which

in many cases will lead to increased eesor the remaining transactions. Thecompetition between service providersin the Nordic regions has been erce ora number o years, continuously pushingdown margins. For years we have seen acombination o continuous high volume

growth which has enabled service providerto reduce their ees. This will create aneed to review the whole price structureas service providers are still expected todeliver the same service levels as beore.

Clearly the introduction o CCP hasand will change the business landscape.With urther changes to the marketsplanned and when the CCP environmenthas settled in, the Nordic market willdenitely look dierent and the question iswhich service providers will be let.n

What docommonstandards for centralclearing mean for theindividual servicesprovider?RobertMattsson-Axen,

head o productdevelopment, Nordea

the pension sector. There are three pillarsin the pension industry a state-backedsocial security scheme, occupationalpensions and individual retirementplans. The rst o these dominates, and ispressurised by an ageing population.

The occupation-based pension pillarmust be enhanced to cover the short allso the other two. We still have to come toa unded pension system, he says. ManyGerman employees are not really investedin investment unds when they retire thisculture has to change over the next year.

Some service providers say thatinstitutional investors are removingGermany rom their global custodymandate in order to have a specicprovider in the country. Moritz Ostwaldo BHF Asset Servicing told ISJ in the lastissue o the magazine: I see an increasingdemand o banks considering excluding

the German market rom their existingagreement rom their global custodian asthey need the best service possible and godirectly to the market.

Uwe Dreger at Deutsche Bank which,since selling its global custody business toState Street in 2003 has enhanced its ocuson domestic custody - agreed that thereare signicant benets to using a localprovider, particularly with services suchas corporate actions. The advantage o alocal provider is the expertise the peopleyou deal with know the market by heart you are normally better linked up with

local tax authorities or tax reclaims.But he adds that this market trend

is usually down to the clients overallallocation to Germany. I 80% o theinvestments are made in one marketthen you probably will spend the timelooking into a single market with a singlecustodian. The remaining 20% portolioallocation will probably be with a global orregional custodian

For next year, Mr Dreger expects to seemore requent requests or proposals asinstitutional investors reassess the servicesthey are hiring.

Due to the nancial crisis moreclients will be looking at their longer termcustodian relationships and assessing themmore critically in terms o risk and servicelevels, and at looking at choices available inthe market.

Mr van den Brink at CACEIS adds thatinstitutional investors now would liketo know exactly the business a providerconducts. Thats dierent to beore, wherepeople think the global picture looks ne.CACEIS benets rom this situation the last thing that we can use is anotherbanking crisis.n

CCP: myviewMarcoStrimer,CEO, SIX x-clearIts important clients have a choice oclearing with central counterparties.Were in a phase where interoperabilityis not a swear word. Were gearing toget interoperability among each otheror our clients to give them a choice oa strategic CCP.

Interoperability means you needto be ecient and have a competitiveoering, not just price but service. Thesecond thing is risk; there might be athin line as to when the price impactson the risk. Since the crisis, we hadseen that members are more concernedas to how much collateral they had toprovide to a single CCP provider.

This is exactly why interoperability isso important, that you can net out therisk you have across dierent exchangeplatorms to one risk position.

I nd that the Nordic marketplacemade a good choice in having a CCP.I you look last year ater Lehman[collapse] and how important theCCP became, and the stability o theinrastructure its really remarkable.Nordic markets deciding to move intoCCP model is very welcome; that theyoer choice is even more welcome.n

Speaking to ISJ.tv at Sibos. See the

interview online now.


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and local presence in Egypt tocater to this client base.

5.What are the issues ordisadvantages to not having apan-Arican central clearingsystem, and is there a chance

that groups o countries canhave a shared settlementinrastructure or centralcounterparty?

BOURGI: A pan-clearingsystem will be benecial inany continent let alone Arica.The advantages outweighthe disadvantages which aremainly limited to impact ontime rames or settlement.However, in spite o AMEDAsgreat eorts, we will see crosslistings but we are ar awayrom a Pan central clearingsystem in Arica.

SONBOL: Having a pan-Aricancentral clearing system anddepository is not applicable inEgypt, but most o the Aricancountries are looking orwardto having dual listing ratherthan a having a pan-Arican

central clearing system.

6.How much have additionalcustody services such assecurities lending penetrated

the Arican markets, and isthere signifcant potential inthe next ew years?

BOURGI: Securities lendinghas entered South Arica manyyears ago. Egypt is developingan inrastructure throughMCDR to oer passive and

active lending. Developmento other markets will only be amatter o time but will dependon the markets levels oliquidity and the sophisticationo market participants.

SONBOL: Currently there is nostock lending Egypt ,but weare expecting stock lending tobe activated in the Egyptianmarket by the rst

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