NEMA in Athens occurred at a time when Greece’s inclusion in the Eurozone was looking precarious, while Dubrovnik preceded the UK’s vote to leave the EU. It should have been fairly obvious that NEMA in Hong Kong would signal a huge upset in the US presidential election. With NEMA Africa and the Global Custody Forum (GCF) only weeks away, there is understandable nervousness about what surprise the world may throw at us. Those worried about the constitutional referendum in Italy, which occurs shortly after NEMA Africa, might want to stop reading now. But what were the key points at NEMA in Hong Kong?
Trump
NEMA obviously did not have any sessions about the recent upset in the US but Trump certainly cropped up on the agenda and was being discussed in abundance on the sidelines. Most attendees expressed disbelief at the result. While markets have stabilised and are actually performing quite well, there is likely to be volatility down the line. One only has to look at the plummeting value of the Mexican Peso to figure that out. The US is the largest, non-regional market for Asian investors and any unwinding of trade deals by the new Republican regime will present major economic challenges for APAC markets.
Plans to water down the Dodd-Frank Act by the Trump regime was met with skepticism at NEMA, with delegates doubting it could be achieved. Many banks have already spent huge sums of money implementing Dodd-Frank, and some will express alarm at having to unwind their compliance and infrastructure builds. While Dodd-Frank may be scaled back to a degree, it will not be scrapped. There was also doubts that the US Foreign Account Tax Compliance Act (FATCA) would be culled by the new government. As one delegate put it bluntly, “will FATCA be scrapped before or after the 11 million undocumented workers are deported?”
The Future of the Custody Business
It is no secret that the custody business has faced a variety of challenges over the last eight years. A toxic combination of low interest rates, declining client fees, regulatory costs, and a reduction in ancillary services such as FX and securities lending have heaped pressure on the custody business. That being said, the mood was optimistic. Many point out that the bulk of the trickiest and costliest regulation (i.e. Alternative Investment Fund Managers Directive [AIFMD] and UCITS V) has been enacted and banks have dealt with the challenges capably. Admittedly, there are newfound issues such as Brexit, which organisations will have to contend with.
Technology is going to be central to the custody business’ operating model over the next few years. Moves to streamline internal processes are in play and many panelists acknowledged that automation was a priority. A failure to update ageing processes and client services in line with technology advancements will be fatal for the custody industry. Blockchain has traditionally been considered a major threat to securities services. This fear is no longer present not because Blockchain has failed but rather market participants recognise they have numerous synergies with the technology. While Blockchain may prove effective at automating many outdated processes, many of these technology providers lack the infrastructure and skillsets of a custodian, central securities depository (CSD) or central counterparty clearing house (CCP). As such, there has been a merging of interests between financial institutions and Blockchain providers of late.
Given the recent geopolitical shocks of the last six months, it was apt that contingency planning was discussed. Global custodians have to ensure they have a fallback option in the event of a sub-custodian exiting a market. Hot, warm and cold contingency plans all have their advantages, but also their disadvantages. Any organisation’s approach to contingency planning comes down to a choice between cost and risk. This is not assisted by institutional investors and asset managers who often demand their custodians have a hot contingency plan but are unwilling to accept the additional costs that go with it.
Some sub-custodians simply do not view certain markets as being sufficiently lucrative to maintain a presence, particularly as banks are trying to curb costs and prop up their balance sheet capital strength. If a sub-custodian decides to leave a market for whatever reason, it must ensure this is discussed well in advance with clients so they can assess their options and secondary providers.
Asia
Unlike NEMA in Shanghai, China did not feature much on the agenda. This is probably because schemes such as Shanghai-Hong Kong Stock Connect, Mutual Recognition of Funds and provisions permitting foreign investors to trade on the interbank bond market are bedded down. Instead the conversations centred around harmonisation and integration across Asian markets of the post-trade space. Many argue Asia should look to Europe for guidance, but not completely emulate it. Recent events in Greece and the UK have hardly cemented the EU’s standing in the region though. However, the political reality is such that individual markets are simply not going to integrate their market infrastructures such as CCPs. “It is simply not possible,” said one panelist, adding that China was loath to integrate with other regional economies on terms that were not its own.