An industry transformed

Intended or not, the consequences of regulatory reform dominated discussions at Global Custodian’s global sub-custody roundtable at Sibos 2015 in Singapore.

By Editorial
• Robert Almanas, head of strategic alliances, SIX Securities Services
• Shrinath Bolloju, head of investor services, Asia-Pacific, Deutsche Bank
• Berthold Kracke, head of business management, Clearstream
• Rob Scott, head of custody and collateral solutions, Commerzbank
• Richard Schwartz, contributing editor, Global Custodian

How would describe the general mood of the business?

Rob Scott: Speaking from a Commerzbank perspective, we are very optimistic. I think there is a lot of opportunity out there in the market. We are seeing people redefine their business models. Pricing has gone to rock bottom in the industry and we need to start getting paid for risk and reward but, as a general business tone, I think we are very optimistic.

Berthold, do you share this optimism?

Berthold Kracke: If we take a very specific example, TARGET2-Securities (T2S), it took us a while for us to decide what it means for our customers, but now I think we have a very compelling offer with interesting opportunities.
SIX Securities has already migrated to T2S. Is there anything that you have learned since migrating that might be useful for your colleagues to take into account?

Robert Almanas: We did successfully migrate to T2S without any issue. As any of us in the post-trade business know, the devil is in the detail. We learned new things as we continued to test. It was key to be actively engaged in all the various committees and the governance structures and not be afraid to raise your hands and say ‘I’m sorry, hold on, we need to understand this more’.
But like Berthold, we are seeing traction in terms of how we are leveraging our network model. We call it a hybrid model. We’ve always connected directly to central securities depositories (CSDs) – we’re a direct customer of Clearstream Banking Frankfurt, for example – but then we work in conjunction with sub-custodian banks, where we buy and bundle services. T2S is a natural progression for us. I am not sure what it will be like for the rest of the CSD community, but so far so good.
And like Rob, despite some worries about regulatory overhead we are seeing customers now stabilising their business models, which is then helping them to indentify the solutions they want. That enables us in turn to engage in a productive discussion about rolling out new products.

Shrinath, as someone based in the Asia-Pacific region, but representing a global bank, what resonance does T2S have for you?

Shrinath Bolloju: Obviously it’s a very important project for Deutsche Bank, given our presence in Europe. It is also important because we have global clients who are affected by T2S. It has now started to resonate not only with some of our clients, but also with some regulators that we work with. I think it has a lot of potential implications – we just have to watch.

Regulation is and will remain a major theme for the industry. In terms of committing resources to comply, which is more difficult: meeting the requirements of your direct regulators or adapting to the requirements of your customers’ regulators?

Shrinath Bolloju: From the position of running Asia-Pacific for a global bank, the most immediate impact is the fact that a lot of the regulations coming out of Europe and the US have extraterritorial implications. Because of the cross-border funds that we administer, it has huge implications on our side of the business.
The way we look at it is not so much that compliance is an issue; it is more the wall of regulations coming from different sources, the timing of it and in many cases the lack of harmonisation across regulations. Some regulators could possibly have spoken to each other and made the process a little more harmonised. Obviously clients continue to look at us for guidance. Their expectation is that as a service provider we will help them navigate the maze.

Rob Scott: I totally agree. The challenge for clients is interpreting each regulation in their jurisdiction. The key is making sure you understand the nuances and the differences. I think regulators perhaps could do a better job of speaking to each other. They are all trying to attain the same fundamental aims around transparency and investor protection, but you don’t have the consistency in implementation that would help make investment in compliance more efficient.

How much ‘mindspace’ does regulation occupy for your clients? Are we over-emphasising it?

Robert Almanas: I don’t think we are over-emphasising it at all. Since 2009, it has actually brought us closer to our customers, because it is occupying a lot of our mindspace and theirs. It has almost become a service, where our experts are on demand by our customers. Beside the issue of harmonisation, one phenomenon I think that has not been resolved is turning a blind eye to the unintended consequences.

Shrinath Bolloju: That resonates quite a bit with me. The unintended consequences of regulation are almost as important as operational requirements and as such this is where clients look to us to get insight to help them navigate the regulatory field.

Berthold Kracke: We shouldn’t only complain about the regulations and compliance. Some aspects make us address issues much better than we did; for example, recovery and resolution. There are also good elements to new regulations that we benefit from and that make the market safer.

Do you think that applies to the industry as whole?

Rob Scott: I think so. It is definitely at the forefront of the clients’ minds. I agree that they need help navigating the regulations and it is no easy task going through thousands of pages of legislation and white papers. Regulation is having a great effect on risk issues for investors, but you are also starting to see a shift in the banking industry, with firms re-evaluating their business models, pulling out of various businesses, being more risk-averse and I think that can only be a good thing.

Shrinath Bolloju: There is also an increasing recognition that in certain parts of our businesses there is mispricing and clients are starting to recognise that.

Rob Scott: Fundamentally, we have been bad as an industry in constantly accepting re-pricing that is going down towards zero. We have all lived in a competitive environment and we have all been remiss in understanding our own risks sufficiently or in having transparency in pricing that percolates to customers.
We need to educate our customers not only about the risks they run, but about the consumption of resources in our organisations as a result of what they do.

To what extent is that the fault of the industry itself given that, historically, certain services were offered at no cost to attract business that had a higher margin?

Robert Almanas: I would argue that both parties are guilty. Sure, if you go back a decade or two, providers would give you the custody for free as long as they got your securities lending business, but people’s risk appetites have changed since the financial crisis. There is now a sensitivity to the added tasks involved in providing the service. That’s not to say it is a perfect world now, but I do think we are coming to more convergence on that.

Rob Scott: There is a whole generation of network managers whose sole job is to push down prices. I would just encourage network managers to consider that, if you are getting something for next to nothing, with all the regulatory challenges that are out there, sometimes you get what you pay for.