Becoming global

Ulf Noren

The development of the global custody product in Sweden was the result of outbound investment opportunities brought about by deregulation, technology development and dematerialization

When Ulf Noren started in the custody business in 1984, “International Settlements” was used to describe a combination of cross-border settlements and safekeeping services in addition to functioning as a kind of back office to the institutional trading desk. “We were five or six guys, sitting on the first floor, together with an office dog, and we were processing up to 100 trades a day,” he recalls. “The market dealt with physical share certificates until 1989/1990, when the market turned dematerialized.

“I remember there were worries at that time about whether the public would accept the fact that the general safety they felt by being able to look at a securities certificate would go away. Furthermore, would that really facilitate international activity to the extent that some early experts said that it would? It proved that it was one of the foundations for the explosion that we have seen.”

There were obstacles to that growth, however. During the 1980s the primary form of communication was by Telex. This was superseded by the telefax. “We started to use this frequently during the mid-80s,” says Noren. “One of the things that began to be discussed at the time was something the cash guys were involved with—SWIFT. At the time the majority of the securities individuals were quite skeptical about it because cash and securities are two different animals. But then if you look at dematerialization and the use of SWIFT as an electronic instruction medium that became frequently used in the mid-1990s, another 10 years down the line they have contributed greatly to the industry.”

What also contributed greatly was the tendency at the time for deregulation of the financial markets and self-regulation among the financial institutions. “Getting rid of the currency restrictions was really meaningful and helped with exploding the outbound business of the global custody product,” says Noren.

The main concern then was on the whether the sub-custody business, in Sweden for example, could remain a self-financing activity because the number of transactions was fairly small. “The more we automated, the cheaper the transaction would become. Back in the 1980s we saw some people were even pricing securities transactions under 200 kroner per transaction (about £22). There has to be a floor somewhere, we thought. Since then, the transaction fee has been cut in half many, many times.

“But we saw growth and we saw institutions developing. There was a realization in the 1990s that there has to be a wider pool of investment opportunities and it has to become global in order to secure the pensions systems of the world. The biggest contributors to that were deregulation, technology development and dematerialization.”

A further worry was that when deregulation happened, cross-border activity exploded and custodians often found themselves late with instructions and in the claims territory. “You dealt with these things with the client on the phone and you fixed it together,” says Noren. “Suddenly you were exposed to a lot more things, like buy in, which we were not quite familiar with in our own market at the time, and you had to get IT systems that could cater for this exploding activity.

“Being an optimist I knew the business would grow, but no one at that time could have predicted how big it was going to become and how many markets were going to be included in global portfolios and how relatively streamlined the basic activities would become.”

Going forward, Noren expects that markets will become more regulated. We certainly see a much bigger impact from regulation from 2008 where the dialogue between regulators and banks had been somewhat congested.

“To thrive I think it’s important to be compliant with every single aspect of what is regulated, otherwise you are thrown out, but also the regulations can be seen as a tool to remodel the business and produce something new. The most obvious is to ensure you have a set up that ensures all your users and clients can be compliant and can sleep well at night. When that’s done you need to be very inventive in terms of how your use your money. SEB, for example, has an IT collaboration agreement in the global custody business line with BBH where we will use their IT platform in an in-sourced way together with SEB infrastructure. This will provide us with a mega leap in the service model that we offer our client base.

“You also need partners. You have very few institutions that can handle Europe or the globe all by themselves and have the muscles and resources to do all that investment and be consistent in quality. There are a number of events like T2S (TARGET2-Securities), which will have tremendous effect on collateral and liquidity management as well, in addition to being an important trigger for development in the asset servicing space. Projects like that might not only be regional in the sense of Europe but also global, and more continents are finding reason to standardize according to some kind of model.”