A view from 1987: Sub-custody’s origins in Southeast Asia

Mark Davies, now an independent consultant to the industry, recounts his experience of an adolescent Southeast Asian sub-custody market in the late 1980s.
By Jon Watkins

I recently read that the average number of countries a person visits in a lifetime is eight, which got me thinking about how lucky I’ve been with travel in my career.

 My first big business trip was to South East Asia way back in 1989. To give a little background, I was working at the London office of The Hong Kong and Shanghai Banking Corporation (HSBC) and had recently been given my first sales job, selling the bank’s electronic banking system ‘Hexagon’ to financial institutions (FI). The only two Hexagon products that were of interest to FIs were ‘nostro’ accounts and ‘securities’ accounts (as custody accounts were known). I confess I knew very little about custody. All my banking to date had been in trade finance and credit and the only training I received was how to work Hexagon (through dial-up modems) and how to demonstrate it. There were no specific business areas that had responsibility for nostros or custody, the nearest thing was correspondent banking which dealt with the relationship with other banks.

HSBC in those days was a Hong Kong retail bank with offices around Asia and the Middle East dealing mainly in trade finance for its international corporate clients.

I started my new role with a list of UK-based FIs with custody accounts in Hong Kong and started cold calling.  These potential users of Hexagon turned out to be the original global custodians (GCs), many of which are now not in the business at all and some names that don’t even exist.  RBS, Nat West, Bank of Scotland, Lloyds, Baring Brothers, TSB, Manufacturers Hanover Trust, Chemical Bank, Chase etc. Also a number of investment managers – Ivory and Sime, Philips and Drew, UBS Asset Management.

In addition, many of the large UK names had multiple separate units as account holders. RBS had the Islington-based GC business, one in Edinburgh, one in Jersey and another in the Isle of Man. Lloyds had Haywards Heath, Unit Trust business in Chelmsford, Jersey again and the London-based Lloyds Asset Management. All these separate units appeared autonomous in their choice of sub-custodian.

It seems odd now but when I contacted each of the custody departments, nobody had ever spoken to anyone from HSBC before. Correspondent bankers spoke to their counterparts, but not the operational departments. This was just after the crash of ’87 and most of these names were reliant for reconciliation on monthly statements sent by post. Hexagon enabled these customers to see their portfolio on the same day as well as status of each trade – live! 

In the majority of cases I was greeted with open arms and Hexagon sold like a hot cake. You have to remember that in ’87/’88, the term ‘network manager’ was in its infancy – usually, the head of department performed the function in his spare time. Chase was probably the first bank to formalise the function of network management in May ’87.

It didn’t take long but I was fast being asked by the clients about issues with their custody accounts, rather than Hexagon. I didn’t mind one bit but I didn’t really know enough to add much value other than be a post box but I was learning fast.

At that time there were only six markets in South and Southeast Asia where a foreigner could legally invest in the local stock markets. Japan, Hong Kong, Philippines, Malaysia, Thailand and Singapore. HSBC had a custody operation in each of these catering mainly for foreign clients. These had been in operation for years just ploughing along, pretty much independently of each other with central coordination just starting in Hong Kong.

Custody was not really recognised as a separate business line. All this coincided with these markets (known as the ‘tiger economies’) beginning to boom and becoming increasingly interesting to fund managers. Looking back, the cross-border business arrived in our offices rather than being sought.

The chain of events of opening an account usually started with the investment manager wanting to buy a stock in a new market, say Thailand. He asked his GC whether they had a sub-custodian in Thailand. Quite often the answer was “no, but we’ll see what we can do”. The bank would first look to see if they had a THB nostro a/c and ask that bank if they offered custody accounts. If not, then the Bankers Almanac was pulled off the shelf to find out which banks you’d heard of had an office in Bangkok. During the late 80s and early 90s I received many enquires about whether we offered custody in a particular market and how quickly an account could be opened. I don’t think I had to negotiate a tariff for quite a few years.

After about a year of selling Hexagon to a finite audience, I was spending 80-90% of my time on custody issues and, already becoming something of a specialist in a field of one. I was transferred from Electronic Banking to the Financial Institutions Group (FIG) to spend 100% of my time on custody. FIG was a global unit which did understand interbank relationships but MI was very rudimentary.

The big change for me was that I was with other people who understood what I was doing and thankfully saw it as useful. It was decided that I should undertake a trip to Asia to see for myself what I had been dealing with for the past 18 months and try and learn how things worked.

It was a fantastic and fascinating trip full of many firsts and, looking back, it changed my career. I travelled to Singapore in business class (one of the firsts) as the first stop. The custody operation was pretty big in those days. With most Malaysian stocks quoted on an exchange in Singapore called CLOB, the vast majority foreign investors used Singapore for both markets. Everything was still physical throughout the region which meant the custody operations had a large vault which in turn meant they were mainly on the ground floor or in the basement.

The quirk with the Malaysian stocks being held in Singapore was that every trade involved a re-registration process involving many scooters daily heading across the causeway at Jahor Bahru for re-registration. Singapore, to me was just mind-boggling. Changi airport was relatively new, the original Raffles Hotel was still there as was the original Chinatown. Boat Quay was thriving and it was still illegal for men to have long hair and for anyone to chew gum.

I then travelled on to Hong Kong and my Head Office, to meet face to face with so many of the individuals that I had been talking to and helping me for many months. I loved Hong Kong and it is still my favourite city. It may be overwhelming at first but it is full of life and very efficient if you know the rules. I was lucky enough to work there for three years later in my career.

After a few days, I was off again. This time with a colleague to Bangkok and Jakarta. We had to smuggle a modem into Bangkok so that the office could start reporting accounts through Hexagon. Many Asian countries were not yet in the SWIFT network and were still using paper and telex. Hexagon was therefore a great leap forward. My memories are mainly of heat, humidity and traffic jams.

Both cities felt further removed from my western comfort zone than Singapore and Hong Kong but therefore were even more exciting. Jakarta had been included because there were rumours about foreigners being allowed to purchase 7 or 8 stocks on the exchange. We were to find out what was happening and therefore whether the bank should open a custody operation. My colleague had worked in Jakarta before and knew his was around which my trip that much easier.

HSBC did open a custody operation in Jakarta which grew to be one of the largest in the region with over 300 employees at one point. It was also quite profitable and also provided more that it’s fair share of headaches. There must be some rule of economics which applies to custody operations which links operational difficulties with greater financial reward if you get them right. At the same time, the risks of getting them wrong combining with operational losses and claims can be as high.

I went on to visit our offices in Kuala Lumpur, Manila and Tokyo. All very different cities. Kuala Lumpur still had a very colonial feel about it with our office overlooking the cricket ground. Manila, by contrast had a US feel about it with the famous jeepneys (old US WWII army jeeps turned into private enterprise buses/taxis). Again, the custody operation was relatively small but the main player in town. Foreign investment was relatively low probably due to the difficulties of negotiating through currency restrictions of PHP. Last but not least was Tokyo with its low-rise buildings and every man wearing a black suit, it looked like the set of the 60/70s TV series, ‘The Man from Uncle’. At the time, HSBC was a small operation with most foreign investment flows going to the large Japanese banks.

And so my exhausting trip came to an end. It turned out to be the first of many as the markets of Asia increased over the next few years from six to 16. HSBC then took on the Middle Eastern markets.

The business has taken me to many different parts of the world. Looking back, I now realise how lucky I was to be in the right place at the right time and I have stayed in the world of securities services ever since.

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