Markets over the last year are down 6.5% according to the FTSE All World index whilst unhedged global bonds have fallen around 3%. Global Custodians have been helped or harmed further, dependent on their cost and revenue structures, by the 12% trade weighted dollar upsurge of the last year.
Fundamentals are negative with few anticipating bull markets and a high likelihood of volatile exchange rates. Costs continue upwards in the face of increased regulatory activity whilst overcapacity, at best, caps fee levels.
How do we return to a path of stable growth? Do we outsource, collaborate more, innovate, go for growth or cull all unprofitable activities?
SIBOS produces sessions with potentially some of the answers, although we have to question who will listen. Over and above the perennial problem that few decision makers attend, other than as speakers, any of the sessions, there is a remarkable complacency about the threats facing our industry. It really needs to change dramatically for it to continue to prosper.
One of the SIBOS sessions focusses on cross border challenges of intermediated securities. It will consider the issue of legal transparency versus operational efficiency. But are they so diametrically opposed? Of course, the almost inevitable path to greater segregation of client assets adds costs to the process. In addition, the insatiable appetite of regulators for transaction data, whether currently they can use it effectively or not, has been described as a tax on activity. And, in the competitive environment we live in, these added costs cannot be on-charged. The market must, though, stop focusing on operational costs alone and concentrate their effort on reducing financial risks, for the former dictate whether one should remain in the business whilst the latter creates the risk of wipe out because of the business.
At SIBOS we will also discuss infrastructure. Powerful vested interests promote nation specific, cost ineffective, risky and duplicative developments. The growth in Trade Repositories and Central Counterparties is indicative of that trend. The next frontier for innovation in the securities infrastructure space should be consolidation. We cannot afford the operational costs, operational risks and unique features of all the different markets. And the only way to overcome this is by consolidation. We have seen the globalisation of the trading space with high volume counters moving more and more to non-domestic trading platforms. We have seen the power of internalisation in the US ADR market or the ICSDs. Purely domestic market infrastructures are a declining force because of the globalisation of investment. T2S is the biggest lost opportunity for radical revision of EU securities markets, simply because it was never ambitious enough. I recall a conversation with the ECB in the early noughties when I opposed T2S as a settlement consolidator but supported it as a regional CSD. Logically infrastructure needs to move to become regional and even global although the model needs to be utility based as the hybrid utility-global custodian bank model of the ICSDs has not been that successful outside of the bond markets.
SIBOS will debate a global collateral inventory. The paradox is that, despite enhanced global connectivity, there has been slow take up of the new products already available in this space. We need, as I mentioned already, more regional and global infrastructures and collateral is a good component as the most dangerous asset class of them all. But global infrastructures responding to fragmented global players is not the solution. Alongside globalisation of infrastructure is a need for further consolidation in the private sector space.
The vast majority of global banks and brokers are linked entities. They operate in silos, perhaps by country, region or product. They do not operate as homogenous entities. And in many cases, they should eschew independence to gain scale benefits for the coming, perhaps block chain inspired, investment cycle and to use added buyer power to force through industry needed consolidation of the plethora of utilities we have created and the risk that new ones, such as a global collateral inventory, will be just another series of linked entities.
I have often written in the past about another SIBOS topic, the need for issuer to investor automation. The legal luddites and the investment banking post trade ignoramuses appear to love the paper based structure of the current environment. But, as often stated in the past, with just a hundred or so data elements needed to allow new issues to be distributed in established standard formats, the market should insist on such a development. Other areas such as e-proxy voting are more developed and should be extended. And investors need to be mobilised for this initiative as they have the power as the true buyers of the service.
And SIBOS should also discuss the legal framework for someone must find a way through that complex and apparently eternal debate. The laws still remain uncertain, in an international environment, around transfer of title, asset safety, finality and insolvency. Is it a legal or political issue? The reality is that neither of those constituencies will solve the problem. We have to look for new structures, adapt laws in their country of residence, as has happened in Belgium and Luxembourg for ICSDs, and find a commercial solution. It is the future of the industry that is at stake. The industry needs to act on this, and all the issues being raised at SIBOS Singapore. For its own survival, it needs to do so with greater alacrity than is being evidenced at the moment!
Will SIBOS, this time, be the catalyst for action?
With global markets beginning to stumble, John Gubert asks how custodians can return to a path of stable growth.