BNP Paribas Cements Global Footprint, While AIFMD Presents Opportunity for its Depot Bank

BNP Paribas Securities Services CEO Patrick Colle talks about a turning point for the securities services provider in 2012 and how AIFMD will change operating models of hedge fund depositories and prime brokers.
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BNP Paribas Securities Services has been steadily growing its proprietary network over the last decade but 2012 was described by CEO Patrick Colle as the turning point for the custodian and its global ambitions. Specifically, the launch of the US domestic custody offering in December last year completes its ambitions on becoming a truly global player.

Today BNP Paribas Securities Services has a proprietary network covering 25 countries and a global custody network of 102 markets, with 90% of client assets held in its proprietary network, which ensures full control over risk and operational processes. BNP Paribas has so far migrated two thirds of US assets held on behalf of clients onto its own platform.

In 2012, BNP Paribas saw assets under custody increase significantly by 22%, which has led the bank to a holding of over $7.3 trillion. Net income in securities services increased 7% to 228 million in 2012, while BNP Paribas assets under administration (AUA) have also notably increased by 19% to $1.3 billion.

At a press briefing yesterday, Colle citied five factors currently driving BNP Paribas strategy: the evolution of the depot bank role under AIFMD, collateral management, asset safety, outsourcing and performance measurement.

BNP Paribas has launched several new products in derivatives including a third party collateral management offering in 2012. It currently provides independent OTC valuation services and an OTC derivatives clearing offering for investment banks.

But AIFMD is the one regulation that has the ability to change the business model of hedge fund services, said Colle. The regulation, due in July this year, brings an opportunities and risks for the depository of a non-UCITS fund. Were already a depository of 12 jurisdictions, said Colle. We have recently launched a trust and depository bank in the UK and can leverage the opportunities from AIFMD as hedge funds and investment trusts will need to have a depository.

AIFMD places more responsibility on depositories for the restitution of assets. As such the operating model of the hedge fund depository and the prime broker will change, said Colle, but how is yet to be determined. The depot bank is responsible for the restitution of assets but assets that are kept with the prime broker of the hedge fund need to be guaranteed by the depot bank. These assets are re-hypothecated in the market, but in the new regulatory framework, some assets will have to move from the custody of the prime broker to the custody of the depository bank. This implies advantages since the level of financing, the costs of financing and leverage of our bank makes the regulation a positive for us. There has been a shift from the prime broker to the depot bank in this regard.

Colle emphasized the changing business models under AIFMD. The Association of Global Custodians is working on this because two months ago hedge funds and prime brokers were not waking up to the risk management issue implied under the AIFMD. There has been a shift of custody assets away from the prime broker to the custodian. The depository could be a single custodian of all the assets and the prime broker for collateral purposes will be moved.

Under this framework it is unclear whether the assets will stay on the books of the depository so that the depository in effect becomes the collateral manager. There is the option, under AIFMD of the depository taking most of the collateral to meet financing requirements. Safe, collateralized financing from the depository or triparty arrangements between fund managers and custodians is another option. There are two to three possible set ups. But already the provision of financing is being ringfenced away from the prime brokers. Considering one hedge fund might have x number of prime brokers, this will be the most profound change of the operating model that the regulation is seeing right now.

With the US opened, BNP Paribas Securities Services will likely set up a base in Columbia later in the year. In addition, said Colle, the custodian has also seen acceleration and the growth of global operational hubs in Chennai and Lisbon and is likely to open a base in Latin America going forward.

BNP Paribas Securities Services is also seeing opportunities in France, with outsourcing by dealing desks of performance analytics and FX passive overlay solutions. More dealers are outsourcing the passive component of their front office, said Colle.