How do you see the future of the sub-custodian business?
Challenges are being faced by the entire industry, but the global tier one banks in particular because, they tend to be involved in the same products, markets, currencies and clients groups. They are often burdened with significant cost challenges – which although are an industry-wide problem; their problem is accentuated due to their sheer size and scale. Trying to mobilise and coordinate change to global platforms, deployed in multiple instances across the globe is a- kin to trying to change the course of an oil tanker. Not impossible, but takes a long while to achieve! As a result, those banks are refocusing their business models and you will have noticed in recent times, some high profile exits of post-trade service businesses. This trend I believe is set to continue. It is in recognition of the fact that you can no longer be all things to all men, which was the old model. Where it seemed “scale at any cost” was the prevailing focus.
With the numerous changes to the regulatory landscape and for example the way capital is allocated to these businesses now, the old models of providing commercial subsidies across your franchise to areas of less or challenged profitability are considerably more challenging. Primarily due to the fact that booking entities now need to commercially stand on their own feet, else higher capital charges will be allocated and so the downward spiral continues. The business is therefore taking a look at itself and ways it can be more creative and cost efficient.
We aren’t immune to the challenges but because we have a very focussed strategy in terms of product and coverage, one which puts our clients’ needs central to this, we find we don’t have to continually revisit our business model Meaning we can be a little more agile and effective in our delivery. We are fully integrated into Commerzbank’s investment banking division which also affords us truly integrated services from execution, to clearing to finality of settlement.
I believe there will always be a need for sub-custodians and all the tangible value added services, knowledge of all the various actors locally, coupled with extensive and unparalleled connectivity to market infrastructures and regulators.
There is a lot of talk about sub-custodians exiting markets, do you see that trend occurring?
If you look forward, there are challenges around some sub-custodian models, particularly in countries or regions where volume is maybe challenged or the client base is not supported by lots of localised inbound and outbound trade flow. Business models substantively reliant on cross border activity will continue to experience stress and could over time be marginalised to such an extent that consolidation is likely to occur. We happen to sit in arguably the most important market in the Eurozone and enjoy a very strong and deep-rooted client franchise. Germany continues from a macro economic perspective to be a power-house in this regard. In some of the lesser markets, I believe you will start to see possibly some exits. However, in the larger markets, business will continue to thrive and products and services continue to evolve.
In an environment of no new volume, competition and margin being as fierce as it ever was, as well as increased regulation, it is clear that sub-custodians will have to be smarter regarding the ‘added value’ they can offer.
We service different types of clients; Financial Institutions, Corporates, asset managers, pension funds and insurance companies, and have success here primarily because we are likely to be the house bank of many. However, there is an opportunity to further develop these business relationships and provide additional products and services.
We are not just out there competing in the global custody space and competing in every RFI and RFP. We have comprehensive knowledge and understanding of our clients, we have clarity in our business model and we are therefore able to operate in this marketplace in an effective manner.
In light of all the challenges, where is the opportunity for sub-custodians to prosper?
Firstly, I believe based upon the past few years, there’s absolutely a space for sub-custodians. However, we need to be creative – a trend which is beginning to emerge among tier twos is partnering with each other in different markets to see if that leads to a more fruitful business relationship. This could drive up volumes in both the front office as well as cost efficiencies in post-trade services. For example, if you look at tier two organisations and analyse their business models they are usually very regional and specifically try to service particular asset classes and client groupings, what you tend to find is that they lack innovation investment on the front office and have cost challenge on the back end processing. So the question is: can you find other tier two organisations where you can complement each other from a front office perspective and leverage off of each other’s relative strengths? Be largely non competitive and with limited overlap in terms of clients, and whereby, by combining forces you can attain cost efficiency in order to remain competitive.
For example, let’s say I’m an organisation, whose biggest segment is pension funds, what might pension funds need? Well, good access to ETF platforms and execution activities. If you then partner with another bank that has those capabilities, you could offer those additional products from the front office by means of a simple cooperation / collaboration type of agreement. Serving to drive up increased revenue opportunities while collaborating in other areas of cost control in the overall value-chain
Is this a new trend you are seeing among sub-custodians?
Firms are certainly less proprietary in their thinking right now and more open to alternative ways of doing business. I believe we will see collaborations working in those important markets, whether that’s the application of a new FinTech or by smartsourcing. Our TradeCycle collaboration with Clearstream is a good example of smartsourcing in practice. A complete post-trade offering, TradeCycle allows the client to choose the services they need – whether it is one module, several or the full suite, and Commerzbank and Clearstream work together at the back end to deliver precisely what the client requires in a seamless manner.
Companies have explored, for cost containment reasons, the offshoring route to lower cost locations. However, the reality remains that the industry is faced with very aged technology throughout its core securities processing value chain. No matter if you are a tier one, two or three you generally have operational and technological challenges in this regard.
If there is little client or product overlap from a competitive perspective then why not try to drive up volume by means of cooperation. Collaboration could work well if you can find pockets of product which you can leverage one another’s investment and relative differentiation.
Are these conversations taking place already?
Yes, absolutely. My prediction for custody is that the application of FinTech will be paramount for people to get right. The second thing is that I don’t think there will be wholesale exits, as I don’t believe in the consolidation story that all the small players will get sucked up and evaporate. I don’t think that is the case at all as we are seeing a lot of business demand for our services for example where perhaps our operating model and client proposition is different from that of the globals.
You mention how important implementing technology is; will it be easier for tier twos and threes than the biggest players?
The challenge is the same. However, what is different is the scale. To change systems and core processes for a bank that has infrastructure in 120 different countries is like as described earlier, “trying to turn an oil tanker”. So what happens is tier two organisations can adapt their services and products in a more efficient way.
Blockchain must be at the forefront of these FinTech conversations, where do you see it benefiting the industry?
People are for sure currently looking for that “silver bullet” solution, which I don’t necessarily believe exists in isolation. When you have very good technology that is revolutionary you should perhaps look at some of the core problems in the industry. My opinion is that one of the challenges which everybody has is attaining a “golden source” for instrument and static data. When you get both of those wrong, or a combination of the two, then that reverberates all the way down your downstream processes and that creates an awful lot of overheads and inefficiency. I would urge all ‘blockchainers’ to focus on standardising some of the instrument and counterparty static. If they can do that then it would solve around 60% of downstream problems and then what will happen is that further business cases will form where these new technologies can be applied. This is opposed to having the technology and then trying to find the problem.
Rob Scott has spent three decades in the banking industry working at some of the biggest names in the securities services industry. Starting his career at Barings Bank, Scott moved onto roles at Banco di Napoli and Bank of America in the 90s before heading over to Cantor Fitzgerald in 2002. After five years there as head of international operations and COO he joined Citi as a senior strategic post-trade consultant. Before joining Commerzbank in September 2013, Scott also held two different roles at Deutsche Bank –global head of securities clearing and financing, along with co-head of global sales and relationship management – and spent 18 months at Accenture as a post-trade expert. At Commerzbank he heads up market services, responsible for security services business development and commercial growth including, custody, collateral management, clearing, DMA and regulatory reporting spanning 58 markets globally.
How have you seen the industry change during your career?
The industry has changed an awful lot during my career, but I think the biggest change will be coming over the next five years. The industry has been very static in the way that it addresses clients, in the way it hasn’t really been transparent with pricing. It has been operating in the same way because it has aged technology. Regulation has forced people to be more transparent, it is forcing people to look at their business models in a more focused way, and out of that they will refocus their business and client base. There will also be more application of new FinTech. Look at a computer from 25 years ago and look at your iPhone there is more technology now on your iPhone. When you get that level of transformation it is quite a change.
What would you say your passion is outside of work?
I’ve been lucky to have been a successful kid’s football coach, working with the under-17s. I’ve managed all of the year groups since under-5s and we’ve been very fortunate with the crop of boys we’ve had at the club, some of which have progressed to premiership clubs. We’ve also been super successful during that time. I wouldn’t say I was the ‘Jose Mourinho of my local area’ as I receive a lot of help from others, but close to it!
Football coaching is definitely a passion and it is a release from day-to-day work. It has similarities to my working life with regards to getting a team ticking along and managing individuals in order to achieve more. The whole team ethic of a sports environment can be translated very well into my business life and it makes you a better manager, makes you calmer and makes you think in a different way.
My job here at Commerzbank for the last three years has been aiming to mobilise, an already good setup, into something that we can maximise even further.
So would this have been the career you would have pursued if you hadn’t worked in the financial markets?
Yes, I probably would have gone into football coaching more seriously and taken the next steps to achieve UEFA coaching A licence which is when it starts to get serious. I’ve taken FA coaching badges, so I would have probably gone down that path… that or politics!