KAS BANK clearing specialist on Euronext Paris
KAS BANK is the first General Clearing Member of Euronext that is able to provide clients of the three underlying Euronext exchanges with its services from one portal instead of from three different connections. KAS BANK commenced its clearing and settlement services on Euronext Paris in November, after successfully completing a pilot phase with securities broker Eduard de Graaff. Euronext members can now trade on all three Euronext exchanges and have their positions cleared and settled using KAS BANK as their General Clearing Member. As from February 2002, KAS BANK can provide all its clients in Europe and outside Europe with this service. In the coming months, KAS BANK will conduct several pilots in order to gain further experience in the French infrastructure. Due to its highly automated services, KAS BANK can provide this service without any further increase in costs.KAS BANK now offers its clients one clearing and settlement protocol for the Euronext exchanges in Amsterdam, Brussels and Paris. In connection with this, KAS BANK introduces its new, automated collateral system; clients can now reduce costs by using their collateral surplus for other liabilities. Aside from these expansions, KAS BANK also provides one uniform reporting structure for the three Euronext markets. Expectations are that clients will have a better insight into the increased transaction volumes and turnover around the first quarter of 2002.
For Global Custodian article on KAS BANK (previously KAS Associate) see “KAS’s Custody Niche Across the North Sea”, IT 2001.
ESF Members Vow to Battle On
Despite the exposure of its threat to build a European central counter-party (CCP) as a bluff, the European Securities Forum (ESF) has decided not to implement the sunset clause in its constitution. The clause, which would have wound up the ESF in April next year unless members decided otherwise, was overruled at a meeting on 30 November at which members renewed their “commitment to a pan-European capital market.” ESF is also promising “new arrangements to enhance the strength of its membership and the role of its own executive.”This is understood to mean the recruitment of senior investment bankers to the executive committee of the ESF; the establishment of a permanent secretariat; and especially the broadening of the membership of ESF to include non-investment banking interests such as fund managers, custodian banks securities depositories and especially the smaller players in various national markets. Details will emerge from a full meeting of members, which is now unlikely to be held before the New Year.Though an ESF spokesman describes broadening the membership categories into new areas as “pure speculation,” the step does reflect the relative failure of an investment bank-led ESF to mould the European securities market infrastructure in its own image. The promise to appoint more senior figures to the executive committee of the ESF recalls the embarrassing collapse of the ESF threat to build their own single European CCP if the London Clearing House (LCH), Clearnet and Eurex Clearing did not build one for them. At the meeting of the EuroCCP Working Group of the ESF on 28 June, the members simply refused to put up the money. As the minutes of that meeting put it, “there is a risk to the reputation of the industry if it appears to lose interest in a development for which it has lobbied the authorities … [a decision by ESF] to abandon its objectives it could damage its reputation and prospects for successful lobbying in the future.”Considered in that light, the decision to override the sunset clause was more or less inevitable. The chief focus of interest in European CCP developments today, of course, is the future of Clearstream – currently the subject of competing bids from Euroclear and Deutsche Borse. The ESF announcement today says the organisation “continues to believe strongly in a horizontal structure which separates the governance of clearing and settlement from trading platforms … It is important to maintain vigorous pressure for horizontal consolidation.” This puts ESF squarely in the Euroclear camp (whence it came, critics might say) in the battle for control of Clearstream between Deutsche Borse and the Brussels-based clearer. But ESF will also continue to lobby for the removal of the barriers to efficient cross-border clearing and settlement in Europe, itemised in the recently published Giovannini Group report.See Global Custodian Pre-Sibos issue Summer 2001 (“Three’s Company”, pages 42-47).
T+1 Conference At Toronto Stock Exchange
The Canadian Capital Markets Association (CCMA) is holding a half-day conference on December 12th at the Toronto Stock Exchange on the latest T+1 developments, including three white papers.Those who are interested in attending can now register to the T+1 workshop online. Just click on the following URL
Fintuition Extends Operations to New York
For the first time since its creation in 1996, Fintuition Ltd, the London-based specialist Securities Finance training company, is to offer its courses in North America. In 2002, Fintuition will be offering its Global Collateral Management course in February and its Equity Finance & Structured Products course in April with both courses being run for a second time in September. All the courses will take place in NYC and will be limited to 16 participants each.Alison Brooks, Managing Director, said “I am pleased to be bringing our specialist training courses to my home country and we are confident that the courses will be as well-received in the US as they have been in Europe”.Alison Brooks and Fred Gander from Dewey Ballantine will be course directors for the Equity Finance course and Christian Karg from JP Morgan in London will be director of the Global Collateral Management Course.
Full details of dates and on-line booking is available from
For further details please contact Jonathan Gollow, Business Development, Fintuition Ltd +44 (0)20 7388 6363 or
Kas Associatie N.V. Wins First Mandate
KAS Associatie N.V. has been awarded its first UK custody mandate by the GBP 145m Norwest Holst Group Staff Pension Scheme following its launch into the UK market earlier this year. Norwest Holst, part of VINCI, the world’s largest company in construction and related services, have appointed KAS to provide custody services to a UK Equity mandate managed by GMO Woolley Limited.KAS launched their custody services in the UK initially focussing on the smaller and medium sized pension fund market, an area many feel is under serviced in the UK. KAS does not impose any minima criteria business or fee levels.Ian Ratoff, Head of UK Institutional Investors said:”Launching into the UK has been a very exciting time for KAS and we are delighted that the Trustees of the Norwest Holst Group Staff Pension Scheme have chosen us to provide custodial services to their pension scheme. This mandate win supports our views that there is a real demand for custodians to service smaller and medium sized pension schemes which some players may ignore.”
See “KAS’s Custody Niche Across the North Sea”, pp 16-17, Global Custodian, IT Issue 2001.
Money Market Mutual Fund Assets January 3
Total money market mutual fund assets stood at $2.306 trillion for the week ended Wednesday, January 2, 2002, the Investment Company Institute reported today. Fund assets decreased $40.84 billion from a revised $2.347 trillion for the previous week ended Wednesday, December 26, 2001. The revision is due to data adjustments and a change in the number of funds reporting. Assets of Money Market Mutual Funds (billions of dollars) Retail: Assets of retail money market funds decreased by $7.75 billion to $1.088 trillion for the week ended Wednesday, January 2, 2002. Taxable money market fund assets in the retail category decreased by $7.36 billion to $896.85 billion; the tax-exempt fund assets decreased by $392.2 million to $191.33 billion. Institutional: Assets of institutional money market funds decreased by $33.09 billion to $1.218 trillion for the week ended Wednesday, January 2, 2002. Among institutional funds, taxable money market fund assets decreased by $32.62 billion to $1.133 trillion; the tax-exempt fund assets decreased by $466.7 million to $84.33 billion. ICI reports money market fund assets to the Federal Reserve each week. The Institute also provides other statistical reports
on investment companies, including monthly reports on five broad categories of mutual funds.
The Hennessee Hedge Fund Index Increases by 1.6% in December 2001
The Hennessee Hedge Fund Index increased by 1.6% in December 2001, bringing its year-to-date return to 4% net of fees, significantly outperforming most major US and international equity indices, but lagging Lehman’s bond index, which increased by 8.98% over the year. MORE at
Hedge Funds Still Outperform Global Equity Markets
Despite posting their worst performance since 1996, hedge funds still outperformed global equity markets, according to early data from Allenbridge Hedge Info – which estimates that single-manager funds rose 4% last year, while funds of funds gained 3.6%. MORE at
Delaware Mutual Funds Go For “eDelivery”
Shareholders of Delaware Investments’ mutual funds can now elect to receive fund materials electronically, rather than hardcopy. The new Delaware eDelivery allows shareholders to receive annual and semi-annual reports, statements, prospectuses and other documents online at
Hedge Funds Rocket in 2001
Hedge funds proved a better bet for investors in 2001 – with the average US hedge fund rising by 5.6% net of fees over the year, according to data from Van Hedge Fund Advisors International. Offshore hedge funds performed even better than their domestic counterparts, averaging a 7% net gain for the year.
More at http://www.plansponsor.com/eprise/main/PlanSponsor/News/Markets/VanHedge
Kirby Quits Bolero to Re-Join Reuters
The longstanding rumour that Tony Kirby, executive director of the Global Straight Through Processing Association (GSTPA) during its fund-raising stage, was poised to leave bolero.net – the faltering trade documentation standardisation project backed by SWIFT and the Through Transport Company – look set to be confirmed this coming Tuesday. Kirby takes up a new position as head of STP Marketing Activity at Reuters on 28 January. It means Kirby re-joins the firm at which he made his debut in the securities industry, before joining SWIFT and then the GSTPA. His job will presumably be to Forge better links between the Reuters information businesses and its transactional services. There is an obvious opportunity for Reuters to provide pricing and other data to the GSTP/axion4 and Omgeo virtual matching engines. At Bolero, Kirby was director of Global B2B services, and a member of the executive committee.
Also read an article in IT Issue of Global Custodian
The Electronic Trade Enablers
Deposits to Unit Investment Trusts Increase by $1 blon
Deposits to Unit Investment Trusts increased by $1 billion in October 2001, significantly below a year before when deposits were up $2.8 billion, according to figures compiled by the Investment Company Institute (ICI). Unit investment trusts, or UITs, are investment companies that purchase fixed portfolios of selected stocks or bonds. MORE at
Shock Horror: The Biggest Bank in the World is Japanese
Figures published today by Bankersalmanac.com include the surprising revelation that the Sumitomo Mitsui Banking Corporation, the top-rated agent bank in Japan in the 2001 Global Custodian survey of major markets, is now the biggest bank in the world. The Japanese bank, enlarged by the merger of Sumitomo and Sakura banks in April last year, sports total assets of over $905 billion. Deutsche Bank, which headed the leaguer table last year, is second with assets of $883 billion. Last time the table was drawn up, Sumitomo Mitsui did not even make the top ten.Another Japanese bank, Bank of Tokyo Mistsubishi, he Japanese triumph is vitiated by the possibility that many of the assets are in fact liabilities, in the shape of unresolved bad debts, and the fact that Sumitomo Mitsui must re-pay Yen 1.5 trillion borrowed from the government as part of its re-capitalisation programme. These considerations apply across the Japanese banking sector, whose combined assets of $7.9 trillion make Japan the biggest banking sector in the world, ahead of Germany ($6.5 trillion) and the United States ($4.6 trillion). Interestingly, the top ten in the Bankersalmanac.com league table includes only one American bank: Bank of America. The other seven are all European.
Top Ten World Banks
Bank Assets (US$m)
|Sumitomo Mitsui Banking Corporation|
|Deutsche Bank AG|
|Bayerische Hypo und Vereinsbank AG|
|BNP Paribas SA|
|Bank of Tokyo Mitsubishi Ltd|
|Credit Suisse Group|
|Bank of America NA|
|ABN Amro Holding NV|
Scripless Securities Clearing and Settlement Infrastructure
SEC will allow the creation of a scripless securities clearing and settlement infrastructure for the commercial paper market if additional safety nets are created. On the condition that additional safety nets are created to ensure transparency, the Securities and Exchange Commission (SEC) said it will allow the creation of a scripless securities clearing and settlement infrastructure for the commercial paper (CP) market. Following a joint presentation made by the Investment Houses Association of the Philippines (IHAP) and the Philippine Central Depository (PCD), the corporate regulator approved in principle the proposed scripless securities settlement of CPs. SEC chairperson, Lilia R. Bautista, noted that while the commission expresses no objection to the proposed system, it will ask the proponents to submit regular and detailed reports on the issuers and the investors that go through the scripless system. IHAP and PCD said the SEC’s endorsement would encourage financial institutions and investors to use the proposed system for outstanding CP issues. Under the proposal, PCD will create the book entry system, providing participants with individual accounts constituting each participant’s CP holdings for one or more issues.
Also refer to Rick Butler’s “Squeaky Wheels”, Global Custodian, Fall 2001
on inadequate settlement infrastructure for European commercial paper market.
Financial Times Group Launches Fund Ratings Service For Investors
The Financial Times Group today launched FT Fund Ratings, a new service designed to help investors compare and understand more about funds. FT Fund Ratings is a major advance in the information available to private investors. It offers incisive information about fund risks, clear assessment of fund charges and improved comparison of fund performance. The monthly updated service provides consistent information on 25,000 funds from across Europe, allowing direct comparison of funds from different markets.A summary of the FT Fund Ratings for the main UK and offshore funds including those in ISAs, PEPs and pensions will be published in the Financial Times from February and is available now at
A full analysis of funds is being supplied by the FT to Fund Managers, IFAs and Fund Supermarkets for publication and internal analysis. Stephen Hill, chief executive of the Financial Times Group commented: “With the growing number of funds available, and the current turbulence in global stock markets, FT Fund Ratings will provide an easy to use guide to risk, charges and performance. FT Fund Ratings builds on our global reputation for impartial financial information by offering independent analysis from a source that is trusted by investors and professionalsalike. ” “This unique ratings approach from the FT Group will be the only fund analysis service to focus on three key criteria for investors in one system, examining the ISA, pension and PEP markets in a thorough yet easily comprehensible format.”FT Fund Ratings allows investors to identify the risks associated with funds and provides a transparent guide to fund charges, giving the individual investor a better understanding of their fund portfolio. Christine Farnish, Consumer Relations Director at the Financial Services Authority’s (FSA) commented: “The FSA actively encourages initiatives that seek to enhance the transparency and accessibility of financial products. We therefore welcome this initiative and shall watch developments with the greatest of interest.”FT Fund Ratings have been produced in conjunction with Fitzrovia International, Advanced Portfolio Technologies and FT Interactive Data.
India Announces NationWide Funds Transfer Network
The Indian authorities have begun work on eliminating the biggest single barrier to making a success of rolling settlement on T + 3, scheduled to start in April this year. It was announced today that eFunds Corporation will be working with Logica to create a Real Time Gross Settlement (RTGS) for the Reserve Bank of India (RBI) which will allow banks in India to make secure inter-bank payments throughout the country. At the moment, the RBI is the only institution capable of transferring same-day funds around the country electronically. In addition, Logica and eFunds will be working onm a new core banking system to cover all general transactions and central accounting at the RBI, including the bank’s general ledger. eFunds Corporation (Nasdaq: EFDS), a leading provider of electronic payment, risk management and related information technology and business process improvement services, will provide technical expertise and functional support to Logica in the implementation of the RTGS project. It will also perform work relating to the porting of Logica’s RTGS software onto a mainframe platform and help Logica develop a real-time accounting and settlement system for RBI. Logica’s Quaestor product suite will be supplied to 205 Indian financial institutions to enable their direct participation in the RTGS system.Also read on www.globalcustodian.com an article by Dominic Hobson
India Set to Adopt Rolling DvP on T +3
European Repo Market Worth Euros 2.3 Trillion Says ISMA
The value of repo contracts outstanding in Europe at the close of business on 12 December 2001 was Euros 2,298 billion, according to the second of the biannual surveys of the European repo market carried out by Richard Comotto on behalf of the International Securities Market Association (ISMA). This is 23 per cent upon the Euros 1,863 billion identified in the first survey in June last hear.However, the figure needs to be treated with caution. First, 55 banks responded to the December survey, against 48 in the June equivalent. Secondly, 11 of the banks which participated in the first survey failed to contribute data to the second, either because they were unable to provide any or because they submitted it too late. Thirdly, despite this, the authors of the report have added the value of the contracts outstanding at the eleven banks in June to the total for December. This certainly led to an under-estimate of the size of the market at the end of last year, since the value of contracts outstanding with banks which contributed data to both surveys rose by 13 per cent (or 28 per cent compound) in the second half of 2001. Fourthly, although the survey undoubtedly includes all of the major European banks active in the European repo market, and measures cross-border activity fairly accurately, it is impossible to say what proportion of the total market is covered by the 66 banks, not least because its insights into purely domestic repo are relatively limited. Fifthly, the survey measures only the value of cash and securities on the books of respondents at the close of business on one particular day, and gives no sense of the volume of business being done in the market day by day. Which means there is also an element of double-counting, with the two banks on different sides of the same deal both reporting it.In effect, the survey has done no more than put a floor on the total size of the European repo market, creating a base from which its future growth can be calculated. Indeed, the 11 missing banks are excluded from the detailed analysis of currencies and counter-parties which accompanies the December survey results. The survey also confirms anecdotal evidence about how the market works, but without spotting emergent trends. It tells the market little, for example, about the types of collateral now being financed. It shows that the bulk of collateral was issued in euro-zone countries (78.3 per cent) and that Germany (35.7 per cent), Italy (19.2 per cent) and the United Kingdom (11.2 per cent) are the three biggest sources. It also shows that 90 per cent of the collateral in outstanding transactions consisted of government bonds. But the split between government bonds, other types of fixed income and equity or baskets of collateral was not investigated. “Within individual countries it varies a lot,” explains Richard Comotto, the former Bank of England official and ISMA Centre Fellow who is the chief author of the study. “In the smaller European countries, government collateral can be quite a small proportion of the overall total. In Denmark, for example, there is a large non-government debt market, representing mainly mortgage-backed securities. In Germany, we also isolated Pfandbrief as a category. That is as far as we have gone. But of the 9 to 10 per cent of collateral which is not government bonds, I am not sure a huge proportion of that is equity.” Better understanding of equity repo in Europe awaits the conclusion of a working group of the European Repo Council, which is looking at the market. “I see more banks being interested in the product, but it will take some time before it becomes a substantial market,” says Godfried De Vidts, Associate Money Market Product Manager at Fortis Financial Markets in Brussels and chairman of the European Repo Council. “It is a difficult market because you have dividends and corporate actions. Even the custodians are struggling with those issues, so it is not easy for the repo market to advance in equity either.”Likewise, the survey shows a modest shift from fixed to floating rates on cash advanced in repo transactions. This probably reflects no more than a higher level of participation in the survey by banks from France, where floating rates are popular. Similarly, the survey confirms that French and British counter-parties favour documented deals (81.9 percent of all outstanding contracts were documented at the end of December, mainly GMRAs) while Germans and southern Europeans are still happy with spot sales and forward re-purchases (9.1 percent of outstandings were undocumented sell/buybacks). But this probably exaggerates the degree of documentation, simply because the survey sample is biased towards north rather than south Europe. So it is obvious that more research and greater participation by banks -particularly in countries such as Spain and Italy – are needed before market authorities and participants have a clear idea of the true size and inner workings of the European repo market. Clearly, the publication of a biannual survey is intended to encourage precisely that participation. Both De Vidts and Comotto say it is already having that effect. But in the meantime, there are dangers that the data will be over-interpreted. Until the data series has a record spanning years rather than months, there is certainly a risk of attaching unwarranted significance to short term fluctuations. For example, the survey picked up a significant shift since June in the maturity profile of outstanding repo contracts: seven day-one month contracts were up from 17.5 per cent to 23.5 per cent and those over six months from 10.7 per cent to 17.3 per cent. This probably reflects no more than a stronger year-end appetite at banks to lock in funding over the holiday season, though it may also reflect equally short-term bets on the future course of interest rates. Since firms always fret about tying up collateral for long periods, this shift to longer maturities is likely to have unwound itself by the time the June 2002 survey is competed. However, plans by the European Repo Council to encourage a “forward forward” market in general collateral via the electronic trading platforms by applying full rights of substitution may deepen the longer-dated repo market in Europe. This may in turn encourage the development of futures and options on repo rates.Despite its limitations, the survey has already produced data robust enough to draw some firm conclusions about how the European market is actually working.-Tri-Party Repo Has Yet to Take Off. Tri-party accounted for only 5.7 per cent of outstanding repo contracts. The volumes agreed bi-laterally or (39 per cent) and through voice brokers (40.1 per cent) were seven times as large, and even dealing through electronic trading platforms such as BrokerTec, Eurex and Euro MTS (15.2 per cent) was significantly higher. This suggests repo tri-party agents are still struggling to convince Europeans of the virtues of a product which plays a highly significant role in the repo market in the United States, despite lengthening maturities (to which tri-party is well-suited) and claims that it was the chief source of dollar liquidity in the wake of September 11. The absence of data on equity and basket repo (to which tri-party is also well-suited) also means the survey is unable to confirm the supposition that fixed income repo is unlikely ever to abandon bi-lateralism. The hopes of tri-party agents are now invested in Basle II encouraging European banks to switch from unsecured to secured lending. An as yet unpublished survey by the European Central Bank is said to bear this out. The Argentinian crisis is already encouraging the Spanish banks in particular to look harder at secured lending.-Electronic Repo Trading Is On the Increase. The volume of business passing through electronic trading platforms such as BrokerTec and Euro MTS has nearly doubled since June, rising from 8.1 per cent of outstanding contracts in June to 15.2 per cent in December. Predictably, this has come mainly at the expense of voice-brokered business – which is down by an eighth to 40.1 per cent in the last six months – rather than direct bi-lateral business. If counter-party anonymity is anything to go by, BrokerTec is winning the battle, since 8.7 per cent of the 15.2 per cent was anonymous, and out of the three platforms only BrokerTec and Eurex Repo have the central counter-party (CCP) needed to guarantee anonymity – and, by common consent, the LCH-owned RepoClear is garnering the bulk of the business. Anonymous trading is at nearly twice the level it was in June (4.6 per cent). It is a reasonable deduction that the 6.5 per cent of electronic trades settled without anonymity are passing through Euro MTS, though the lack of Italian banks participating in the survey makes it hard to judge. But is a reasonable conclusion that repo trading will grow fastest where it is anonymous, especially across borders, because it eliminates the credit constraint. -Repo Desks are Becoming Collateral Management Desks. Though the survey measured a decline in securities lending as a proportion of total business on repo desks from 17.4 per cent in June to 14.6 per cent in December, the latest results on a larger base do confirm the increasingly willingness of the banks to regard repo and securities lending and borrowing as more or less interchangeable. This broader and better integrated approach will also entrench the repo desk at Continental European banks, where it remains a relatively novel idea.But if the data is comprehensive enough to allow these conclusions to be drawn, its compilers freely admit its shortcomings. “We originally started collecting far more data than we ended up with,” admits Godfried de Vidts. “We have had to balance the need to obtain new material against the strain that would be put on banks’ back offices and IT departments in helping to get the data together. If we had asked for too much, it might have prevented banks taking part.” He adds that the survey has forced banks to prepare data series they have never considered important before, sharpening their thinking about how they can best manage their collateral.The survey series was prompted not only by the natural interest of market participants but also by calls from the Securities Settlement and Money Market Working Groups of the European Central Bank for more accurate statistics on repo transactions in Europe which fall outside the open market operations of the central banks themselves. Central bank repo figures are of course published separately by the European central banks. A proper estimate of the size of the repo market in Europe would need to add the market and central bank figures together.ISMA’s European repo market survey December 2001 is available
Custody Revenues Set to Fall Again
Figures from Combinaed Actuarial Performance (CAPS) presage another dent in the ad valorem earnings of custody banks. According to CAPS, the average balanced pension fund had a second year of falling returns in 2001, down 11.9 per cent. This is the first time there have been two negative years in a row since 1973/74. While equities, globally, produced double-digit negative returns, fixed income (3.0%) and property (5.6%) provided some solace with positive returns.
Small comfort from UK outperformance
UK Equities recovered in the fourth quarter of 2001, but this was not sufficient to reverse the losses of the earlier part of the year. However, with the UK Equity Standard median for the year at -13.1%, compared to the FTSE All-Share return of -13.3%, just over half the funds in the survey beat the index after fees. The relative results for funds in the UK Smaller Companies section were even more encouraging with a median of -14.5% compared to the index of -16.9%.Overseas Equity funds provided the biggest disappointment with a median of -16.8% compared to the index return of -14.1%. This was due to funds favouring European investment over North America, which performed relatively better.
More risk, less return
For the five years ending 31 December 2001, returns on UK and Overseas Equities were 7.3% and 9.4% pa respectively. Five years ago, the same figures were 16.1% and 12.1% pa. While equity returns have been considerably lower recently, volatility levels have nearly doubled. Tracking errors for many actively managed UK Equity and Balanced funds have increased substantially in recent five-year periods. In contrast, risk on fixed income and property has declined while their returns have improved relatively.This volatility in the markets has reduced the number of funds managing to outperform their section median in each of the last five years. In the equity and balanced sections, it is rare for more than one fund to have achieved this.
Allocation to fixed income increases
Over the year, Fixed Income weightings in Balanced funds rose from 12.5% to 13.6%. Despite this increase, allocation to fixed income still remains below its 1998 peak of 15.6%. Cash fell from 6.6% to 4.7%, while Property allocations hardly changed at 1.1% at the year end.Average equity weightings in Balanced funds increased over the year, from 79.6% to 80.3%. This is surprising, given the relatively poor performance of equity markets. Within this, average holdings in UK Equities fell, from 54.0% to 53.3%, while the allocation to Overseas Equities increased from 25.6% to 27.0%.While the allocation to Overseas, as opposed to UK Equities, is increasing, the proportion invested in Europe has declined recently. Three years ago, Europe represented 60% of Overseas Equity allocation. This has now fallen to 42%. In addition, European Equity allocation within Pan European (UK plus Continental) Equity funds has fallen over the last 18 months. CAPS Pooled Pension Fund Database covers the largest and most representative sample available to the trustees of UK pension funds. We currently cover 83 separate asset managers who manage over 199 billion in pooled funds, both balanced and specialist.
DTCC Moves Into Insurance Distribution
Following its success in transforming mutual fund distribution with Fund/SERV, the DTCC announced it is looking to work the same magic with insurance products. It has joined forces with ACCORD (The Association for Cooperative Operations Research and Development) to streamline communications between insurers and insurance distributors. The partners say they will help give the industry the tools allowing distributors to market, sell and process insurance products with the same ease and speed they do with other financial instruments such as stocks, bonds and mutual funds. This is referred to as the “mainstreaming” of insurance products.With this agreement, DTCC and ACORD will work toward the development of a set of common data standards that all sectors of the annuity and life insurance industry can use for exchanging product and sale information and for providing money settlement in the process.ACORD is the insurance industry’s leading standards organization. DTCC, through its clearing corporation subsidiary’s Insurance Processing Service (IPS), provides an automated, centralized system that electronically links insurance carriers with broker/dealers, banks, and financial planners for the exchange of information and money settlement during the sale and support of variable- and fixed-rate annuities and life insurance products.The first undertaking of ACORD and DTCC this year will be the completion of the “Product Profile” standard. “Product Profile” will allow insurance carriers, distributors and vendors to share product information, via IPS, by using a standard format.”Annuity and life insurance comprise a vital part of the financial services community, and we are glad to be working with DTCC on this important initiative,” said Gregory A. Maciag, CEO and president, ACORD. “Together ACORD and DTCC will provide the leadership needed to drive industry efforts toward standardization and automation in the annuity and life insurance fields.””At DTCC, we welcome the opportunity to work with ACORD,” said Marc Reiser, vice president, DTCC’s Insurance Services. “We have built a strong relationship with ACORD during the past three years and have seen how the organization effectively leads industry efforts towards standardization.””This standardization is an important element in mainstreaming insurance products to the broker/dealer community and will help the insurance industry establish and maintain a competitive stance in the financial services marketplace,” Reiser added.Other near-term projects include expanding ACORD’s standards in the area of licensing and appointments and life applications. DTCC plans to expand functionality in both these areas and will work with ACORD to ensure that a completed standard is ready for the enhanced products.”There are a broad array of projects that ACORD and DTCC will begin working on in the near future, and we will be calling on our carriers, distributors, other standards organizations and vendors for their input and cooperation as we move ahead toward the standardization of data formats and processing,” said Reiser. “We know that that the ACORD partnership is the best, most efficient way to serve the industry and the best way to fuel the growth of the life insurance and annuities market.”
Fund/SERV story (Three’s Company) published in Global Custodian, Summer 2001
NBG/Alpha Bank Merger Off
The merger between the two leading indigenous agent banks in Greece is off. National Bank of Greece and Alpha Bank announced that it had become clear during merger negotiations that a common understanding was impossible on such issues as the operation of the new bank based on market criteria and the equality of the two parties; these points had constituted, from the outset, the basis for the merger of equal talks.The bank statement read: “Given the trust of its shareholders, the preference of its clients, the devotion and hard work of its staff, Alpha Bank will continue its autonomous and productive course conducted by the permanent values and principles which led it to become the largest bank of the private sector in Greece.”Also see Major Market Agent Bank Review 2001 results for Greece
Verticals versus Horizontals: Who Cares Who Wins?
Clearstream knew that its decision – made by the Cedel International board on December 7th (see news item
“Clearstream For Cedel’s Negotiations with Deutsche Brse”
) – to negotiate a merger with Deutsche Borse alone risked alienating the investment banks which have campaigned for a merger between the Luxembourg-based clearer and Euroclear. London-based investment bankers have huffed and puffed repeatedly that they would switch their business to force a merger if they did not get what they wanted by more reasonable means. On 10 January JP Morgan Chase made good on that threat. The bank confirmed that it intended to shift assets worth $150 billion from Clearstream to Euroclear, and that Tom Swayne had resigned his seat on the board of the Luxembourg-based ICSD. The bank made clear that its decision was a protest at the decision by Clearstream to enter exclusive negotiations with Deutsche Borse, with a view to creating a vertically integrated business combining a trading platform, a central counter-party and a depository. “JP Morgan Chase supports a horizontal solution to the clearance and infrastructure question, while Deutsche Borse advocates a vertical solution,” read an official statement from JP Morgan Chase.On 21 January it emerged that UBS was also threatening to move its business across the Ardennes. The threat was less explicit than that issued by JP Morgan Chase, since its realisation depends on the outcome of the merger talks between Deutsche Borse and Clearstream, but the implication was obvious enough. “UBS AG supports the horizontal approach to European capital markets, including separation of ownership and control of clearing and settlement from exchanges,” it read. “We were disappointed that the Board of Clearstream decided to terminate merger discussions with Euroclear and pursue exclusive merger talks with Deutsche Borse AG. Thus, UBS has indicated to Clearstream and Deutsche Borse that it intends to move some of its assets. UBS action is dependant in part on the outcome of the Clearstream/Deutsche Borse talks. UBS had constructive talks with Clearstream management yesterday. UBS believes this strategic decision is in the best interest of our customers, of our group, and of the capital markets in Europe.” But the threat had to be taken seriously by Clearstream. If UBS did defect, it would – following the decision of DKW to move its Bund business to Euroclear last year – mean that Barclays Capital is now the only major investment banking group to keep its business at Clearstream. “We constantly review our position in the light of market developments, as one would expect,” says the British bank, tersely. But exactly how much would it matter if even Barclays Capital was lost? Clearstream wants to keep the business, and spent a day trying to persuade UBS to stay. But it would not matter that much if they lost it. JP Morgan Chase and UBS are just two out of 2,500 clients. The Euros 150 billion JP Morgan Chase is taking away may seem a lot of money, but it is only 2 per cent of the Euros 7.4 trillion Clearstream has on its books. And JP Morgan Chase is not in a position to shift its German equity business from Clearstream Frankfurt anyway, since there is no alternative to using the German CSD. Likewise, UBS accounts for about 3 per cent of total assets at Clearstream. Moreover, it is easy to think of a number of large and influential German banks, such as Deutsche, Hypo Vereinsbank and (ironically) even Dresdner Bank, who might actually shift assets from Euroclear to Clearstream. Many smaller Continental banks, whose presence in the securities trading and financing arena is increasingly significant, are already closer to Clearstream than they ever will be to Euroclear. And however angry some London-based investment bankers feel, they will all have plenty of clients who remain happy to keep assets with Clearstream. So the JP Morgan Chase decision is at least premature – since Deutsche Borse has yet to table a formal offer to the Cedel International shareholders and is not obliged to do so until its exclusivity rights expire on 31 January – and may be relatively unimportant. UBS acknowledges that defecting now would be premature, and other banks are known to be postponing a reassessment of their relationship with Clearstream until the outcome of the talks with Deutsche Borse is known. Unsurprisingly, given the closeness of relations between Euroclear and JP Morgan (until 2000 Morgan operated the Euroclear system, trousering $250 million a year for its trouble), Clearstream senses its rival in Brussels has launched a dirty tricks campaign by encouraging bankers already close to its view of the world to make the merger with Deutsche Borse look unpopular or even unviable in the run-up to 31 January with a series of well-spaced defections. Certainly these would-be defectors would be more credible if they had agitated for Euroclear to make a killer bid for Clearstream in the weeks before Christmas. The Brussels-based clearer may have raised its bid ostentatiously at the last minute, but its mix of cash for the Deutsche Borse and stock for Cedel International shareholders was scarcely designed to wow the right 50 per cent at Clearstream.Clearstream can plausibly argue that the vertical versus horizontal dichotomy is over-simplistic anyway. The Euroclear case for a merger with Clearstream (and other CSDs) rests mainly on the elimination of multiple interfaces in the back offices of the major investment banks. But the bulge bracket banks are not the only trading and investing houses which matter in Europe. Smaller domestic players want to keep the local CSDs. The elimination of multiple interfaces also depends as much on consolidation per se as it does on the direction of the consolidation. And not only has Clearstream never said it opposes further consolidation of depositories in Europe, it can also point to the Euronext grouping (to which Euroclear is linked) as not hugely different to the vertical platform Deutsche Borse wants to build. In the short run, vertical integration will almost certainly deliver cost efficiencies faster than a long drawn-out process of horizontal integration, and in the long run competition is always and everywhere the best means of securing efficiency and low prices. No wonder vertical integration is not as counter-cultural as Euroclear and its investment banking friends pretend: it is common in Asia and was recently adopted by the Helsinki stock exchange in Finland. Nor is continuing competition between ICSDs necessarily a negative outcome. The recent study by the Centre for European Policy Studies concluded that a single European CSD – akin to the Depository Trust & Clearing Corporation (DTCC) in the United States – was “not necessarily cheaper than competing organisations.” A merger of ICSDs would certainly do nothing to improve efficiency in European equity clearing and settlement, where agent banks reign supreme. Given that the ICSDs cannot centralise the settlement of equity transactions (which remain overwhelmingly domestic) without alienating that army of smaller broker-dealers and fund managers in every market in Europe whose interest in cross-border business is minimal, the ICSDs are in reality offering European equity traders and investors no more than an alternative to agent banks as a way into domestic CSDs. They will rightly be tempted to stick with agent banks, who offer a broader range of asset servicing products than the ICSDs in markets where the cultural, habitual, regulatory, fiscal and legal barriers far outweigh the infrastructural as business inhibitors. As the politics of clearing and settlement in Europe heat up, it will become increasingly obvious that Euroclear is more popular in investment banking circles than it is among the agent banks. This could be a decisive factor in the outcome.
********************************************************************************************************************Comment:The underlying technologies required for improving settlement timings are broadly similar whatever the accounting deadlines imposed. The article does not recognize that maturing technology is a key part of this equation. Orchestrating web services is an inflection point in supply and value chain integration. This will reduce the technology costs significantly by separating the business analyst from dependence on the IT developer. CSDs and CCPs are important…the market infrastructure does need to evolve…but advances in technology are equally relevant. The underlying technology change is driven by a continual move towards more application integration to reduce back office costs – the difference since Y2K is that new web-based standards allow organizations to use one infrastructure for internal integration, integrating with external business partners and also connecting with customers. Y2K only made pre-existing systems compliant and the underlying process and systems change was limited to reduce overall project risk. Many organizations still have large client-server systems (albeit Y2K compliant) which need to be broken down into their constituent functionalities and exposed to the settlement flow. The new generation of XML Web Services enables older legacy systems to expose their services so that system replacement decisions can be made separately from infrastructure decisions (and settlement deadlines).
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Industry Experts Comment on Clearstream Drama
GlobalCustodian.com: Are the threats this week by leading banks to switch business from Clearstream to Euroclear in protest at the failure to achieve a horizontal alignment of the two ICSDs a sufficient argument against the full vertical integration of Deutsche Borse and Clearstream?
John Gubert, HSBC:
The rationale for horizontal versus vertical structures is a commercial issue and not a polemic one. Horizontal structures enable the markets to build not for profit utilities with strong user based governance. They allow economies of scale both in management, staff and technology.Vertical structures that integrate trading, clearing and settlement, best typified by the proposed Deutsche Boerse model, seek to commingle the shareholder value driven world of the listed company with a monopoly arrangement post trade. Despite all promises that this monopoly will be benign, the fear is that it will be used to promote shareholder value at the expense of user interest.Were there multiple choice- and real choice- at all levels of the vertical structure, the market would be willing to see this model operate alongside others. But, at the moment, that choice is not really there except in the international bond activities of the ICSD’s.It is questionable whether user dislike for the vertical structure will lead to new thinking by Deutsche Boerse. Much may depend on shareholder reaction. Like all listed companies, the driver for strategy will be closely linked to the valuation placed on the company by the market. It will be interesting to establish whether others will follow the proposed moves of Chase and UBS. It is also, of course, possible that some clients may move the other way. The Chase and UBS thinking will, in part at least, have been driven by commercial realities. Scale gives fee discounts and they both have strong relationships with the two ICSD’s due to mergers. UBS was the Clearstream house as was Chase. J P Morgan was the Euroclear house as was Warburg. Consolidation could thus also be economically advantageous for the two houses.The news though undoubtedly poses problems for Clearstream. Losing two of ones top clients automatically weakens a company. It also will hit morale in Luxembourg. The converse is the case for Euroclear.It is that weakening of morale that is the key issue for users. Financially, earnings may suffer a glitch. But key staff retention remains the big issue for Clearstream management. Its top management has been decimated, the users and press have been critical of its culture (and its ethics) and now it faces up to the possible loss of two key non-executives on its board.The market will be concerned if this leads to further key person loss. Clearstream Luxembourg and Frankfurt are critical components of the market infrastructure. Performance degradation, perhaps due to loss of skill sets and focus, poses the greatest threat to market stability.Logic calls for consolidation in Europe. But consolidation must mean removal of layers of management, closure of facilities and consolidation of IT platforms. To date, there is little evidence of this happening. Fees in Europe need to reduce and reduce substantially. For the major holders of assets pay an exorbitant share of the costs of the big ICSD’s through ad valorem fees and non-competitive pricing of cash accounts. Holding a simple Eurobond is totally out of line with the equivalent cost for a domestic bond (CREST, for example, charges nothing). Cash balances are unremunerated and cash management tools complex. The ICSD’s and many in the market focus on the cost of a transaction. That serves well the high volume transaction houses. But for the non-broker dealers, the ICSD’s are a costly problem. And consolidation of infrastructure and user based governance must lead to fee cuts in those areas of excess charging and not just in the often quoted transaction fee. For that fee contributes perhaps around 15% of the ICSD’s gross income. Transaction cost cuts may provide useful headlines but they do little to tackle the issue of the total cost of our relationships with the ICSD’s.
1. It is very curious that several of the major firms who were pushing for a Clearstream / Euroclear merger on the grounds of “economies of scale” were the same firms who found it necessary to create the GSTPA o the grounds of “competition is good”.2. Vertical reintegration has really gathered pace in Asia and Australia in Hong Kong, Australia and Singapore. In those markets there is an absolute belief that the only way top achieve real economies and efficiencies is the total integration of the trading and settlement activities. This makes perfect sense and I predict that it is these markets that will leave Europe and the US embarrassingly behind by actually doing what is said cannot be done.
Paul Symons, Head of Retail and Public Affairs, CRESTCo Ltd:
“There appears to be very little support for vertical silos in Europe outside Germany. Although a vertical silo may appear to reduce costs in parts of the value chain, this will generally reflect cross-subsidisation of one activity (where there may be more competition – say in trading) by another. There is a markedly consistent view from all consumer levels that separate control of CSDs and trading platforms means that CSDs are best able to respond to consumer needs in respect of settlement. In particular, this is perceived as the best means of ensuring that access to settlement services is open and fair, and that tariffs are transparent.Of course we should not read too much into the decision by JPMorgan Chase and the public concerns of UBS. But two such high profile announcements so soon after DBAG’s intended purchase of Clearstream must demonstrate that customers do not see vertical silos as the settlement solution for an integrated European captal market.”
Another Market Infrastructure Expert:
“The clear answer, sadly, is “no”. However large and influential JP Morgan and UBS might be, their total holdings under Clearstream management are unlikely to be sufficient to cause terminal damage to Clearstream profitability. In some ways, their defection might even facilitate the absorption by Deutsche Brse on the grounds that this example of loss of confidence will dent the stated value of Clearstream, enabling a lower price to be paid by DB. I think I see two overriding issues. The first is that Clearstream will remain, unless stripped of the responsibility, the de jure CSD for German equities, which, given the enormous importance of the domestic marketplace in Germany, will ensure its survival, either independent or under DB management. The second is that those entities that have been crying out for consolidation at the settlement level have had their chance to respond to the opportunity, and have let it pass them by. Of course, the implicit right of veto enjoyed by DB did not make things any easier, but its existence was well understood in advance, and could ultimately have been overcome by a sufficiently attractive offer by Euroclear.Of itself, there is nothing wrong with vertical integration. It brings STP efficiency, it can bring lower cost, and it can enable unanimity of strategic direction. On the other hand, unless allied to horizontal segmentation of ownership, it also imposes lack of user choice, restriction of egress rights, lack of user focus, and opacity of pricing. This is clearly understood by the international participants in the European capital markets industry, but their voices have not yet been strong enough to counter the determination of the German marketplace to build and operate a vertical silo. Voices are not going to be enough; they will have to vote en-masse with their feet. The action of just two major international banks, whilst significant, is not going to achieve much. But it is a serious wake-up call.”