Following the agreement of Cyprus 10 billion bailout deal with international lenders, the custody providers in the island country are holding steady, says Andreas Yiasemides, head of Fiduserve Fund Services.
In an interview with Global Custodian, Yiasemides sets the scene.
How is the custody sector coping in light of the financial challenges facing Cyprus?
Up to now we have not had any effects on custody. All assets are off balance sheet so the haircut and all the measures applied by the Euro group do not apply. There are no problems with custody clients transferring their assets as these are off-balance sheet items. The only issue is with Laiki Bank, which is undergoing a restructuring. It will not be a problem for client accounts including Clearstream, Citibank, HSBC and other international reputable custodians. The only thing is that it will take some time for the clients of Laiki Bank to get their assets back to be transferred to another custodian. There is nothing wrong with other banks in Cyprus. The other thing worth noting is that a majority of the custody in Cyprus was under Cypriot funds called international collective investment scheme. Some of these are private funds, which enjoy many tax advantages. This will not change because there will be no tax on dividends and no tax on the sale of capital gains, sale of shares. All of these advantages will remain. The only problem we have is in the banking sector where are talking about bank balance sheets. Fund clients will not face any problems in terms of what will happen over the next two days (the bailout is granted in return for a haircut on bank deposits) and this will pass over time. The first day of all of this happening was not good news. This is something we can continue to adjust to and we can continue to offer custody and fund services. We also have the trust from our clients. They dont want to move out of Cyprus for the time being. They are only thinking about moving their banking facilities outside of Cyprus. We havent seen any moves of assets of funds or assets under custody. These are segregated from bank assets so we havent seen the same concerns in this area. In the custody agreement it is explicitly stated that all the assets are segregated from bank assets and segregated from the sub-custodians so there is nothing to be afraid of.
What impact will the crisis have on the type of business activity of the custodians?
The majority of funds in Cyprus are created by foreigners so there is no difference between Cypriot and foreign clients. Cypriot investors, along with having their assets under custody know that their assets are off balance sheet. Many of them are Cypriot investors and transform their deposits to assets under custody to shares in bonds or any ETFs or other assets that will be outside the balance sheet of banks in order to be secure. They know that assets under custody provides this security to them because they are not included in the balance sheet of the banks. So for the time being we havent seen any concern, fear or anxiety regarding this sector of the economy. Of course we have a different picture in the banking sector. We have many funds in Cyprus. Our priority as fund provider and custody provider is to convince our client that they dont have to operate in Cyprus for banking but if they want an overseas banking facility we are trying to find solutions for them for a banking facility, without moving away their assets under custody. They dont want to move away or change their tax structures because there are many tax advantages that are still there. So the big affect will be on banking facilities.
Is there any problem for cash outflows?
Yes there are some conditions to be announced by the Central Bank of Cyprus regarding the flow of cash outside of Cyprus. A new law has been voted/ratified by parliament last week for the flow of only cash from Cypriot banks to any other bank around the world but that will be enforced from Thursday because now the banks have closed for a bank holiday for five days in order for their systems to be adjusted for the change one of the changes is that Laiki will be merged with Bank of Cyprus because the system should be adjusted for all of the changes and thats why there is a public holiday after Thursday. But even after Thursday the Governor of the Central Bank of Cyprus will put some restrictions already ratified by our parliament regarding the flow of money outside Cyprus and within Cyprus. Even now we have some conditions regarding the withdrawal of money from Atms and credit outflows in order not to have a very big outflow of money because of the reputation, comments and panic. Its a very strange and unexpected decision for Cyprus taken by the Euro group and if they are going to use it as an example that will have a very big affect in Europe in the Euro currency because clients will not be afraid of Cyprus, instead they will be afraid of the whole of Europe. They will not continue to have deposits in Euro in Europe if this decision is to be used in any other country.
From a custody perspective those collective investment schemes advantages will still be there. There is no threat of those disappearing.
How are the local custody providers being impacted?
I can tell you that only Laiki will not be a global custodian in the next year, for the time being. All other banks will continue to offer custody services and especially the other banks, except Bank of Cyprus, will continue to offer banking services at the same level as before as there is not hair cut in the deposit of any other bank, even international banks such as Societe Generale. Of course, and this has been discussed many times, because now in an effort to make Cyprus an international center for funds, a new committee that I am a member of that has been established by the government, called Cyprus International Fund Association and this committee has decided that we are going to start negotiations with big banks and international custodians to establish an office in Cyprus in order to provide more depository services to investors that want to have an international custodian in Cyprus. And the other thing we are trying to say to our clients is even in the case of Bank of Cyprus, Laiki and Hellenic Bank, it is ok to have their assets under custody with the bank because they are using reputable sub-custodians. If clients are using a local sub-custodian through HSBC then there is nothing to be afraid of. We are making some effort to have an international name in Cyprus in order to give more marketing effort in promoting Cyprus as an international center for fund industry. The organization will be called CIFA (Cyprus Investment Fund Association).
Which local banks are currently offering sub-custody?
Bank of Cyprus, Hellenic Bank and another two Greek banks Eurobank and Piraues Bank. Societe Generale also has a foreign branch in Cyprus.
What will happen to Laikis sub-custody division?
For the time being, because it is part of the bank that will be merged with the Bank of Cyprus, the custody department will be part of the Bank of Cyprus. This is because there will be a merger of the good bank and bad bank. The good bank will be merged with the Bank of Cyprus and I believe that custody will be part of this good bank.
Andreas Yiasemides joined Fiduserve Fund Services, a newly created division of Cyprus Fiduserve Management, in March. He joined from Bank of Cyprus, where has was head of Custody and Trust. Fiduserve Fund Services supports a wide range of fund related structures, including formation, corporate administration, accounting, administration and director services. The entity covers a range of fund structures from a variety of jurisdictions including Bermuda, BVI, Cayman, Cyprus, Gibraltar, Guernsey, Ireland, Luxembourg and Malta.
(JDC)