The Future of Custody: Bruno Prigent and Etienne Deniau on the Evolution of SGSS

In September last year, Société Générale Securities Services (SGSS) embarked on a “development and competitiveness plan” to support clients as they address regulatory change, and an efficiency plan designed to cut costs and create value in the wake of that change. Bruno Prigent (pictured) and Etienne Deniau talk to Global Custodian about the high priority evolution of the business.
By Janet Du Chenne(59204)
In September last year, Société Générale Securities Services (SGSS) embarked on a “development and competitiveness plan” to support clients as they address regulatory change, and an efficiency plan designed to cut costs and create value in the wake of that change.

While the regulatory change has created challenges for buy side clients, the opportunities for SGSS to provide services to them have been plentiful. Clients are being impacted by the Alternative Investment Fund Managers Directive (AIFMD) and UCITS (IV and V) and in the post trade space, the European Market Infrastructure Regulation (EMIR), Dodd Frank and TARGET-2 Securities (T2S) are also starting to grip.

“The main target of AIFMD and the UCITS is to propose passporting for asset managers, but also to define more precisely the role and liabilities with regard to these clients,” says Bruno Prigent, global head of SGSS.

The management of liabilities presents opportunities and challenges for SGSS, says Prigent, in respect of the overall liability of its depot bank for client assets and the restitution of those assets in the event of bankruptcy of the sub-custodian. “In the past we had to monitor our sub custodian network but we now have to be more and more present and check the thoroughness of the different providers,” he says.

SGSS is also planning to develop its services in Europe in the wake of T2S, the upcoming harmonized settlement platform for Eurozone securities. “Today we are able to provide local custody and settlement in different countries, but tomorrow we will have one settlement platform in Europe — we have to be able to provide custody across more locations,” says Prigent.

In preparation for EMIR and Dodd Frank, SGSS has also developed new clearing products. Its parent group recently bought out Credit Agricole’s shareholding in Newedge. In April, when the transaction is expected to close, Société Générale’s (SG) will become the sole owner of the OTC clearer. This acquisition completes SG’s post trade servicing offering with Newedge as a clearer and SGSS as the custodian.

The plan, which is subject to SG’s acquisition of Newedge being approved, will enable the bank to offer two models. Firstly, the top down approach will see Newedge offer clearing services for all OTC products. “The client can choose one clearer for all aspects of collateral, including the transformation and so on,” explains Prigent. “The clearer will have relationships with different custodians for the management of the collateral. Secondly, the bottom up approach will see SGSS managing the multiple clearer relationships and being in charge of the all aspects of the collateral, including the administration and transformation of that collateral.”

This open architecture means SGSS’s clients can choose more than one clearer, while Newedge clients can access a one stop shop (global and middle office servicing) for all listed cash and derivatives securities. “And then we will share the same engine for the management of collateral between Newedge and SGSS,” says Prigent.

Etienne Deniau, head of Business Development for Asset Managers & Asset Owners adds that in the new clearing world, SGSS will apply all three levels of collateral management, including sourcing, transformation and cross margining. “We intend to leverage Newedge as they are the OTC clearer and we are the securities clearer,” he says.

With custodians looking to become more operationally efficient and to cut costs, Prigent believes there are two aspects to this trend: the balance sheet impact of regulatory capital requirements and costs.

He points out that SGSS is a brand of SG and is covered by the bank’s capital requirements. “There was a reorganization of the SG group last year and it is now based on three pillars with SGSS as part of the Global Banking and Investor Solutions pillar,” he says. “At SGSS we don’t consume a lot of scarce resources and we produce more liquidity for the group than we consume.”

Deniau adds: “SGSS is not financing assets. It is only offering short-term overdraft facilities that use very little of balance sheet of the bank. SGSS is a net liquidity provider. Financing like hedge fund gap financing or real estate financing is offered by special units in other parts of the bank and we bundle their offer with ours.”

However, Prigent says “costs are the main issue for us because of regulation and for that we have to adapt our services to become more and more competitive.”

SG’s three-year efficiency plan for its securities services brand is a part of a development and competitiveness plan, which commences this year and runs until 2017. “For this plan we have three main pillars: the first is about the product and geography and the target is to offer more and more services in line with the evolution of regulation and the needs of our clients,” says Prigent. “We will also expand our sub custody network from the current 29 markets and open new locations.”

“The second pillar is about developing information systems,” says Prigent. “Here we will invest a lot of money to be able to provide clients with a single custody platform for different countries in Europe. The target is to have one interface for the client and provide this interface in different countries. We currently have this approach for fund administration.

“The third pillar is our competitive plan and there are two aspects here: the first is the efficiency plan, which involves the optimization and harmonization of processes. Here we will reduce some jobs and accelerate offshoring and transfer some activities from Europe to India.”

In a bid to cut costs, SGSS works with a subsidiary of SG Group in Bangalore and the provider plans to open a new location in Chennai in the coming months. “With this captive company we can offshore part of our activities,” says Prigent, “and the project has been agreed with staff representative bodies “

“The second aspect of the competitive plan is to decrease our costs by 10% by 2016. We started this project in October. In the first phase, we began discussing the plan with our staff representative bodies and completed these discussions in mid-February. We will implement this project through 2014 and 2015. In relation to offshoring, we’re looking at which processes will stay local and which will go to India.

SG said last year that it would cut 375 jobs in its securities services division across Europe in response to uncertain economic conditions and to meet regulatory capital requirements. In a staff union letter obtained by Reuters in November, it was revealed the cuts would impact mainly France with a further hundred planned for the bank’s other branches including Italy, Luxembourg, Germany and Ireland.

“And we validated our project with the local regulatory authority and we have the green light. Now it’s a question of execution.”

SGSS’s operating efficiency initiatives helped reduce operating expenses by 3% to €-966 million in 2013, despite the €-30 million recorded in respect of the parent banking group’s transformation plan.

This high priority evolution of the business, in addition to the project to acquire Newedge sets out SG Group’s intention to be a more competitive player in post trade services.

Prigent says: “We can offer the same client fund administration for Ireland, France, Luxembourg and Italy and there is a project to offer fund administration on the same platform for the U.K. market. It is my target to offer clients a similar service for custody, operating from a single platform.

“And it’s the reason why in our [efficiency] plan we also have the competitive plan because the target is to reduce our costs for two main reasons: the first is to compensate for the level of our investment in IT and the costs of regulation but also to be more and more aggressive on the commercial front.”

Since SG’s reorganization at the beginning of 2013, its strategy has been to offer clients a one-stop shop for all the post trade services and to cover the whole value chain. “In the case of OTC clearing, having Newedge would enhance our capacity to offer a one stop shop facility for our customers as well” says Deniau.

“We have a comprehensive service, which enables asset managers to focus on their core responsibilities. Everything that is not core is part of our game.

“On OTC services we have a complete OTC service chain, contract management from affirmation to reconciliation and trade repository reporting (EMIR requirements), pricing, or clearing with Newedge, collateral administration including dispute management and, of course, collateral management. The customer can focus on contracting, and we provide everything, after the contract is signed.

“To complement this, we have an independent valuation service (External Valuer) as required by AIFMD. We also provide a regulatory watch (to help asset managers manage a fund in another jurisdiction) in order to comply with regulatory reporting, which is a big issue for AIF Managers. If you are a French company managing an Irish fund, you need to follow the local Irish regulation. In this respect, you need a very specific service to help you out and to fulfill your asset management responsibilities. And, despite fund passporting, asset managers have more and more reports to give to their clients, and to regulators. And we can produce these reports for our customers.”

Commenting on the outlook for SGSS within the universal banking group, Prigent says: “The first priority is to develop and deliver more services for the client and thus offer them more value. Secondly, Société Générale group’s overall target is to have an ROE greater than 10% by the end of 2015. The ROE for custody is above 10%, which is very good and very interesting for the bank because it contributes positively to its ROE of the bank.”

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