The making of a regional custodian

Attila Szalay-Berzeviczy

From the fall of the Iron Curtain to the integration of settlement systems to a harmonized platform in Europe, Attila Szalay-Berzeviczy, talks about the growth in the capital markets in Central and Eastern Europe and how that prompted providers to think more global

Not every securities services industry professional can say their careers were directly influenced by geopolitical history in the making. But Attila Szalay-Berzeviczy’s is the exception. His inroads into securities services in 1990 coincided with the rebuilding of Central and Eastern Europe (CEE) and the development of region’s capital markets.

His native Hungary was a front-runner in the region in building its capital market, he recalls. “A bunch of people were working very hard to have the first operational stock exchange of the CEE region in Budapest,” he says. “In June 1990 the reopened Budapest Stock Exchange became not just a capital market infrastructure but a symbol of freedom and market economy returning to Hungary after 50 years of darkness.”

Szalay-Berzeviczy was working for Budapest Bank, then a state-owned bank, at the time. He took part in building a securities services business to support foreign investors entering Hungary. “Then the market was really physical,” he says. “I spent half of my days in the vault endorsing physical securities, so that my team could put the shares in a bag, sit in a taxi and deliver them to KELER, the local CSD (central securities depository) that started its operations back in 1993.”

Trade settlement was confirmed using typewriter and telex. There was one SWIFT terminal, which as head of the department, Szalay-Berzeviczy had the privilege of using. “We were starting to learn how we could use message MT599 free format message to confirm settlements. Then J.P. Morgan was hired to advise us on how to build and run this new business line, how to respond to an RFP and how to set up settlement processes.

“Then, as we established ourselves, we started to challenge the other provider in town: Citi. I remember, our very first clients were Deutsche Kassenverein, Smith New Court and The Bank of New York`s depository receipt division.”

Budapest Bank’s first major challenge was to comply with the U.S. Securities and Exchange Commission’s Rule 17F5. “This piece of regulation gave guidance to U.S. global custodians with regard to selecting an agent network outside of the United States. The capital requirements set by this rule for eligible sub-custodians made our life difficult,” says Szalay-Berzeviczy.

In 1994, Bank Austria Creditanstalt (BACA) acquired Budapest Bank`s securities services businesses. BACA had a strategic alliance with Banque Paribas, which put Szalay-Berzeviczy in direct contact with BACA`s Michael Aschauer and Charlie Cock of Banque Paribas (now BNP Paribas). “Michael and I learned a lot from Charlie`s team. We can say today that Paribas had a big influence on how Central and Eastern Europe`s securities services industry was shaping up.”

Back in the 1990s Szalay-Berzeviczy had a strong belief that the countries of CEE would one day join the European Union. This would boost the local stock markets, which would have a positive effect on the profitability of the region`s securities industry. “I started my securities services career in 1994 with building up a sub-custodian from scratch. It took 10 years to arrive to the EU and turn our markets into eligible and attractive targets to all investors in the world.” Szalay-Berzeviczy was so convinced of the positive effect of the EU enlargement that he became the chief architect of the takeover of the Budapest Stock Exchange by the Vienna Stock Exchange, BACA, Raiffeisen Bank, Erste Bank and Oesterreichische Kontrollbank. This transaction was successfully concluded a couple of weeks before Hungary officially entered the EU. This led to Szalay-Berzeviczy’s appointment as president of the Budapest Stock Exchange for four years.

“In the 1990s I was also systematically preparing my business (BACA in Budapest) for the time when the first domestic institutional investors would appear on the radar,” he says. “I strongly believed that the increasing wealth in CEE would increase the savings and the investment activity.”

In 1998 Hungary’s first pension funds were established, and the investment funds business and the insurance companies’ investment activity started to boom. In addition to Hungary, Poland and Czech Republic also saw an explosion in domestic investment activity, making the region attractive for sub-custodian banks.

“Then we had to set up the fund administration unit within the department and these domestic market developments slowly turned the sub-custodians in CEE into global custodians,” says Szalay-Berzeviczy. “From the early 2000s the domestic clients became gradually more and more interested in investing abroad. So we took on a new responsibility: network management. We started to open securities accounts first in Germany and in the U.S., then in more and more countries. And as we grew, our clients became more and more sophisticated investors, more demanding, and managing the network became a serious part of our daily work.”

Now, as head of group securities services at Raiffeisen Bank International, Szalay-Berzeviczy says the next big impact on the CEE markets will be when the Czech Republic, Hungary and Poland adopt the euro. “That will change the game again. Eastern European economies will converge further to the west and TARGET2-Securities (T2S), the harmonized securities settlement platform for Europe) will roll out to new countries on the East. But the strongest and fittest sub-custodians of this region will always have a job if they are smart enough to foresee in time the coming threats and opportunities.”

“The cultural difference between West and East is still so meaningful that the coverage of this region will require for a long time local specialists,” he adds.