The race to 100

Bruce Lawrence

From scale to retrenchment the custody industry has changed. There are, however, still opportunities in markets that are currently being developed

“One of things I remember greatly 20-25 years ago was ‘The Race to 100,’ says Bruce Lawrence, managing director at H.B.L. Consultancy Services. “There seemed to be a market competition between the major custodians of the first global custodian to offer 100 markets. That seemed to be the benchmark, and all of a sudden everybody was opening sub-custody accounts all around the world.”

For someone like Lawrence who has been in the back-office world for 40 years, he probably has come closer to working in 100 markets than any one custodian. Throughout his time at J.P. Morgan, Chase and Credit Suisse, and now as a consultant, he has worked in countries such as Nigeria, Mongolia and Russia to help prepare the markets to offer securities services.

Yet as history has borne out, “The Race to 100” has now been muted, with less ambitious goals such as BNP Paribas now aiming to offer sub-custody in 30 markets.

“There’s been a lot of concentration, and a lot of it comes from client demand. In Mongolia today, yes it’s a new up-and-coming market that has phenomenal natural resources, there’s over 200 listed companies, but only 20 or 30 are actively trading.” Thus, the client demand needs to pick up in some of these smaller, emerging or frontier markets in order to justify multiple custodians in operation there, he says.

Today, though, Lawrence’s work as an advisor on behalf of the London Stock Exchange Group (LSEG) at the Mongolian Stock Exchange and bringing the securities market into the 21st century, so to speak, can bring about quickly advanced markets.

“These new markets that are being developed at the moment—Mongolia, Myanmar, for example—these markets are able to take advantage of the best practices, the rules and regulations that are already being drip fed into all the other markets,” he says. “So in fact they’re starting off with a much better advantage. For example, Mongolia is totally dematerialized. London isn’t and won’t be until 2023. So in some instances they’re actually ahead of some of the other markets in regards to meeting the G30 minimum requirements and standards.”

Nowadays, Lawrence has a checklist of sorts to go through when developing a market such as Mongolia, implementing modern amenities such as dematerialization, a central registrar, a real-time gross settlement system (RTGS), delivery versus payment (DvP), etc., all of which help make the market attractive.

“There’s an appetite within the market. My challenge I’ve got out there at the moment is that there are more banks interested in the market than the market can actually service,” he says. “There’s four or five banks looking for a license, but in reality, the market can probably only sustain around two. So at some point there will be some consolidation.”

Consolidation has been a theme throughout the securities services world, even in more developed markets. Plus, Lawrence has witnessed the fee compression as custodians have often had to do more for less.

“As the business has grown and developed there’s been various services and products out there that are core and added value. If you look what’s out there, I think the core has absorbed over the years certain elements that were in the past added value services. In fact, that’s had a detrimental effect, because we get paid our fees based on the core services, and any kind of additional revenues came out of the added value services. So you’re actually doing more in some ways for a smaller amount. A lot of that has come out of competition within the markets and also consolidation; there’s been a natural progression where all of a sudden XY Bank is absorbed so that becomes part of the core services.

“Twenty-five years ago we had our four core values: safekeeping/custody, corporate actions, reporting and valuations. Now we’ve got all these extra add-ons that have been tweaks of the names or different reference points, such as compliance/sanction monitoring, performance analytics, enhanced tax services (such as for the Foreign Account Tax Compliance Act (FATCA)) and risk assessments. The net result is a product offering that continues to evolve and best reflects the needs and demands of the disparate markets we operate in today and the ever-changing requirements of the investor community.”