If the euro is good for anything once it is introduced next year, it will surely help break down barriers and smooth financial transactions in Europe. But some custodians in Europe believe their job of clearing securities transactions will be no simpler in the euro-zone than it is now. They will still be indispensable.
Will the single currency create new opportunities for custodians in Europe to emerge as euro-custodians, taking business from today's global custodians, or will it simply put the squeeze on everyone?
All agree that the advent of the single currency will swell investment volume. Opportunities at the level of the investor are bound to increase, says Ian Dalton of Euroclear. They will be able to choose from a much wider pool of investments. Clearly those organisations will be doing much more cross-border rather than domestic business, so clearly they will use a custodian to facilitate the settlement of those transactions," he says.
Calum MacDougall, senior vice president at ABN AMRO Bank sees the increase in euro-zone investment volume prompting global custodians outside the zone to look for a euro-provider to replace the various local providers. And in a few years, any successful euro-provider will have to offer added-value services. "In a few years' time, it may be possible to get pan-euroland clearing and settlement done by linking up to one local CSD central securities_depositary," he says. "This will mean the demand for 'simple' euro custody could partly be covered by the CSDs directly. Other euro-providers will need to provide added-value services to justify their existence." ABN AMRO already offers those services, he adds.
But in the meantime, intermediaries remain a necessity for fund managers. The technical side of securities clearing is hardly going to be made simpler because of the single currency, says Robert Seaford, managing director of Paribas Securities Services. "Initially there is not going to be any direct benefit," although on the cash side things will be less complicated, he says.
The illusion that Europe will be one country for investment purposes will soon be shattered by the reality, says Philippe Rey, senior vice president at Société Générale Securities Services.
"There will be a big discrepancy between their wishes to invest in the euro-zone as if it was one country, but they don't understand that on the custody side the technical problems will remain," he says. There are 70 different systems to clear cash and securities within the 15 countries, Rey points out. "What is in the pipeline in terms of systems simplification will be very long and very difficult."
All this is bad for the investment business but good for custodians, as long as there are a few providers able to position themselves between the wishes of investors and the realities they face, he says. Volumes of business for custodians will increase. "There is room for global players... there will certainly be a role to play to be the buffer to this patchwork of systems."
As the new single currency allows for deregulation, competition between custodians will increase and the response to that will be more mergers and acquisitions, says John Gilchrist, director of corporate communications at Cedel. "You'll have the big American corporations competing in a way they haven't yet in Europe - as they did in Big Bang," he says. Big players keen to grow include Chase, Goldman Sachs and Merrill Lynch.
Some of the big European players are likely to come together to compete, Gilchrist says. "What we'll see as the big players move in, the smaller players will merge and try to build distinctive competencies for themselves."
Larger investors are keen to cut out any layer of cost they can. By using a standardised custody product provided by different custodians in each country, they may in some cases even be able to cut out the global custodian as middleman, says Rey. MDCC (multi direct clearing and custody) is such a product and is already used by Paribas, Deutsche Bank, ABN AMRO and ING Bank.
"What we need is to be physically present locally as subcustodians through one entity, and also having one standardised product for the client," he says, dubbing the effect of this 'virtual global custody'. "Global custody continues to be good but it will be more focused on mid-cap clients for emerging markets and for larger countries."
Custodians could become squeezed in some of the smaller local markets, says Gilchrist. The focus will shift in favour of bigger financial centres. When the single currency is in place, companies within Europe are likely to head to those centres to raise finance rather than using their own smaller and less liquid domestic financial markets, he says.
He sees fewer local institutions and fewer global institutions providing custody services post-euro. "There'll be global, regional, international players - fewer players but bigger and in the big centres," he says.
"You're going to see the evolution of a number of strong European providers. Those which have a strong pan-European presence will be in a better position," says Seaford. But firms are unlikely to set up physical presences in countries purely for custody - it will only be economically worthwhile for them to open new offices if other business demands it too, he says.
Paribas, says Seaford, is well-placed to rise to the top as a euro-custodian. It already operates in six of the 11 countries joining the new currency in the first wave next year. "We really want to be able to leverage our traditional competitiveness in terms of the opportunities the euro will provide," he says.
Not everyone sees change in the marketplace. The euro is unlikely to bring any new players into the custody market, argues Robert Binney, managing director of worldwide security services at Citibank.
"The barriers to entry in this business are huge... there is a significant cost of technology which is going up all the time," he says. Morgan Stanley and Barclays have decided to give up the global custody business because the technology was just too expensive, he says. "Unless you've got up-to-date technology, you are global - or at least pan-European - and you have senior management commitment, then you are not likely to be a survivor," he says.
Binney says Citibank's major competitors are mostly strong in one country but weak in others. He says Citibank's strength is partly in its ability to be its own subcustodian in 50 markets around the world. No other global custodian can do that in more than 10 countries, he says.
American banks Bankers Trust, Bank of New York, Chase, Citibank and State Street will continue to be strong as global custodians for European clients while ABN AMRO, Deutsche Bank, Paribas and SBC will be among the main Europe-based players."