Bringing it all together
The decision by US multinational 3M to select ABN-AMRO Mellon Global Securities Services to provide trust and custody services to its $1.5bn global defined benefit pension (DB) arrangements was not only a first in terms of business volume and breadth of countries to be covered. It was also indicative of a custody industry adapting itself to the consolidation and communication needs of large corporations today.
Nadine Chakar, managing director at ABN-AMRO Mellon, notes that 3M’s approach reflects a strategic shift by large multinationals. “Multinationals may have used an insurance contract in the past with the hope that assets and liabilities would match.
“Now they are moving toward a global asset management structure with risk and compliance as major factors on the back of global transformations such as the euro introduction. And they are seeking the facility to bring this all together.”
Chakar says Mellon Trust saw the writing on the wall a few years ago: “We are, I believe, the second largest master custodian in the US, working for the likes of 3M and Kodak which are coming to an age where they want more oversight and consolidated reporting for their whole business.
“This was part of the rationale that went into creating ABN-AMRO Mellon. We had the technology, but the requirement was for local presence and expertise in areas such as tax and asset bundling questions.”
3M went to RFP to get a solution for their needs and Chakar says ABN-AMRO Mellon won the mandate based on this alliance of technology and global reach.
“Another issue was our consultative approach. “No-one has ever done custody on this scale and you have to strike a very good balance in meeting the home office requirements of 3M, such as consolidated reporting and competitive price structures, without losing sight of the local client whose needs are totally different.”
Chakar says this involves meeting with local human resources, investment managers and consultants to understand the growth plans and investment objectives of the local entity. The important thing is that the parent company does not want to streamline or curtail the independence of its various plans but to implement relationship purchasing and consolidation of information world-wide.
“They want to assess their pension plans relationships to stock exchanges and how well they are performing on a global basis in terms of asset allocation, etc. It is a question of timelier and more accurate information.” She notes that another advantage for US multinationals lies in collating global figures to meet US accounting standards.
And Chaker opines that the ability to recognise that the custodian is almost working for two clients with different technology needs is essential. “The technology must be flexible. We employ asset liability accounting which allows us to model any situation we need and tailor different benchmarks on a local level. I also believe the strength of our performance measurement services leveraging on Russell-Mellon as a platform partner is something none of our competitors have today.
“We also have the resources of local ABN-AMRO offices world-wide to enable us to understand local market nuances and regulatory issues.”
In terms of fees, Chakar says that 3M as a longstanding client has relationship leverage on cost, which would be different from company to company depending on their requirements.
Specifics of the 3M mandate, she says, include performance and risk measurement, customised benchmarks and reporting.
For 3M, Chakar says other products such as securities lending programmes – both agency and principal, treasury management products from spot deals to exotic options as well as commission recapture are available at the discretion of local plans. “This is a no strings attached arrangement. It is purely an exercise of being a master custodian.” The 3M project is already garnering interest, she adds, noting that a couple of similar relationships are close to fruition.
Going forward though, Chakar sees the custody race re-focusing on a balance between technology and people service: “We have always understood that technology is critical to success, but you also need the best human resources to operate this technology. What it boils down to is having people to listen to corporate requirements and implement innovative solutions.
“We are all spending a huge amount on e-commerce and straight through processing (STP) but there is a need for balance to ensure that we’re getting the efficiencies and the client is reaping the benefit of high quality products.”
She notes that the group is constantly fine tuning technology though, as markets move to T+1 and eventually T+0 settlement times, but that this poses its own problems for arrangements like the 3M contract. “This is OK in the developed markets where you know what you’re dealing with. It’s the emerging and still submerged markets where there are still many obstacles in terms of regulation here.”
Chakar also flags up the challenges ahead reporting at a consolidated level regarding time and position differences: “The information system we use operates on a real-time basis giving a snapshots of an exact point in time. For performance though there is the need to freeze the time period.”
On the pan-European depositary question, Chakar predicts alliance as the utilitarian solution. “The Euroclear/Cedel thing is a bit like watching a football match, every time you open a paper one of them has scored.
“I think probably the most sensible thing is to see them come together and create a robust pan-European depositary which would be great for both consumers and providers. I’m sure we’ll get there, but it is difficult because unlike the US you don’t have the same laws, taxes and regulations. The single currency is the first step.”
For the future, Chakar says ABN-AMRO Mellon’s goal is to become a dominant custody provider and believes the complimentary strategy of the two groups could give a competitive edge: “Europe is our main focus and we have the unparalleled advantage of being a European provider fuelled by American technology.
“I think we are the only provider that feels comfortable servicing a client in Italy reporting in Italian and similarly, for example in Germany and France . Being in Holland helps here and we have a very solid multinational staff. It’s a combination that none of the American banks can provide. The European banks have traditionally grown up as clean, fee-keeping banks and not as a provider of information. Marry these things together and you bring a unique blend to the market.”
And she argues that the groups ‘custody only’ approach helps: “Even the larger banks like Chase or Citibank don’t focus solely on custody. I don’t sell asset management, we are not a bank and clients get 100% of our time.” She notes that this is paramount in an industry tagged with the commodity label.
“I don’t believe custody as a service is dead. All the technology in the world is not going to substitute taking the time for client relationships. The ‘bigger is better’ argument just means offering a cheaper price. I don’t really care to be the biggest I just want to be one of the most profitable so I can still be in business and provide the best service I can.”
For European domestic custodians she predicts a short-term shelf life, however: “They will remain for the immediate future, but once the exchanges and depositaries combine there will be no need for them and they will need to look at ways of re-inventing themselves. The market is already becoming tighter.”
And the prolific development of convenient internet solutions for distribution of products and knowledge to clients is becoming a big differentiation point, Chakar adds.
One product to be rolled out shortly will be customised market and country information targeted at industry segments depending on their levels of sophistication.
The group is also working on what it dubs the ‘Data warehouse’: “This is a custody neutral interface with various providers, which allows clients to hub out of our technology. For example, asset managers could be interfacing with 50 or 60 banks world-wide for custody and we have developed the technology that can fuel their own systems and provide consolidation and ‘warehousing’ for the back office information. We are seeing a lot of US interest here.”
The group is also set to provide increased derivatives clearing through a subsidiary of ABN-AMRO.
“Projects like these can now be done in three months from focus group to development thanks to the internet. There’s a lot going on and unless you plan properly you won’t be in the custody game for much longer.”