Co-operating to survive
The Nordic region tends to punch above its weight when it comes to global custody. Despite the small size of each individual market, there are still some rich pickings to be had.
In September, ABN Amro Mellon secured a e16bn mandate from Första AP-Fonden, the First Swedish National Pension Fund (AP1) to act as sole provider of global custody and related services.
AP1 is one of four buffer funds set up by the Swedish Parliament as part of the country’s national pension system. The second Swedish National Pension Fund (AP2), appointed US custodian State Street to provide global investment services for its around e10bn of assets under management in June 2002. Also in September, Northern Trust won a deal to act as sole global custodian for Swedish insurer Folksam’s e13.3bn of insurance assets and mutual funds. Not only was the deal large, it was also very creative in its approach to Swedish mutual funds laws.
Northern Trust worked with the Swedish regulators and put a solution in place that has now become a part of the mutual fund act. Previously custody and trustee services for mutual funds in Sweden had to be provided by a local bank. Northern Trust teamed up with Svenska Handelsbanken, which provides these services while Northern Trust provides the global custody for all assets.
The deal marked the first time a non-Swedish bank would provide custody and related services to a Swedish mutual fund. Anne Lise Winge, head of European business development at Northern Trust, says the bank is looking to expand this approach across the region, where each country has similar mutual funds laws.
There are also innovative elements in the AP1 deal. Keith Hallman, head of sales, Nordic region at ABN Amro Mellon, says the fund is unique on that it undertook its own domestic custody, having a direct link into the local central securities deposit (CSD). Under the deal, ABN Amro Mellon will provide global custody for both domestic and non-Swedish assets.
Other functions also have been outsourced to ABN Amro Mellon, including trade matching. “AP1 has been managing a great deal of its money in-house and it will outsource trade matching to us. Today, AP1 sends us a trade that has been already confirmed in the market. In the future, the fund will send a ‘soft deal’ – a trade that is not yet confirmed. ABN Amro Mellon will confirm that trade in the market for AP1.”
Hallman says one of the distinguishing characteristics of investment and pension funds in the Nordic region compared with the rest of Europe is that they tend to have large pools of money that they manage in-house. The custodian has seen this as an opportunity to offer the continuous lined settlement (CLS) third-party services of its co-parent, ABN Amro. AP1 will become a third-party member of the FX settlement system, gaining access to the system via ABN Amro, which is a settlement member of CLS Bank. “Those firms that are managing their own money are doing a great deal of FX trades and will benefit from the consolidation and risk reduction that CLS offers,” he says.
Despite the recent success of foreign custodians, the Nordic market remains very competitive. Around 13 custodians, both domestic and international, originally tendered for the AP1 deal. The large US and European global custodians will often fight out mandates with locals such as Nordea and SE Banken (SEB).
Northern Trust’s Winge says traditionally, clients would give their international assets to a global custodian and their domestic assets to a local bank. “However, increasingly institutions are now looking to consolidate all of their assets with the one provider,” she says. “In this scenario, Northern Trust would become the master record keeper and would provide other services such as daily accounting and securities lending, which is becoming more popular as funds look to make money out of their assets.”
The challenge for funds in the region, she says, is that many are small institutions with a limited workforce but assets of huge value. “These funds have to be very efficient and look for partners who can create further efficiencies through the application of technology and in the client services they deliver. Clients in the region feel it is very important that their custodians act as partners with them.”
A more regional outlook from funds has spurred the formation of the Nordic Custody Alliance, whose members are Denmark’s Amagerbanken, DnBNOR from Norway, Sweden’s Swedbank and OKO Bank from Finland.
Amagerbanken was the most recent recruit to the Alliance, joining in October and completing the regional coverage of the group. Peder Krag, executive vice-president, international and treasury division, at the Danish bank says because of the structure and size of the Nordic market, outside investors tend to look at it as one market and do not designate more than one manager to each country. “The members of the Nordic Custody Alliance believe that when it comes to the trading and settlement of securities, these customers would prefer to have a single point of entry for the Nordic region,” he says.
Although the Nordic region is moving towards having a common trading platform, it does not yet have a common settlement platform, he says. By choosing one of the four members as a point of entry, users of the Custody Alliance know their business will be taken care of in all four countries. “While there are banks offering a regional solution, we would argue that while they may have good services in one or two of the markets, they cannot be as strong as each of the members in the Alliance are in their domestic markets.”
Neal Meacham, vice-president, head of custody, at Swedbank, says the members of the alliance found that clients were asking for regional custody services, rather than sub-custody arrangements in the different Nordic countries.
“Clients are looking to reduce costs and improve efficiency. They want to reduce the number of relationships they have across the region and unify services as much as possible. The Nordic region remains diverse – it has four different CSDs, currencies, tax regimes and languages,” he says.
The Alliance does not operate a common platform – each of the members is responsible for its own individual market. Therefore, one of the most important elements of the Alliance is that each member is operationally sound in its domestic market.
“Most clients will enter the Alliance through a hub, whereby they choose a point of entry (which may be the bank they are already using) and all of their Nordic business is handled through this point. Each member bank of the Alliance has an account with the other three; so instructions can be processed in the domestic market, confirmed back to the entry point bank, settled and cleared locally. Some larger clients will prefer direct access for each market and will use the Alliance for management information systems (MIS), reporting, fees collection, SLAs and relationship management.”
Meacham says straight-through processing (STP) remains a very important issue in the region –
pension funds and investment managers are demanding that instructions are not touched. Many funds have come a long way in improving their efficiencies, which has made the custodians’ lives easier, he says. “While STP has in the past been focused on settlement, there is now much activity in corporate actions processing. Automating this area will make a big difference and will lead the way to more value added services such as tax, reporting and web-based services.”
The Alliance is an approach to the increasing competition in the market, particularly from the larger US global custodians. Whether they continue to operate as the Nordic region consolidates - talks are under way between the CSDs - is a moot point.