In an industry sector where the overriding message is that big is not only beautiful but nigh on essential, it pays to come out fighting if you’re one of the smaller players.
Laurens Vis, assistant managing director at Amsterdam based custodian KAS-Associatie, with e260bn in assets under custody, wastes no time in pointing to the group’s ‘total devotion’ to the securities industry and its emphasis on ‘service’ as key factors that will keep KAS in the global custody game.
“As an institution, if you’re big enough for the large global custodians you probably get the service you like. However, if you have to fight hard for attention then it’s different. We hear people in the market saying they are not receiving the proper service from their global custodian. This is not to be negative on the global custodians – they are a tremendous force and have a great purpose in this industry, there’s no doubt about that.”
Vis believes the differences inherent in KAS’s approach are also vital for issues of custodian independence: “We stay away from any activities that our users are in – particularly fund management, trade capture or trade execution. Regulatory bodies say that custody and asset management must be separated for pension funds, so when competitors get the mandates it makes sense for the fund to come to us for the custody.”
He adds that this segregation is a positive factor in seeking to be a neutral global provider: “US groups have benefited from their own strict regulation for home providers, whereas Europe has always been more open. European groups are starting to open offices in New York, though, so we may see more custody exports.
“All the global custodians have fund management capacities.”
In terms of the value added services KAS does offer to clients, Vis says products such as stock lending, finance and cash initiatives are now essential. “You have to do this or you wouldn’t be in the business anymore.”
While KAS has Fortis, Van Lanschot, Rabobank, Van der Moolen, ING, Kempen and Beurshave as minority shareholders to about 40%, the remainder is listed on the Amsterdam stock exchange (AEX).
Dutch clients account for approximately 40% of the group’s business – with the three major investment blocks being euro dominated assets (65%), then US, Japanese and UK clients with a small amount of emerging markets securities.
Vis points to the declining share of Dutch guilder assets – down from 80% to 50% in recent years – as a sign of the globalisation in KAS’s business.
“I think in assets under custody we are in about 15th place globally – we’re certainly in the top 20. We like to see ourselves firstly as a specialist firm – with a big tradition in the Dutch pension industry – then for entities with a Dutch base, but with a global reach and a fully fledged service.”
And going forward, Vis believes the challenge is to constantly update technology: “The big event is combining core business with activities resulting in management information – performance, risk, attribution and dealings with supervisory boards.”
However, he stresses that product should follow demand: “We don’t invent new products, we react to requests from the marketplace. One thing we are developing, for example, is the facilitating of individualised DC pension schemes – where we will carry out the administration.
“There are a few schemes in the Dutch market which are moving over to DC and individual accounts and we would seek to be the umbrella for the pensions sponsor, adding performance measurement and attribution analysis.” Vis says KAS is also seeing increased outsourcing of pension fund back office provision, which the group has carried for several years for some clients. Egon Tibboel, head of relationship management at KAS, says one of the major tasks ahead is to get clients’ hard copy information sent out via the internet.
“It doesn’t matter where our client is – they will be able to see all the relevant information.”
Tibboel notes that compliance monitoring and real time access to portfolios including positions and settlements pending are already available on the internet to enable clients in meetings with investment managers.
Vis believes the technology aspect, is advantageous to a house like KAS. “ We shouldn’t be too hesitant in saying that we are up-to-date compared to what the overseas players can do – there’s nothing to be afraid of. We think that being in the same time zone as our end users is also a great help. In a European market with greater integration you meet several European cultures and the Dutch have always been able to cope with that.”
He adds that the present business focus is to consolidate the firm’s existing market share. “We already have approximately 30% of Dutch institutional clients – and the opening up of the global market can only be an opportunity for us. The less connected markets get to geographical places the more our services can get to where we want them because of internet development.”
Here, Vis comments that he believes a ‘dynamic dialogue’ between custodians, market participants and the industry infrastructure will reap future benefits for all. “Things are changing as we speak – more on paper than in real life – but hopefully the European infrastructure will become less complex. It can only be good for both users and service providers.”
Vis dismisses the custody as commodity argument: “If you look at the operational risk elements, legal infrastructures, country exposure, listing requirements and the whole array of specifics surrounding settlement cycles and portfolio management – I don’t think custody is a commodity business now at all.
“If the depository structure really becomes pan-European and all the issuing companies obey a set number of pre-determined specifics – such as dividends, corporate tax rules and regulations – then I think it will be a commodity type activity. So far that is not the case. “hose who believe it is only paying tribute to the custody intermediaries doing a proper job for the end users – who may then think custody is a commodity type activity.”
He also points to the debate over time zones as a future stumbling block: “I don’t know that if you combine all the time zones you get 24 hours, but we have to start negotiating deadlines, which for the moment are orientated toward night and day. If the interconnection happens and the exposure of clients is in different time zones, then it becomes vital to make artificial deadlines, or perhaps we don’t need any deadlines at all?
“Furthermore, financial needs have shifted from overnight to intra-day, which from time to time leaves the industry with substantial intra-day exposures. An intra-day credit system in combination with credit interest mechanisms still doesn’t exist – not even at central bank level. I suspect the industry keeps quiet about this on the participant side, but essentially where there is exposure there is risk, which should in turn be remunerated!”
Conversely, however, Vis says he doesn’t want to make custody sound more complicated than it is.
“It will always remain a people business and I feel that one of our distinguishing factors is that we can relate back to the individual needs of our clients, instead of presenting them with a mass product. We have a flexibility which is important for Dutch and European pension funds while there is still the need for regulatory information to be individualised and local.”
The UK has been singled out as a potential market for KAS: “As a large, mature market you have to have the best market practice and there are a few business gaps we are closing to achieve this. It’s always difficult to get the first users of a new service, particularly when the operations will be run from here in Amsterdam. The specifics are UK orientated, of course, but it will take a little more time.
“I think we have a good opportunity though – not necessarily in stealing business away from existing providers, but because I think there is room for another provider in the market.”
As well as the group’s operations in Belgium, Vis says KAS has earmarked a few other ‘more mature’ markets for development – on a stand-alone basis.
“The basic service platforms have to be there first so that we can inter-link directly with the infrastructure. If you make yourself dependent on another provider you don’t have the platform as fully integrated as it should be.”
The reality of the custody game, Vis notes, is that as volumes get bigger the number of providers get smaller, which he says is certainly going to continue happening in Europe.
“In the long term there might be a distinguisher between those providers which orientate themselves toward the wholesale users and those which look to the vast majority of retail users.” IPE