Despite its under-developed second and third pillar pensions market, Spain is an attractive and competitive market for global custodians. With the European Commission in February urging the Spanish government to embrace pension reform “more vigorously”, there is plenty of scope for growth.
Some attempts at reform have been made. The Pension Plans and Funds Regulations Act of February 2004 aims to encourage pension funds to become more professional, relaxing caps on foreign investments and removing the ban on investing in unlisted securities.
Other aspects of the Act include the ability to outsource money management to other occupational pension funds registered in Spain. The new regulations are demanding more open management of pension funds and have also clarified the responsibilities of the fund manager and the depository bank.
Only two international global custodians – Citigroup and BNP Paribas – have made any headway in the country. Like many other European countries, Spain requires despository banks to be domiciled locally and both Citigroup and BNP have local operations. While the two overseas banks dominate in the non-resident investor segment, it is the local banks such as Grupo Santander, BBVA and La Caixa that have carved up the market for servicing Spanish pension and mutual funds.
Juan Briz, head of sales and relationship management, corporates at BNP Paribas Securities Services in Madrid, says: “The market is very competitive. We compete with local banks and also with Citigroup, which is the only other international player with a presence in the custody and securities services marketplace in Spain.”
Rafael Gonzalez-Aller, securities country manager, Citigroup Global Transaction Services, says in terms of capital, Spain is the fourth largest equities market in Europe. “A big chunk of this investment – around 65% – comes from non-residents,” he says.
Luis Colín, deputy general manager at BNP Paribas Securities Services says since Spain became a part of the EU and joined the Euro-zone, market capitalisation has grown by about 15%. There is also a good appetite for companies issuing debt and that is attracting more foreign investment to the local market, he says.
“The investment by employees and companies in pension funds has been growing in parallel with the growth of the Spanish economy. There is about €56bn invested in pension funds, compared with €280bn in investment funds,” he says.
Colín’s colleague Briz points up that corporate pension plans are yet to attract large numbers of members. But there are promising signs: “The Spanish government last year created a corporate pension plan for civil servants and the numbers here are huge – there’s around half a million members. The public sector is trying to set an example for the rest of the market.”
Given the encouragement from the Spanish government as well as the growing economic environment, Briz is confident that the corporate pension market will grow in Spain.
In January, BNP Paribas won a €5.8bn global custody mandate for the international fixed income portfolio of Banco Sabadell, which includes the investments of its pension fund. The bank, which recently acquired Banco Atlantico, wished to consolidate its fixed income portfolio under a single provider.
Briz says the deal was an important breakthrough for BNP as it gives it a stronger presence in the Catalan region of Spain, which is dominated by local banks.
The fixed income market is very strong in Spain, says Citigroup’s Gonzalez-Aller. “Most of this market is in the hands of foreign investors – around 60%. The corporate bond market also has been growing significantly in the past two years but that is still in the hands of local players and local investors.”
Colín points up that while traditionally custodians have focused on plain vanilla services, they are now seeing more interest from clients in sophisticated custody services such as multi-management.
Two areas – securities lending and fund administration – are gaining ground. Says Briz: “Securities lending is growing in popularity and we are working with our customers and the regulators to set up all the rules needed for an efficient securities lending market. This represents a very good opportunity for BNP Paribas.”
Adolfo Garcia, head of custody at Banco Santander is more cautious about the prospects for securities lending. “Even though there are no longer concerns on capital-gains tax on securities lending in Spain, the market is sill concentrated in London.
“Regulations on how mutual funds may lend are pending but it is expected that they will be approved soon, most likely before year-end. Due to the relevance of the mutual fund industry, this regulation will help to increase liquidity next year in Spanish securities lending.
“Unfortunately, there is no regulation expected to do the same same for pension funds, so there is ambiguity as to whether the latter may lend. The reality is that pension funds are not part of this market.”
The regulation referred to above is the new ‘Reglamento de Instituciones de Inversión Colectiva’(Regulations for Collective Investment Institutions), currently in a draft format.
On the fund administration front, outsourcing is emerging as an option. “Our Spanish clients are offered fund administration and middle office outsourcing services,” says Briz. “The market for fund administration is not very mature – fund managers tend to do their own administration but we have seen a growing demand for outsourcing such services.”
For Banco Santander, fund administration is a key service, says Garcia. “Pension funds and mutual funds are outsourcing fund administration to their depository banks. As clients require more new services, we are finding that they are trying to outsource as much as possible.”
The cherry on the cake for custodians, says Briz, is investment performance and services. “This is a more mature market than fund administration and our more demanding clients are looking for performance measurement and investment reporting that is tied to custody.”
The clearing and settlement scene in Spain is run on a vertical model, with the trading and settlement sides done by the same company – Bolsas y Mercados Españoles (BME). An umbrella group, it integrates the companies that direct and manage the securities markets and financial systems in Spain.
The Barcelona, Bilbao, Madrid and Valencia stock exchanges as well as Mercado Financieros (which includes the fixed income and public debts markets as well as the MEFF derivatives markets) and Iberclear, which provides securities registration, depository and clearing and settlement services. BME brings together, under a single activity, decision-taking and coordination for all of the Spanish equity, fixed-income and derivatives markets and their clearing and settlement systems.
“BME is helping standardise the market and develop it. Having trading and settlement under the one roof is a powerful combination,” says Colín.
While Spain still operates four separate stock exchanges, for those stocks listed on more than one stock exchange, trading is done on a single platform, which provides greater liquidity and transparency.
An initial public offering of BME shares is expected by the end of the year, with promises of improvements in operational and procedures on the clearing and settlement front. “The market has grown substantially, but difficulties in clearing and settlement remain,” says Gonzalez-Aller. “Spain is a very complex market because each security must have a regulated name attached to it and this must be there throughout the clearing and settlement process, unlike elsewhere in Europe. This requires more resources in the back office and good technology systems that can control the processes. The knowledge, experience and systems required are not built up overnight.”