Consolidation now on the agenda
Regulatory reform, changes to existing market practices and wider European infrastructure developments have come to dominate the Dutch agenda in recent times. The Dutch pension fund industry in particular has come under increased regulatory scrutiny, both in the context of local developments - notably solvency issues - as well as recent EU directives.
As Eric Orlans, chief executive officer of securities services at ING/Bank of New York (BNY) notes, larger Dutch pension funds now have to report on their portfolios monthly following the merger of the pensions and insurance supervisory authority, Pensioen- & Verzekeringskamer (PVK) and De Nederlandsche Bank (DNB) a couple of months ago. “The effort to produce these reports has been considerable for these pension funds, often supported by their custodians,” Orlans says. Ben Kramer, head of sales, institutional investors at KAS Bank, says: “The tighter control imposed by PVK/DNB has increased the administrative burden, which has led to clients outsourcing their administration.”
Furthermore, the Pensioenwet (Pension Law) is scheduled to come into effect in 2006, and enshrined within it will be the hotly debated Financial Assessment Framework (FTK), which has been in development since 1999. The PVK’s stated aim is ‘to bring its supervision into line with the (international) developments in the financial world in the area of risk management and reporting’ through a new assessment framework which ‘seeks to ensure more transparency and better comparability of institutions’ key financial data’. Orlans adds: “The FTK seeks to shore up the solvency of pension funds. However, the full impact of the FTK is not yet clear, and consultation with market players is currently under way.”
On the market infrastructure side, too, it has been all change: the merger of the Amsterdam, Brussels and Paris exchanges to form Euronext; the amalgamation of the clearinghouses in Amsterdam, Brussels, Paris and London within LCH Clearnet; the absorption of central securities depositories Sicovam, Necigef and CrestCo into Euroclear Bank. “All have clearly had a great impact on custodians’ systems and investments,” says Clayton Heijman, chief commercial officer at Fortis Information Banking.
“The result is that with regard to custody and clearing services we are able to offer our clients direct connection to the Belgium and French market,” says Heijman. “We are also able to offer integrated risk management between different countries and /or markets based on a consolidated position.” The direct connection also decreases the costs and potential risks for clients and allows Fortis to adhere to tighter deadlines, Heijman explains.
The formation of Euronext, and the subsequent implementation of the NSC single trading platform - which enabled broker-dealers to access Euronext remotely - means stocks previously listed in the Netherlands can be traded through the same platform as former Belgian, French and Portuguese equities. A further major change took place in 2003 with the migration to the Clearing 21 platform: the Brussels derivatives market moved on March 24, the Amsterdam derivatives market on November 3 and the Lisbon cash market on November 7.
“This is a step forward in the harmonisation of the Euronext markets, since members will be sharing the same clearing technology,” says Ingrid Reichmann-Kops, director of marketing and sales at ING Securities Services. “The introduction of Clearing 21 has greatly contributed to standardisation, with similar processes and reporting now realised among multiple markets.”
Citigroup’s Sikko van Katwijk says: “Clearing in the Netherlands has basically evolved from a department within the Amsterdam Exchange into an independent clearing organisation integrated within Clearnet SA.” However, he adds that at this point in time the clearing of on-exchange transactions is not yet fully harmonised.
The first stage in a joint Clearnet/Euroclear project known as European Stock Exchange Settlement - which seeks to provide a ‘one stop shop’ solution for trading through clearing and settlement across the Euronext markets - is a new common interface called Settlement Connect. Although its implementation has been postponed several times, at the time of writing, Settlement Connect is slated to go live on September 4 2004.
The June 2002 EU Collateral Directive is set to pass into Dutch law imminently, the lower house of the Dutch Parliament having passed the Bill on to the upper house for final approval. “When the draft bill has become an Act, the transfer of collateral under all kinds of financial transactions - including securities lending and borrowing transactions - will be easier,” says Reichmann-Kops.
In addition, the tax refund procedure known as ‘e-filing’ is also set to be overhauled allowing non-Dutch residents to reclaim ‘over-withheld’ Dutch dividend withholding tax electronically. “This new and faster method of reclaiming replaces the old more slow method where all the applications had to be hard copy files, that were hard to archive,” says Reichmann-Kops.
As Heijman says, competition for custody business within the Netherlands has really hotted up as foreign providers have entered the market. “Tariff structures are therefore more under pressure, and some providers have ceased their activities with regard to sub and global custody due to the increasing competition,” he says. “Consolidation of local providers has not been a real issue in the Dutch market – until now.”
The decision by two Dutch banks, ABN Amro and ING, to partner with (respectively) Mellon and BNY has only ratcheted up the pressure on the smaller indigenous providers. “The traditional Dutch players have been forced to go head-to- head with the truly global custodians – after all, the Dutch market is the largest pension fund market in Europe following the UK, and consequently all the global custodians increasingly want a piece of the action,” says Reichmann-Kops.
Stefan de Kort, Dutch market specialist at ABN Amro/Mellon, says: “Given the enormous investments in both systems and people it is expected that only the custodians of a certain size will survive the battle for servicing excellence.” However, Kramer argues that clients still place a premium on a pro-active approach coupled with customised solutions. “Clients are increasingly focusing on quality, people and services, and large global custodians are unable to provide suitably tailored services.”
According to van Katwijk, there has been a shift away from the traditional client-vendor relationship in favour of what he terms “partnership-thinking” on the part of clients. “This has been accelerated by the focus on performance, regulatory restrictions and reporting and end-clients becoming more critical of service and quality levels,” he adds. “Although the core of our services is commoditising, the way we integrate our processes with our clients is changing. The above trends make relationships much more strategic and more intense in terms of interoperability.”
Heijman notes an increasing interest in outsourcing non-core activities on the part of institutional investors. “Furthermore, due to the tighter supervision of the PVK/DNB, there is more demand for performance measurement, risk management, compliance tools and specific reporting facilities like PVK reporting,” he says. “In addition, clients want better and faster information about their portfolios.” Falling stock markets mean clients are also searching for new sources of added value, Heijman says. “Securities lending is seen more and more as a way to add that value at relatively low risk, and an increasing number of pension funds and other institutional investors are lending their assets to us.”
Orlans says: “Those pension funds who are already using external asset managers increasingly tend to diversify among larger numbers of external managers, and this may lead to an increased use of master custody products – and those global custodians which can provide that service.” Although the Dutch pension market has traditionally been predicated on the defined benefits (DC) model, the shift to defined contribution (DC) schemes is now underway. “DC schemes require much more timely information flows, for instance in respect of daily valuation,” he says.
With the spectre of rationalisation hanging over the sector, Rod Ringrow, managing director of investor services at State Street says that the big decision now facing pension funds is whether or not to outsource. “Many funds currently run their own accounting systems and performance and analytics systems,” he says. “The question is could custodians take what they have done for the investment managers regarding outsourcing, and do it for the pension funds?”
Ringrow also highlights the renewed focus on corporate governance. On July 1 2004 Vereniging van Bedrijfstakpensioenfondsen (VB), the Dutch Association of Industry-wide Pension Funds, announced it is working on a pension fund governance code along the same lines as the Tabaksblat Committee corporate governance code. Prioritising ‘transparency, accountability, supervision and control’, a final version of the VB code is expected in November this year.
Ringrow and Heijman predict that outsourcing and regionalisation will increasingly dominate Dutch clients’ thinking. Van Katwijk says: “As institutional investors review core activities and increasingly look for strategic partners to work, so we will see drastic changes in supplier networks, connectivity and processing.”
De Kort says:“In order to survive in the competitive marketplace custodians will need to offer total solutions consisting of custody and back-office services.” Reichmann-Kops belives that consolidation among providers looks inevitable. “Economies of scale will become a more important variable for success due to the huge investments providers will need to make. We expect those smaller players that lack sufficient volume will be forced to quit the business or to partner with competitors in order to survive.” However, Kramer takes the opposite view: “The specialist with the local knowledge will prevail.”