GERMANY - New regulatory requirements from the German supervisor and increasing demands from institutional investors will lead to consolidation in the local custodian market, according to Kommalpha Institutional Consulting.

Bafin, the German supervisor, recently increased the number requirements a custodian must meet, including adding stricter checks of the investment limits of custodians' clients.

While Clemens Schuerhoff, managing director at Kommalpha, said the new requirements created "clarity" regarding the tasks and processes of a custodian, they also showed that "investments have to be made" when operating custodial services, particularly in IT and qualified personnel.

"In the end," he said, "it's a question of the net margin and whether smaller custodians will survive given the smaller volumes of business."

But Schuerhoff said regulation was not the only challenge custodians now faced.

Institutional investors are making more demands, he said, mainly in the areas of online reporting, additional services like securities lending or market coverage.

"Smaller custodians do have a structural problem to meet these demands in full," he said.

According to Kommalpha, large German institutional investors are already turning more to global custodians, but among mid-sized investors, this trend "does not exist", as regional, cooperative and private banks still have a strong foothold.

Schuerhoff said takeovers of smaller German companies by large international groups would go ahead, but he added there would also be "in-between steps" of increased in-sourcing and outsourcing relationships.

Some players will offer to take on several components of custodial services, such as investment-limit control, some technical processes and/or reporting - "up to the complete takeover of the business, leading to some custodians disappearing from the market".