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Cracks appear in Chinese walls

The pension scheme of Swiss Rail, which will become fully independent in early 1999, has provoked a fundamental debate on global custody in Swiss banks and pension funds. Working out its investment strategy, Robert Stampfli, head of the Pensions-und Hilfskasse der SBB, has decided to separate global custody and asset management. In future, whoever applies for global custody will not be hired for active asset management, Stampfli told IPE.

ComPlan, the new pension scheme of Swisscom, has the same idea. Swiss Rail will invest SFr11bn ($8bn) and combine other lucrative services such as securities lending with global custody, leaving banks having to make a far-reaching decision. Until now Swiss banks, rooted in the universal banking system, offered both services, and the pension funds, trusting on Chinese walls, accepted the combination. If the approach of SBB and ComPlan starts a major trend, banks will have to decide client by client either to apply for global custody or asset management - and to loose out on the other business.

In light of this, all five major pro-viders of global custody services in Switzerland - Credit Suisse Group, UBS, Bank Julius Bär, Pictet and State Street Bank - have applied for global custody.

The scheme of SBB will select the global custodian in the next few weeks, and following that, the portfolio managers.

It has mainly been the providers with active portfolio management capabilities who have opposed this separation of the two services.

But coping is not the crucial point, Stampfli points out. Because a custodian knows the margins and fees of portfolio managers, a bank acting in both fields, could realise advantages in tendering for new mandates. In this regard competition not portfolio management could be affected when the services are combined.

Marcel Zutter, head of the Swiss operations of State Street, does not believe that imitation of investment processes is the major problem. Cli-ents, he says, want to be sure, that a global custodian is willing and financially capable to invest in the demanding technical systems in order to keep them up to date. To smaller global custodians, this is becoming a threat.

Also clients want to be sure that the custody business will be managed on a long-term basis, Zutter believes, so that custody will not in the future be done 'on the side'. It needs to be organised as an independent business area with its own management, budget and responsibility, he maintains.

While the idea of separation is supported by some advisers, Dominique Ammann, partner of PPCmetrics, has a pragmatic approach. He trusts in the Chinese walls and would not exclude a capable portfolio manager purely if the same bank acted as custodian. Fees and performance remain the decisive factors in the end. Erich Solenthaler

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