With Romania and Bulgaria joining the EU in January, the number of former eastern bloc countries in the Union has risen to 10, including the Czech Republic, Poland, Slovakia, Hungary and Slovenia.

Of these countries, Poland is attracting the most interest from global custodians.

Back in 2001, Citigroup bought Poland's Bank Handlowy, based in Warsaw. Jervis Smith, managing director, head of funds and insurance, Citigroup Global Transaction Services, says Poland, along with Russia and Turkey are the three countries of most interest in the region. "You cannot generalise about the situation in the region. But there is a gradual development of pension funds systems in some of these countries, as well as growth in mutual fund retail assets," he says.

"Poland has a strong overall appeal to Citigroup, and the busy funds environment in that country is developing well. Bank Handlowy was a well-established local bank and we also have fund administration and custody activities in Poland. Citigroup has a 50% market share of the third party funds administration business and a big presence in the inflow business."

Ulrich Burghardt, a director at HypoVereinsbank (HVB), says the picture in the region is patchy - some countries have
begun developing corporate pension funds, while others have not. "Corporates in Poland, the Czech Republic, Hungary, Slovakia and Slovenia are beginning to develop more services for their employees, which was not typical in the past. These countries are moving closer to international developments in the field of pension funds."

He admits the development of the pension fund industry will take time, but the region is extremely important to the bank. "EU membership for these countries is helping them and will help them a lot in the future, too. A second wave of payments will be made in 2007 and countries like Hungary, Poland and Czech Republic, which have made a lot of investment in new infrastructures will receive a lot of funds from the EU to help them achieve the required EU standards."

Infrastructure improvements include the moves in the Czech Republic to introduce netting facilities to Univyc, the clearing and settlement house.

The Czech Capital Market Association (Akat) also recently widened the range of information available on the Czech capital market. All securities and custody business members of Akat agreed to do quarterly reporting on assets under custody and number of transactions. At the end of the second quarter of 2006, members had €36.35bn in assets under custody and had settled 66,281 transactions. In one of its Central and Eastern European market reports, ING Bank stated: "As long as the Akat consists of all the important custodians on the Czech market the new statistic finally provides relevant data on foreign investments in Czech securities and vice-versa, local investments abroad."

The data would enable custodians to easily compare assets under custody with the total sum and calculate their real market share in a particular segment, said ING. It said its share of custody of securities, both domestic and foreign, is 16.4%. This ranked it in the top three providers in the country.

In Poland, the government has changed its securities laws in order to comply with EU regulations but has fallen short of the wishes of many custodians in not approving the creation of omnibus accounts. ING is hopeful that progress can be made, however, pointing up that the reforms that went through - which transposed provisions of EU Directives such as Mifid, Transparency Directive and the Takeover Directive - will allow for crucial changes. These include the extension of the single passport rule on services of EU exchanges, multilateral trading facilities and settlement systems.

Another notable move was the abolition of the monopoly of NDS, the Polish equities depository. "Changes in the clearing and settlement framework will enable local regulated markets and investment companies to designate settlement systems other than the NDS as the settlement systems responsible for settlement of the transactions," said ING.

ING says the abolition of the settlement monopoly is likely to have a significant impact, enabling participants to settle trades in a different infrastructure. "However, it must be noted that the practical implementation of some of the new facilities, especially resulting from the passporting of regulated markets and clearing and settlement services may heavily depend on more detailed regulations and the market situation, which may make such services not feasible for potential market players."

Not all the potential of the region resides in the EU accession countries. Russia is eyed with increasing interest by custodians, if only because of its sheer size. "Citigroup has been involved in Russia for 12 years and has been through the 1998 debit crisis and the ensuing economic turmoil," says Smith. "We are starting to see the green shoots of a truly democratic society, which is always the best environment for the middle classes and savings," says Smith.

Citigroup operates two main corporate banking offices in Russia - one in St Petersburg and the other in Moscow. The bank holds 14bn in assets under custody and Smith says is starting to see "some serious business" in the country. There is a great deal of interest in Russia from western European and North American fund management companies. "The mutual funds industry in Russia is just €2bn, mainly because we have not seen the development of disposable income among the middle classes to encourage savings. As people get more disposable income this will improve, and we are gearing up to cater to that growth."

In June, UK-based custody rating agency Thomas Murray gave Russia's National Depository Centre (NDC) a public CSD rating of A+, indicating a low overall risk, based on a number of factors including its strong ownership structure and membership of the European Central Securities Depositories Association.

Thomas Murray did point up uncertainties surrounding the developments in the Russian market towards rationalising the infrastructure and implementing a central counterparty, the National Clearing Centre (NCC), which will have an impact on the clearing and settlement arrangements of NDC. "In addition there is an almost complete reliance on pre-funding to manage liquidity and counterparty risk at NDC," says Thomas Murray. "While this works for the exchange transactions in the current market, it is likely to be less effective and may not be sustainable as the market grows, which could result in significant future liquidity difficulties. Other issues that influence the outlook include a significant IT development project for a new settlement system that NDC has commenced."

"NDC has employed good risk management controls and adopts processes that work well within the current Russian marketplace," says Simon Thomas, chief executive and chief ratings officer at the company. "It has continued to grow its business especially in the safekeeping and settlement of equities while maintaining its share (almost 100%) of the fixed income safekeeping and settlement business. Nevertheless NDC faces considerable challenges in the future with the expected consolidation of the Russian capital markets infrastructure, which will create some uncertainties. NDC appears to be well-placed to feature strongly in any future infrastructure arrangements. The rating reflects NDC's capabilities and commitment to mitigating risk in the Russian securities marketplace."