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Impact Investing

IPE special report May 2018

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Custody market loses local bias

The advent of Euronext, the pan-European stock exchange created by the merger of the Paris, Amsterdam and Brussels bourses, is wreaking significant change on the custody and securities servicing profiles of its member countries. None more so than Belgium, which by the standards of Euronext members is a very small market, with few custody assets available.
Traditionally, the Belgian market has been almost an exclusive preserve of local banks, with restrictive regulatory guidelines for local custody and local provider services only. In order to provide global custody services to Belgian parties, custodians had to operate through a local bank. However, with the advent of Euronext, not only trading, but also clearing services are centralised, so investment managers are likely to start choosing custodians who can operate across all three Euronext markets. Most industry observers believe the protectionism that characterised the Belgian market will fade away.
Another aspect of the Belgian market that has played into the hands of local providers is the physical nature of the settlement scene – Belgium has a high amount of paper stock certificates still in circulation. Local players feel their familiarity with this aspect of the market, which requires a great deal of manual processing as stocks are transferred, will enable them to defend their business against the larger foreign global custodians.
However, the combination of the ‘Euronext effect’ and the phasing out of physical securities will change the custody landscape in Belgium, the inevitable outcome being the arrival of more offshore players and the squeezing of domestic institutions.
In July 2002, Bank of New York won its first Belgian custody mandate since establishing a branch in the country in December of the previous year. AXA B Fund, a Belgium-registered mutual fund, appointed BoNY to handle custody and a range of other services including fiduciary, portfolio compliance and monitoring. BoNY uses Belgium as its European hub and its global processing services are centralised there. BoNY’s Belgian branch, which employs around 1,000 staff, was established by its Luxembourg subsidiary, in order to enable the bank to offer custody and administration services to Belgian domiciled investment undertakings.
In January 2003, State Street announced an outsourcing agreement with Swiss Life Asset Management Belgium. The US bank took over the Belgian unit of Swiss Life Asset Management’s administrative, operations and support services. Under the deal, State Street will provide trade support and settlement, portfolio record keeping, custodian communications for settlements and systems network and applications support. As part of the agreement, State Street will migrate the Belgian company to its technology platform, which will deliver additional services to the company such as performance measurement and post-trade compliance. Ludwig Caluwe, managing director of Swiss Life Asset Management (Belgium) says the outsourcing arrangement will deliver efficiencies of scale and service that will provide its clients with faster processing and more robust reporting capabilities.
Sikko van Katwijk, securities country manager, the Netherlands and Belgium, Global Transaction Services, Citibank International, says “A bank like Citibank will look at markets from a clearing perspective, to service the big investment banks and broker-dealers. We have always looked at Belgium as a very small market, but with the new exchange setting we are servicing clients through Euronext, which of course includes Belgium. Local market players have never seen competition in this way.”
Like many other markets in Europe, Belgium’s pension funds are embryonic. However, the establishment of sector or industry-wide pension funds – funds set up for workers in particular industry sectors – are likely to lead to a concentration of assets and will attract players interested in servicing those assets.
Furthermore, the social networks that these funds represent, for example metal workers in Germany, the Netherlands and Belgium are all represented by unions and other international bodies, could be of benefit to firms wishing to service the assets of those funds.
Van Katwijk believes this is an area of great opportunity, albeit a long-term trend. “With the scale of the Dutch or Belgian market, asset servicers realise that more scale is required. Industry-wide funds could lead to the establishment of cross-border links with other funds. Whether this works in practice remains to be seen and also would be subject to regulatory approval.”
As regulators begin to focus on transparency and costs, investment managers are under pressure to prove they have selected the best parties to service their asset base. The trend in Belgium (and in many other European markets) for local asset managers to choose local custodians is therefore likely to also become a thing of the past. As the custody wins for State Street and BoNY prove, the levels of service demanded by investment managers require a significant and ongoing investment in technology. It is a fact that domestic custodians throughout Europe are grappling with and for a small market such as Belgium; the lack of scale is a serious handicap for its local players.

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