Custody market on the move
If the past few months are anything to go by, the French securities services market should prove to be one to watch this year. The large domestic players and overseas banks are positioning themselves to take advantage of what they regard as a market of significant potential growth.
In December 2004, Credit Agricole and Caisse Nationale des Caisses d’Epargne, set the ball rolling by agreeing to combine their securities services business lines, including depositary bank, custody, clearing, fund administration and corporate trust services.
An equally held holding company will bring together the two banks’ separate securities services subsidiaries and will have operations in Paris, Luxembourg, Madrid, Brussels, Dublin and Amsterdam.
The banks estimate that the new company will have net banking income in 2005 of e450m. It will also be the leading depositary bank for Ucits in France and the largest bank in terms of assets held with Euroclear France, with around e1.2trn in assets under custody. It expects to have e570bn in assets under administration and will act as a transfer agent for around e600bn in assets.
In early 2005, Natexis Banques Populaires (NBP) the wholesale arm of the Banque Populaires Group, teamed up with The Bank of New York (BNY) in a move designed to deliver pan-European services to customers. NBP’s securities business will be expanded globally, while BNY will get a stronger presence in France.
Under the arrangement, BNY will provide global custodian services for NBP’s e80bn of assets under custody across 48 different countries, while BNY has appointed NBP as its French sub-custodian for a large proportion of French assets in the bank’s custody (see page 59).
Philippe Dupuis, head of business to business development at BNP says: “NBP doesn’t have a presence in Luxembourg or Ireland so this deal is very important in enabling us to offer a complete range of products to our customers on a pan-European basis.”
Michel Sidier, a BNY representative in Paris, says NBP is one of the largest providers of outsourcing services in the French market. “When we began discussing an arrangement with NBP we realised both banks had the same culture,” he says.
The banks will develop a closer co-operation across products such as fund administration and transfer agency. NBP will become the preferred partner for BNY across multiple products in France, while BNY will be the preferred partner of NBP for off-shore securities processing products.
Dupuis says the alliance is a first for the French market in marrying domestic services with an international presence. “France is a very regulated market, which makes securities services provision very complex. For that reason, US banks haven’t had as big a presence here as they have in the UK, for example.”
Despite the complexity, France is an attractive market. Sidier says: “France is the second largest market, behind the UK, in Europe. There are many very sophisticated fund managers and pension funds and the mutual fund market is very dynamic.”
It is a market that State Street has also marked up as one of opportunity, particularly for outsourcing. Tim Caverly, executive vice-president, investor services at the bank, says until recently most French banks and asset managers managed their own assets and distributed products through their own branch networks. “As the larger players find themselves competing internationally, they require strong global systems that support operations across different domiciles.”
At the same time, mutual fund products are becoming increasingly sophisticated, resembling traditional offshore structures. “Asset managers need global support, fund accounting and the technology that will help them to grow their businesses,” he says.
State Street provides a range of services for AXA Investment Managers, the fund management arm of the French insurer. On 1 December 2004, 201 employees in France and 16 in Germany joined State Street in an outsourcing deal that covered more than 1,500 portfolios representing e300bn. Nicolas Moreau, chief executive of AXA IM said the deal would help the firm to focus on growing its business.
“The AXA deal provides State Street with a good opportunity to develop a base for providing third-party administration services in France. The deal covers middle office functions, fund accounting, performance measurement, fund administration and investment operation support,” says Caverly.
The deal has given State Street a strong operations team in Paris that will form the nucleus of its third-party administration offerings.
Fund administrator Dexia Fund Services recently beefed-up its presence in France with the acquisition of FMS Hoche, a specialist fund administration subsidiary of Banque de Neuflize. The ultimate aim is to integrate the acquisition with Dexia Fund Services France and Dexia Fund Administration and Custody into a single structure to serve the French market. FMS Hoche has e18.9bn in assets under administration and the Fund Services and Administration and Custody divisions of Dexia have e 33bn in assets in custody in France, of which e14bn are in Ucits.
Dupuis agrees that outsourcing is a big opportunity in the French market, particularly as most asset managers have already outsourced their back office operations. The deal with BNY will help NBP to deliver additional securities services such as corporate actions and tax reclaim processes for its customer base.
Outsourcing is no longer restricted to the back office. BNP Paribas Asset Management has outsourced its middle office and fund administration operations to BNP Paribas Asset Servicing, a subsidiary of BNP Paribas Securities Services (BNPPSS). The asset management firm says it is one of the first in France to outsource its middle office and bookkeeping functions.
Alain Pochet, chief operating officer, BNPPSS, says the company will provide a range of services including portfolio valuation, performance measurement and daily NAV calculations.
“Outsourcing service providers need to have critical mass that will help them to invest the necessary funds in systems as well as to provide geographic coverage,” he says.
In order to provide pan-European services for clients, outsourcing service providers must ensure they have both local and global coverage, says Pochet. “A large percentage of European investors’ portfolios are outside of their domestic markets. Providers must have efficient ways of processing trades in different countries.”
Outsourcing service providers should also ensure that their clients have local contacts with whom they can deal. “BNPPSS provides global services but at the client end we provide final accounting, regulatory reporting and client contacts in the local country.”
This local element helps in countries such as France, which has complex regulatory requirements, says Pochet. “There is a great deal of regulation in this market and that is why it is not easy for every player in the securities services market to come into the French market.”
The French financial regulator, Autorite des Marches Financiers, published a new framework for leveraged funds in December 2004, in a move seen as opening the way for a domestic hedge fund industry. It allows hedge fund investment by individuals under certain conditions, including knowledge of the fund’s strategy.
Many of the developments in the French market are driven by the wider ambition of the EC to develop a single market for financial services. It is likely that further consolidation and alliances will follow as securities services providers respond to a growing demand for pan-European services.