Euro-custody: a single market?
For global custodians, Europe has always presented a special challenge. The core securities movement and control functions may be relatively easy to perform in all major markets. The difficulty derives from the historical fact that institutional investors have not viewed Europe as a conveniently packaged region. Unlike Asia Pacific and Latin America, Europe has been seen as a collection of important investment markets with only very loose linkages and connections. As a result, the concept of European regional custody has never left the starting blocks. If ever there was an opportunity to change that, it is now. With the creation of Euroland, a huge stumbling block has been removed. Securities settlement across 11 markets in a common currency should result in fewer issues, reduced risk and a lower error rate, as well as opening the custody market to new entrants. As an additional spur, many major investors have already signalled that they intend to treat Europe as a single entity. If the buyers treat Europe as one market, the argument goes, so should custodians. Other factors are at work. The European Central Securities Depositories Association (ECSDA) is making strong headway in developing a 'virtual' European depository, building electronic bridges between national depositories so that cross-border settlement can be effected through a single local gateway. This would mean, for example, that a Dutch institution could use its connection to NECIGEF, the local depository, to settle all securities transactions in countries within ECSDA. This virtual depository function clearly creates a need for harmonisation of settlement practices and procedures, which will further level the European custody playing field. As importantly,a significant rationalisation in the number of European stock exchanges over the next few years now looks almost certain. With the political and commercial will in place to cooperate and pool resources, new pan-European exchanges will be looking for end-to-end automation of the trading and settlement process.
1 straight-through processing across the euro zone would be an enormous achievement that would dramatically reduce both cost and risk for all the market players. So far, however, most global custodians have been disappointingly vague about how they will operate in the new Europe. In part this can be attributed to reasonable concern about how economic and monetary union will actually work, and a reticence to make bold predictions before the system has had a chance to prove itself. But it also stems from a worrying lack of strategic vision, especially from continental giants like Deutsche Bank, ABN-AMRO and Paribas. None of these has built a significant cross-border franchise, in spite of their huge domestic custody businesses. Deutsche, which has enjoyed limited success with its sub-custody operations in Asia, has the chance to become a big global player through Bankers Trust, whilst ABN-AMRO has joined forces with Mellon Trust to try and break into the big league. Paribas, meanwhile, continues to trade largely on its acquisition of the European custody business of JP Morgan in 1995, through which it picked up some high quality sub-custodian operations. Paribas recently made a lot of noise about winning a large custody mandate from AXA UAP, but made little mention of the salient fact that AXA is its single largest shareholder. There has been, too, the co-operation tie-up with Bank of Austria.
Ironically, those with the best plans for Europe appear to be banks which sit outside Euroland. For the Americans, the continent has long been a source of rich pickings as they blow away weak and ineffective local competition. The US custodians cut their teeth in the UK towards the end of the eighties, and have since moved on to snap up huge global mandates, particularly in the Netherlands, Germany, Switzerland, the Nordic region and Belgium. Citibank, Chase, Bankers Trust and Northern Trust all have very strong books of European business, but none has yet gone as far as State Street. It has formed a separate business unit, State Street Bank Europe, through which it plans to deliver all its services. Many European institutional investors have given up waiting for the European banks to put up a stronger defence against the Americans. At this stage, it is far too soon to predict whether European regional custody will materialise, but the elements needed to make it happen are all falling into place. What can be said with certainty is that, if the European custodians want to play a part in the global custody game, they are going to have to make a much more serious effort to match what the Americans have to offer. Richard Greenstead