Iain Morse surveys securities services markets in Portugal, Gibraltar and Cyprus

“Portugal has its own pensions industry but is also a strategic gateway to Brazil, South America and parts of Africa,” says Laurent Vidal, head of business development at State Street bank for France, Spain and Portugal. Spain also offers access to Latin America. “You have to understand the historical background to this, the long-term ties that still exist between the Iberian peninsular and South America,” he adds.

The main competitors in the Portuguese and South American custody markets include BNP Paribas, BBVA and Banco Santander. Santander already has a major presence in both Brazil and Mexico. Local Portuguese custody banks include Banco de Spirito Santo, which last year entered a co-operative venture with Banco de Brasil. Other less well known Portuguese banks include Caixa Geral de Depositos, which offers local custody with subsidiaries in Brazil, Angola and Mozambique. Other Portuguese banks with Brazilian subsidiaries include Banco Internacional do Funchal (BANIF) and BESInvestimento.

The likes of State Street and BNP Paribas are in Portugal partly because of the access offered to these developing markets. “Of course, we can develop relationships with Spanish and Portuguese banks and follow them to the other markets where they operate,” says Vidal. The belief here is that these new, rapidly emerging markets offer glittering prizes to the more entrepreneurial of global custodians than their growth-hungry, mid-size competitors like BNP Paribas. Savings ratios in emerging economies tend to be far higher than in Europe, their pension industries still in infancy. And the Iberian banks, with the possible exception of Santander, might not have sufficient internal resources to develop their in-house custody services to service their client requirements.

Portugal itself has a generous state pension system which has inhibited the growth of private sector pension funds, and second pillar schemes are not widespread. Investment regulations also apply to pension funds. Exposure to equities is limited to no more than 55% of a pension fund’s total asset value. Further restrictions include a 5% cap on equity or bonds originated from one issuer, a 20% cap on the same from a group of associated companies and 55% in direct equity holdings. A further 60% cap is placed on euro-denominated corporate bonds and a 30% cap on unitised equity and mixed asset funds. In practice, many Portuguese funds have a high ratio of euro-denominated sovereign debt.

One recent study suggests an average asset allocation of 60% bonds, 22% equities, 15% real estate and the balance in a variety of alternatives. Bond portfolios are not actively traded and providing custody for them requires no more than a plain vanilla service. Good data on the extent to which these assets are held by domestic banks is not available and neither is much information on the cost of their services. We can surmise that where ‘captive’ assets are under custody, determining the true cost of custody is difficult. There is little evidence of this business going to open tender. Since all of the eight management companies of pension funds are associated with Portuguese banks which can operate as local custodians, this market offers few opportunities to third party competitors.

The total value of pension assets is around €20bn, according to APFIPP, the Portuguese Association of Investment, Pensions and Wealth Funds. Portuguese pension funds must be constituted with a management company and separate custodian. A custodian can be any credit institution or bank established in Portugal. However, any local Portuguese custodian can employ a sub-custodian which may also be a global custodian. While State Street has its own bank in Portugal, as does Santander and BNP Paribas, none of the other US-originated global custodians have yet bothered to make a direct entry to this market. Nevertheless, it seems very likely that these global custodians will have picked up some mandates from the Portuguese banks, both in Portugal and South America.

Nearby Gibraltar is emerging as an onshore financial services centre with assets under management estimated at more than €10bn. Like Malta, Gibraltar promotes itself as an onshore ‘offshore’ financial services centre; taxes and regulatory costs are low, but EU directives fully enforced. Experienced investor funds (EIFs) are very important for Gibraltar, as offshore hedge funds seek to move onshore due to the AIFM Directive.

There are over 100 of these regulated by the Financial Services Commission from a wide range of providers, including BlackRock and Barclays. Total value of assets under management in the EIFs exceeds €1bn. Some highly reputed hedge fund managers have chosen Gibraltar as a domicile.

Under current regulations, a Gibraltar-regulated EIF may not always need a custodian but usually does. If so, it can select a qualifying provider located in any OECD country. Other Gibraltar-regulated fund types include non-UCITS retail funds, UCITS funds and protected cell companies In practice, many of the selected custodians and prime brokers are domiciled in the US. However, Gibraltar custodians include Credit Suisse, SG Hambro and Lombard Odier. The FSC also regulates a handful of pension funds linked to local businesses. They are keen to attract EU passported cross-border schemes but this has not yet happened.

Cyprus also has ambitions to become a financial centre, attracting an exotic mixture of investors and company registrations from the Russian Federation and other emerging economies, as well as the EU. It offers a venue for both hedge funds and a growing number of private equity funds.

Custodians with a presence in the island include BNP Paribas, Société Générale but there are also a number of Greek banks, including Eurobank EFG. But it is the Cypriot Hellenic Bank that claims to lead in the provision of local custody services, with assets under custody of €2bn, thought to equal 70% of the local market by value. Hellenic Bank serves as a sub-custodian for Citi Bank which in turn has a major presence in Moscow, the Russian Federation’s capital.

Like Gibraltar, Cyprus has a very competitive tax regime with corporation tax set at 10%, while personal income tax does not exceed 30%. As with Gibraltar, however, there is no obligation on Cyprus-domiciled funds to use a local custodian; many use global custodians and prime brokers in the US and elsewhere.