Horses for courses
It is difficult to remember the last year when no major mergers or acquisitions took place in the global custody business. But that fact alone distinguishes 2000. All the main runners and riders that started the year have completed the course, though some are in a far better condition than others.
For the main players, the past 12 months have proved much more comfortable than they might have imagined. Y2K turned out to be a non-event, and the business rapidly returned to normal service. With Chase, State Street and The Bank of New York all reporting a steady stream of new mandates, 2000 will probably turn out to be a record year for them. In fact, there was enough business to go round for almost all the major players, as institutional investors relaxed after the dual trauma of the euro and Y2K and refocused their efforts on improving middle and back office efficiencies. As reported last month, outsourcing came into its own during the year, with mandates totalling more than $500bn (e590bn) awarded in the first three quarters alone.
In the UK, hub of the global custody business in Europe, there were highs and lows. Neither MeesPierson nor Société Générale, both of which had suggested that they might make some inroads, fulfilled their early potential. MeesPierson’s parent, Fortis, seems to be overly cautious about expanding the franchise of this very impressive outfit, whilst Société Générale has never properly explained where it sees its franchise or why it should win business in competition with more established providers.
HSBC’s Global Investor Services business, which is now the UK’s only indigenous global custodian, had a mediocre year, capitalising on the fall-out from the withdrawal of Lloyds TSB in 1999 but failing to make itself a contender for major mandates. It also began to lose clients from its previously iron-clad UK agency business, as National Australia Bank stepped in to beef up the custody operations of its Scottish subsidiary, Clydesdale Bank.
On the wider European scene, Citibank appeared to be finally putting together a coherent strategy that will combine its traditional strengths as a custodian with a new-found determination to become a major player in the fund accounting business. In the meantime, it consolidated its position as the leading global custodian in the Netherlands by winning the E35bn custody mandate from Robeco, the international fund manager now owned by Rabobank.
ABN Amro Mellon Global Securities Services also began to make progress, having spent over a year converting clients to the new operating platform. Early in the year it acquired the $1.5bn custody mandate for the international pension plans of 3M, and has followed that up with other successes, including a major pension fund mandate from an Irish state entity and, perhaps most impressively, the award of custody for $35bn of assets from a substantial global fund manager.
One custodian that will be hoping to report major business wins over the next 12 months is Deutsche Bank. After a spring purge of senior management – mostly from the Bankers Trust side – Deutsche installed a new top team of senior custody managers, including Juergen Marziniak and Terry McCaughey, both of whom left senior positions at Clearstream to take on the challenge. If this team cannot get the ship steaming in the right direction, it is unlikely that anyone can.
As in 1999, the custodians had to operate against a background of considerable turmoil in the industry’s infrastructure. Exchanges merged – or failed to merge – and the same was true of central securities depositories. Euroclear announced plans to create a major new entity by merging with the French, Dutch and Belgian depositories in support of the Euronext stock exchange, whilst Clearstream unsuccessfully courted CREST, the UK clearing system. Although the market pressed hard for Euroclear and Clearstream to merge, nothing came of it.
Importantly, plans were finally put into place to create a European central counterparty, with the European Securities Forum instrumental in attempting to pull together the existing counterparties – London Clearing House, Clearnet and Eurex – to create a unified body that could handle all financial assets. It won’t happen overnight, but at least the project has been started.
From a custody perspective, the most worrying trend continues to be the fact that the major custodians are largely ignoring the needs of small and medium sized pension funds. In their scramble to move up the value chain, they are leaving behind a potentially valuable group of clients that find it increasingly difficult to get the service they require at an economic rate. This constituency might not be the most glamorous, or have the highest profile, but it continues to represent the bulk of what the pension fund market is all about. Custodians ignore it at their peril.