In pole position to become CEE hub
The Warsaw Stock Exchange is proving a favourite with CEE-originated IPOs and emerging CEE countries. Iain Morse reports
The Warsaw Stock Exchange (WSE) celebrated its twentieth anniversary on 12 April 2011. Some 405 companies are currently listed on the exchange with an aggregate market capitalisation of over PLN851bn (€216bn), more than enough to sustain a local custody industry. "We still enjoy some good margins on core custody, settlement, safekeeping and so on," says Andrzej Szadkowski, location manager for BNP Securities Services.
Companies listed on the Exchange include firms from other CEE countries like Romania, and Bulgaria, which are linked via UniCredit Bulbank. The WSE vies with London as the favoured venue for CEE-originated IPOs and Warsaw is in pole position as the primary hub for listings and services to the emerging CEE countries. Meanwhile, precise data on percentage of trades attributable to non-domestic investors are not available although the WSE estimate that these average 40% of trades by frequency.
This has created substantial demand by global custodians for Polish local custody services. There is also growing interest in borrowing Polish equities, although until last year this activity was circumscribed by local regulations. It is likely to become an important source of income for local custodians. Polish bonds are also in demand from foreign investors; the country is slated to join the euro in 2014 or 2015 and has been a convergence play for some time.
Poland also has a robust domestic financial services industry and hard-working population which likes to save at more than twice the UK rate. One of the first of the CEE countries to reform its pension system, Poland set up a World Bank model system with a mandatory, defined contribution second pillar. These second-pillar funds now have assets under management worth more than PLN211bn. Polish mutual funds have also developed apace with current assets under management of more than PLN115bn.
The proportion of these assets that are captive and open to custody by third-party providers is not easy to establish. Radoslaw Ignatowicz, member of the board at Deutsche Bank Global Transaction banking in Poland, believes that around 50% of assets are captive but says that this should change over the next decade.
The market is also seen as split between domestic and foreign investors. "The typical route for foreign investors is via a global custodian to a local custodian," says Ignatowicz. He adds that this makes the relationship between local and global custodians of crucial importance. "Some of us are dedicated providers of local custody services to the globals. They know we can interface with them without problem," he continues.
At present, there are 12 custodian banks approved by the Polish Financial Services Authority. All are majority-owned by, or in close partnership with, foreign banks or the direct subsidiaries of foreign banks, with the exception of PKO Bank Polski, which was floated in 2004.
ING, UniCredit Group, KBC, Raiffeisen, SocGen and Deutsche Bank aspire to the status of regional local custodianship, providing this service to the US global custodians through most of the new EU. BNP Paribas insists that it is a global custodian. ING and UniCredit have both built strong businesses in the CEE region, although they have withdrawn from local custody provision elsewhere. Citi is global and local. "The question is whether all the current custodians will want to stay in the market," says Ignatowicz, "If this market follows others we may see a couple decide to sell their books."
Some of the parent groups of these Polish custodians are also remote members of the WSE. Examples here include Raiffeisen Centrobank, Société Générale and UniCredit. There are also other banking groups, some with global custody operations including JP Morgan, Credit Suisse, Goldman Sachs, and Morgan Stanley. The WSE's IPO partners include a role of honour from the likes of Croatia, the Czech Republic, Belarus and Ukraine. The future importance of Warsaw in the CEE should not be doubted, which helps explain why it is of so much interest to foreign banks with in-country local custody operations.
Meanwhile, the architecture of the Stock Exchange and wider financial system is undergoing constant renovation, with an eye to Poland's role as the CEE's financial hub. The exchange plans to replace its current trading system with the NYSE UTP system in 2012. The National Depository for Securities (KDPW) has been an independent entity since 1994. It clears and settles transactions executed on both the regulated and non-regulated markets, not to mention registration and safekeeping. The KDPW is dematerialised, runs a settlement guarantee fund and also has a role in administering money transfers in the pension system. It has also been a de-facto school for custodians; many of those now managing local custody operations in Poland previously worked at the KDPW.
Short selling was introduced on 1 July 2010 and the National Depositary for Securities (NDS) intends to become a direct participant in the Target2 cash settlement system in November this year. At present, Poland, like Spain and Iceland, retains a system of individual accounts per beneficial owner for equities. As elsewhere, this is seen as an impediment to market efficiency; the numbers of accounts that need to be opened represent a slice of labour intensive costs. Ironically, their retention might be helping to keep some local custodians in the market.
In a draft law likely to be enacted early next year, the ministry of finance plans to introduce so-called ‘omnibus' accounts. These will allow regulated entities to hold single accounts under their own names but for these to hold assets which belong legally to different, un-named beneficial owners. "Their introduction will reduce costs, mitigate risks and, overall, make client related processes within custody services much smoother," says Tomasz Stachursky, head of custody at ING Security Services in Poland
Among the regulated entities so entitled will be foreign central depositaries, domestic and foreign investment firms, OECD-domiciled banks, and locally-regulated custody banks. The most widely predicted consequence of these changes will be the simplification and reduction of the cost of buying and selling equities and bonds for foreign investors. A central counterparty (CCP) will also be implemented in 2012.
"Clearing and depositary functions will be performed by two separate entities under a single holding group and other innovations will follow, such as lobbying for the introduction of the novation concept into Polish law," adds Stachursky. Netting should be introduced in 2012, permitting settlements in net cash rather than gross securities. The Settlement Guarantee Fund is also due for renovation; the overall effect of the introduction of the CCP intended to be systemic risk reduction. "All of this will make the market more efficient but also more competitive," says Stachursky.