Good fundamentals are attracting securities services providers but there are hurdles for non-resident investors, writes Heather McKenzie

Strong economic growth in Spain during the past two years has fuelled growth in the capital markets and activity in new issues. Such activity is good news for securities services providers and Spain, despite some difficulties it presents for foreign investors, is an attractive market for custodians.

In June, BNP Paribas Securities Services bought Exelbank, a specialist custody and depository banking firm formerly owned by Banco Sabadell. Exelbank provides custody and settlement related services to Spanish and international financial institutions, depositary bank services to mutual and pension funds and outsourcing services related to investment operations and private banking. It has around €18bn in assets under custody and serves more than 150 funds, managed by about 25 investment managers.

Exelbank will be absorbed into BNP Paribas Securities Services; the integration programme is underway and the aim is for the work to be finished by the end of this year.

Sally Maddick, head of sales and relationship management, financial intermediaries at BNP Paribas Securities Services in Madrid, says the purchase of Exelbank has given the custodian a “strong foothold” in the resident investor business in Spain.

The bank already has a strong non-resident securities services business.

BNP Paribas Securities Services has 200 staff based in Madrid and assets under custody of €214bn. Around 3.6m trades per year are settled, which represent an “extremely sizeable” market share, says Maddick.

Elena Mesonero, head of sales and relationship management for institutional investors Spain at BNP Paribas Securities Services in Madrid, says in the domestic business, local providers dominate the Spanish market, but BNP Paribas has increased its local business since 2000 by diversifying its products and client services.

“We now offer depot bank, fund accounting, reporting and outsourced services for private banks and asset managers - SICAVs, mutual and pension funds and hedge funds.”

Until about two years ago, says Mesonero, the Spanish market was very conservative. “Funds tried to do all the securities servicing on their own. But as the opportunity to invest in more sophisticated products meant doing the custody became more complex, they started to look for specialists in the market.”

Additionally, reforms made to alternative investment laws by the Spanish government in 2006, where hedge funds were given legal recognition, have led to new asset managers coming into the Spanish market to distribute their funds. Since the start of 2007, BNP
Paribas Securities Services has put in place
services for 10 new asset management entrants into the Spanish market.

Spain is becoming a significant market for onshore hedge funds, says Paloma Pedrola, head of investor services in Spain at Societé Générale Securities Services.

“Our business activity has increased in all areas related to asset management activity. We provide asset management firms with full services and back office support in two main areas: distribution for foreign asset management firms that would like to come to Spain and trustee and administration, and added value services to traditional and hedge funds firms.”

Pedrola says SocGen’s clients are beginning to focus on products that service exchange traded funds (ETFs), certificates and warrants.

The bank’s offerings in these areas include a full package for ETF issuers whereby SocGen acts as liaison agent with local authorities, the stock exchange and the local central securities depository, Iberclear. SocGen can also act as paying agent for dividends and as a local custodian. “We are currently servicing five Lyxor ETFs that represent around 35% of the market share in Spain,” she says.

For certificates and warrants, SocGen complementary services and has around 60% market share on warrants, with 1,600 live warrants. The full service warrant offerings include issuance, Isin code chasing and dissemination, registration and testing with Iberclear, legal reporting and amortisation.

The Spanish market can be difficult for non-resident investors, says Maddick. “There are differences in the Spanish market from the rest of Europe. For example, investors can be fined for short sales or buy-ins. Some of our clients are doing huge trades and they don’t want to slip up, because a mistake can be very costly. We help our clients avoid these problems.”

One of the main challenges in the non-domestic business is the issue of registration, she adds. In Spain, the nominee concept is not recognised; ownership is determined by registration name and this forms a fundamental element of successful settlement. Therefore, there is an obligation to maintain a registration name at the settlement level.

The registration name has to be provided to the broker on T+1, however it can be amended until T+2. “Despite this, the registration component is something that can cause issues for non-residents, particularly those doing huge volumes of transactions. We have developed a solution that enables these investors to treat Spain like a plain vanilla market, taking the administrative burden away. This has been a real success, with most of our major clients having signed up for it.”

In an annex to its advice on European Union Clearing and Settlement, delivered in July 2006, the Legal Certainty Group - a group of 30 legal experts that reports to the European Commission on issues of legal uncertainty relating to EU clearing and settlement systems - identified legal uncertainty in the way the laws of the EU member states interact with each other and that the type and degree of uncertainty is in many cases a barrier to cross-border efficiency. It cited Spain, where investors have full ownership rights only if they hold their book entry securities through a registered individual account at Iberclear or with a participant in Iberclear.

Says the report: “The investor thus has no choice but to keep his account with particular domestic intermediaries, and if he chooses an intermediary which is not participating in Iberclear, Spanish law will not accord the same legal effects to his book entry on that account.”

This situation, says the group, argues in favour of a minimum set of legal effects for book entries harmonised at EU level regardless of the status of the intermediary providing the account - in the interests of legal certainty and market efficiency. European moves to integrate financial markets are making their presence felt in Spain.

Rafael Gonzalez-Aller, securities country manager for Spain, Citi Global Transaction Services, says on a European level, Target2 for Securities, in which Spain is participating very actively, and the Markets in Financial Instruments Directive (MiFID) could have a major impact on the evolution of the Spanish market. “It is, however, an open question as to the exact impact these initiatives will have,” he says.

“On a technical level, depository matching processes have moved on to the Swift ISO 15022 standard, which has improved efficiency. This has increased the automation in the local market, enabling service providers such as ourselves to cope with the increase in activity in the Spanish markets. In fact, the agency banks that have invested in technology and resources have been able to cope with this increase in daily activities on the Spanish markets.”

While the fast growing nature of the Spanish market has attracted interest from custodians, Gonzalez-Aller says background, reputation and the capability to handle the local market conditions are considered to be very important by clients. “Some players have tried to gain market share by aggressive pricing, but they haven’t been successful in this,” he says.

Maddick would, no doubt, agree: “The long-standing trust we have with our clients on the non-resident side of the business is now being felt in the resident side of the business. Clients feel they can trust us and that we will take their views into consideration - our products are not set in stone.”