Mapping out a European route
Fennell Betson discusses BoNY’s acquisition of Trust Bank
Buying Trust Bank has transformed the Bank of New York’s approach to Europe. But it was not just the simple act of renaming it Bank of New York Europe that has achieved this. “The bank is our platform for investor services in Europe,” says Jeffrey Tessler, head of the Bank of New York’s operations in Europe, from his fastness in London’s Canary Wharf tower.
However, it can be asked, by absorbing an operation that is highly UK-centric, even with operations in Luxembourg and Dublin, how could that position the group for a continental foray of the scale that it clearly envisages?
Certainly in UK market terms Trust Bank is a prize, making the Bank of New York one of the largest providers of custody services to pension funds. It has relationships with 50 of the Footsie 100, but it is the 20% share of the retail fund administration market, gained through the acquisition, that seems to change the US bank’s perspective utterly.
“Now we are one of the largest fund administrators in the UK, and we will use this as our springboard into offshore and potentially onshore Europe,” declares Tessler.
The secret weapon looks like being Rufus, the administration software used by a number of retail fund operators directly or through a service bureau arrangement. The software was originally developed by UK fund manager Mercury to meet its own needs. But now the Bank of New York sees Rufus fitting its requirements very neatly. “Obviously, it is our product and we will continue to support it. From an expansion viewpoint, we regard this as a real entry point for us into European markets.” He points to the immediate applicability of Rufus in the offshore funds markets by adding a multicurrency facility. But that will just be the start for the big jump into the onshore markets of the continent.
“People have been talking for the years I have been in London of the explosive market in pensions, the DC market, and what it might mean for the mutual funds business on the Continent,” says Tessler, who believes that the growth so far is untapped compared with the potential. “Fund managers are lined up in the different countries waiting for this opportunity in the European marketplace. We are lined up behind them. As they go into these markets and get new mandates for DC pensions or mutual funds, we want to be right behind them providing outsourcing services for administration of retail funds and pensions.” The group is the second biggest fund administrator in the US, he says.
While Trust Bank did not have any presence in Europe, the Bank of New York has had for years, with offices in Paris, Madrid, Milan and Frankfurt. “We have a significant client base within financial institutions. That gives us the basis for a presence because the banks, fund managers and broker dealers know about us. So we will bring together Trust Bank’s product capability with our market position.”
The trend that the bank wants to pick up on is outsourcing. “We see this concept expanding beyond that of retail funds to the point of complete outsourcing of fund managers’ back office in terms of providing everything from trade confirmation and a statementing for the ultimate client,” he says. “Trust Bank was the back office to Mercury, as it was the merger of the Royal Bank of Scotland’s custody business with the Warburg custody and back office that formed Trust Bank. So we are now positioned as the back office for Mercury.”
The Bank of New York believes the future for banks, insurance companies, fund managers and broker dealers is to outsource. “We recently announced the signing of an agreement with JP Morgan Investment Management to provide them with full accounting and administration for their back office. But the group most ready for this are fund managers.
“So now we are in the position as the new Bank of New York Europe to talk about outsourcing from the point of view that we are the most credible provider and potentially the only credible provider of a whole array of outsourcing services for institutional and retail fund managers, pointing to our relationships with JP Morgan and Mercury.” He adds: “Everyone wants to talk about outsourcing; it is the way of the future. We see many more opportunities for us in this field.”
What is driving the move is the cost, otherwise no fund manager would dream of moving to a third-party provider, Tessler acknowledges, particularly those involved on technology side. “In the JP Morgan deal, it was the technology development programme we had in place. We could share with them our vision of the future and where we are spending the money. We are spending about $350m (e344m) annually on technology, but not all on securities processing.” The investment is in technology in such areas as its multi-currency investment accounting system or a master database for all securities, with real-time pricing, accessible through the Internet. “We are spending money on this type of technology, as it is important to our future and how we want to distinguish ourselves in the marketplace. So when a fund manager walks in, they might say: ‘If you are building this, that relieves us of the need to go out and duplicate this spend.’ ”
Services are built up around the ‘investment life cycle’ at every point in investment, ranging from decision through to execution and settlement and safekeeping. “Our focus is providing the right products on a straight-through-processing basis, with a capability for each part of the investment cycle,” he says.
In the bank’s vision, core custody is going to be offloaded to a centralised system somewhere along the line in Europe. “Those who focus on the core processing are going to find themselves superseded by the centralised securities depositaries once they get their act together.” This is why the bank is positioning itself to building whatever clients need, be it outsourcing capability, information, trade execution and so on. The consolidation of the custody part of the industry will continue – and not just because of the core processing – but when mergers occur, custody often becomes a minor part of the whole and the business does not seem worthwhile any longer, Tessler argues. “We believe we are going to consolidate down to a very few, maybe just four or five global custodians and a number of the specialist firms providing customised services.” In Europe, the Bank of New York does not do custody directly, only through its sub custodians.
In fact, in his view, the bank can hardly be described any longer as a global custodian. “We are a securities servicing organisation that is almost a technology company,” he says. He gives the two-year project with JP Morgan as an example. “It was run by a project team that picked apart their business model and looked at our servicing model, and figured out at every point of information flow how the outsourcing arrangement would work. We spent 14 months talking and another year installing the system.” He adds that the bank is now a business consultancy as well and its competitors at this level include IBM or EDS, or Arthur Andersen, PriceWaterhouseCoopers and McKinseys.
But the goal is clear: “We are going to be positioned to be the provider of high-level services, including administration services for funds, DC and DB schemes. That’s where we think the future of Europe is going to be and we want to be the pan-European provider of these services.” Trust Bank was one opportunity grasped on the way to achieve this. There will be others.