Two of the most significant custody alliances established by US banks looking to extend their reach across Europe have been made with Dutch custodians – Bank of New York (BoNY) with ING and Mellon Bank with ABN Amro.
Dutch custodians have considerable experience, dealing as they do in a pensions market that is second in size only to the UK. Moreover, the Dutch pensions market is the most mature in Europe with around $500bn (E463bn) in total pension fund assets. There are over 600 pension funds in the Netherlands – rich pickings for both local and overseas custodians.
The ING and BoNY alliance is focused on Germany, the Benelux countries, central and eastern Europe. In forming the alliance, BoNY is hoping to tap into ING’s local presence and market knowledge in European securities services. Michiel Gosens, spokesman at ING in Amsterdam, says BoNY has the technology that will enable ING to reach a broader range of clients and to reduce its transaction processing costs. He describes the alliance as “very good for both sides”.
As part of the alliance, ING Investment Management appointed BoNY global custodian for its Benelux operations, which encompass assets of around E90bn. The custody services are delivered through the partnership. Dutch sub-custody for BoNY, ING Investment Management and the alliance itself, will be provided by ING. These arrangements put paid to BoNY’s previous sub-custody arrangements with Fortis and Kas in the Netherlands.
A precursor to the announcement of the alliance came one month before, in September 2002, when ING outsourced its international cash equities clearance and settlement operations in London, New York, Hong Kong and Singapore to BoNY. BoNY’s Brokerage and Clearing Services Sector, provides ING with correspondent clearing services and fully disclosed clearing services to proprietary and institutional customer agency businesses. The services provided vary according to specific country requirements, but include the generation of trade confirmations and statements, settlements of trades and in certain locations, maintaining ING’s books and records. The agreement included the transfer of about 100 ING staff, primarily in London, who became BoNY employees. Erik Dralans, member of executive committee Europe, ING, said at the time of the announcement: “There is currently no provider that is capable of offering this service on a global basis at the level required by a company like ING. This agreement will, through The Bank of New York’s development of settlements technology infrastructure, offer us the ability to carry out a high volume of transactions efficiently, whilst also allowing us to offer competitive variable costs to our international cash equity business.”
ABN Amro Mellon Global Securities Services has similar aims and philosophies. The company services more than 110 clients in 26 markets and has around $221bn under custody. Its immediate aim is to focus on its client base in Europe using ABN Amro’s distribution channels.
Jack Klinck, chairman of Mellon Europe, says his bank will bring its technological prowess and deep product knowledge to the venture while ABN will provide the distribution and marketing elements.
Since its formation, which was finalised in January this year, ABN Amro Mellon has been picking up clients, including the European Investment Bank, which outsourced its derivatives collateral management activities to ABN Amro and appointed ABN Amro Mellon global custodian on all of its collateral bonds.
Gerling NCM, the world’s second largest provider of credit insurance, is another customer covering world trade worth around E350bn, with a E1.1bn fund.
Four Dutch insurance companies opted for custody and value added services from the merged group earlier this year. The combined value of the funds is more than E1bn. DBV Levensverzekeringsmaatschappij has signed up for core custody, record keeping, US GAAP-based investment accounting and securities lending services to its life funds, which cover 130,000 policyholders. Dela Natura Uitvaartverzekeringen, which provides funeral insurance for more than 2.2m customers has appointed ABN Amro Mellon to provide custody for its European equity fund and other funds. Another funeral insurer, Monuta Verzekeringen is to receive core custody and securities lending services for its European fixed income and equity funds. Finally, NHL, the subsidiary of Munich Re, has appointed the group to provide core custody, accounting and performance measurement for its two life and damage portfolios.
While there is a tendency in the Dutch market for local parties to have a preference for local names, says Sikko van Katwijk, securities country manager, the Netherlands and Belgium, Global Transaction Services, Citibank International, the locals do not have it all their own way.
One of the largest custody mandates of 2002 was awarded by a Dutch pension fund to a North American custodian – but not one of the biggest names. In February 2002, Northern Trust was appointed master custodian by the Pension Fund for the Metal Industry (PMI) in the Netherlands. The bank was appointed to provide the full range of global custody services, including regulatory reporting for the Dutch regulator, PVK, online daily compliance monitoring, performance measurement, securities lending and accounting for the E13bn pension fund.
Another US custodian who has tackled the Dutch market on its own is State Street, which provides the full range of global investment and securities lending services, including custody, accounting, performance, analytics, compliance monitoring and foreign exchange services on a global basis for Philips Pensioenfond, the third largest pension fund in the Netherlands, and Europe’s oldest pension fund, says Rod Ringrow, head of business development at State Street.
“For State Street, the Dutch market is of interest because it is a very heavily defined benefit market, which is changing rapidly into one that is oriented towards defined contribution (DC) schemes. Given our experience with defined contribution schemes in the US market, we feel we have a role to play,” he says.
Jeff Conway, senior vice-president at State Street, says DC schemes require much more timely information flows. “The daily valuation requirements of a collective fund will lead to more information flows. That will require tighter integration of controls and procedures and the information delivery between the custodian, counterparty and the customer.” State Street can leverage its experience in US mutual funds processing to support daily valuation, says Conway. Indeed, the challenge for administrators to provide the required information flow and daily valuation cannot be underestimated, he says. “This puts a great strain on systems and people, unless you can make a significant investment in both. The challenge often becomes too great and we are seeing many customers asking whether administration is a core competency. This may lead to an increasing trend to outsource fund administration.”
Ringrow identifies the move from defined benefit to defined contribution as the most significant trend in the Dutch market and one that is likely to quicken in pace. Like Conway, he argues that outsourcing of fund administration will increase as asset managers and pension funds consider whether or not to maintain in-house operations.