An integrated approach “to transaction processing, financial logistics, risk management and asset financing supported by state-of-the-art information technology,” -Fortis Bank’s very own description of its ‘information banking’ concept. Admittedly the group has provided each constituent service for years yet according to Marcel Jongmans, head of custody at Fortis, there are five units now merged into one operation.
Within this overall package there are two distinct groups. Global custody is the axis around which everything revolves and with E450bn falling into this category, Jongmans says they are able to offer other directly linked activities. Another core activity feeding off this global custody is securities lending and borrowing. “We’ve got lendable securities out of the custody unit and there’s a market for potential borrowers,” says Jongmans. Completing the trio of core activities is derivatives clearing, where Fortis has made quite a name for itself.
The old Mees Pierson, and now Fortis Derivatives focuses on professionals in the market or, in other words, the market makers. Jongmans describes borrowing and lending sitting somewhere between the two and one of the substantial demands for this comes from the derivatives clearing. Fortis concentrates on market makers as they often need to borrow collateral to go short- financial institutions rarely need to borrow to the same extent.
The fourth element to the information bank concept is fund services, basically administration for hedge funds. “Again you can end up with substantial holdings and, if possible, these are be bought under the roof of custody.” Finally there is prime banking and brokerage. Strictly speaking this is prime banking for smaller hedge funds, prime brokerage being something they are considering.
As for the infrastructure of the information bank, it centres around the global custody package. Another way at looking at it is that the custody element is the hub from which everything else feeds. Following the 1994 merger between Mees and Pierson the group revamped all the IT infrastructure and, in conjunction with a US software company, set up a new IT system for the custody operation.
In practice, each unit in the information bank has its own independent but inter-compatible system. “The securities lending package, for example, is fully connected to the global custody environment and there is a real time interface between those packages to send instructions to receive confirmation on the settlement of the securities lending transaction and on the reconciliation side,” says Jongmans.
The derivatives clearing operation has its own proprietary market maker system and this is fully connected to the global custody system. “Securities lending, market making clearing and global custody have in principle their own part of the system but it is fully connected.” In practice this means the moment an asset is custodied, it is available for lending. The internal linkage between the different services has been established for a while. What Fortis is now aiming to do is to connect clients like fund managers, pension funds and insurance companies electronically to the custody system. Like most custodians, the idea is to get rid of faxed or paper instructions.
Now that the information concept is largely completed, Fortis is contemplating providing clients in the Netherlands with performance and risk management. According to Jongmans the group has signed a deal with a continental specialist, an IT and consulting company rather than a straightforward software provider Essentially the deal is a partnership with someone able to support them with the systems and the sales and marketing capacity. “We bring in our name, our basic servicing and clients and they bring in all the necessary services we need on the performance and analytical services.” The service should be introduced by the third quarter of this year.
Using the global custody are three distinct client groups, first of which is regional sub custody. “We are one of the strongest players in the Dutch market. If you look at regional sub custody in the Netherlands, we have 10 of the top 15 global custodians as clients. We are trying to expand our service to Belgium and to France because Euronext is there,” he says. Most of the large US global custodians are apparently Fortis clients.
The second client group is asset managers, pension funds and insurance companies in the Netherlands and, to a lesser extent, in Belgium. This is an area Fortis is pushing. Kas is the main competitor but there are other local and US outfits with a greater market share. “Initially Kas was the bank of the exchange, where all the local brokers settled their transactions and because of that it had most of the pension funds on their books.”
The third group includes internal clients such as the Fortis in-house funds, the insurance group, the investment bank and the mutual funds. Fortis Investment Bank for example does its clearing, settlement and safekeeping through its books.
Strategy at Fortis appears to be reaping rewards. In the Netherlands they are near the top in terms of custody, derivative clearing, lending and borrowing and, in the UK and Germany they are among the top three in terms of borrowing, lending and derivatives clearing. With regards derivatives clearing, it controls 35% of the Amsterdam market, a fifth of the Frankfurt market and 10% in London. Fortis recently won a E5bn mandate from an insurance company based in the Netherlands to provide custody and securities lending. Jongmans says they are in discussions with them to bid on more parts of their portfolios in other regions in Europe.
Although the information concept links the various components, clients or potential client can pick and choose the services they want to use. “Take derivatives clearing and market makers, as an example,” says Jongmans. “They don’t sell fund services to their clients, they sell financing, settlement services and clearing services and borrowing and lending. They are not interested in primary banking or fund services.” For the majority of contracts with asset managers and pension funds, Fortis provides global custody and securities lending and, to a lesser extent, clearing.
Fortis appreciates its limitations and acknowledges the type of market it is operating in. It considers itself a global custodian in that it has a network of 67 countries in place and, in practice, could do custody in every country. However most of the time it concentrates on institutional clients in the Benelux market. “Part of us is more European-based, part of us is more globally based. With custody, the emphasis is on Europe, if you’re talking borrowing and lending and derivatives clearing, it’s more global”
Euronext is likely to galvanise their European business. “Because the information bank has been appointed as the preferred global custodian and clearer for the entire Fortis Bank, it makes our life much easier because of the fact that we want to play the general clearing role in the Netherlands, Belgium and France for our internal group,” says Jongmans. It recently bought an order management, order execution system with the investment bank and Jongmans says they are developing and will introduce a combined clearing and settlement platform for the three markets by the first quarter of next year.
Jongmans believes those who claimed, as long as six years ago, that sub custody was dead, were wrong. “Maybe within 10 years we can come to an agreement on the notion that sub-custody is dead but for the next few years the major custodians will still want to have those ears and eyes in the market.” In the Euronext market, Fortis’s main competitor is Euroclear but Jongmans still considers them a bond clearer. “If you look into the equity market operations, they need to learn a lot, and to develop a lot of the things in their systems,” he says.
Fortis has E450bn under custody but it aims to double this by establishing joint ventures and partnerships (achieving this via new clients would be nigh on impossible). At present it is one of the top 15 global custodians. “We don’t have our head in the clouds though. We don’t think we are ever going to touch the top three or four with five or six thousand billion and we don’t want to pretend that we are a truly global player like Citi with their local presence in a lot of markets.”