Riveted to market by local knowledge
Received wisdom in the world of global custody is that consolidation of providers will continue as the cost of servicing increasingly demanding and sophisticated clients becomes prohibitive for all but the largest of the current players. Domestic banks will be squeezed out by the large bulge bracket US custodians.
Try telling that to Fortis Bank, the banking and insurance group that focuses on the Benelux region. Its custody arm makes a virtue of its local knowledge. “Fortis positions itself as a global custodian for Dutch and Belgian institutional investors; they are our core business,” says Jan Bart de Boer, global director of sales and account management for clearing and custody at Fortis Merchant Banking. De Boer, who joined Fortis from ING Bank in July 2004, is responsible for account management and sales undertaken by the bank’s custody and clearing units.
Fortis’s global custody operations were previously called Information Banking and acted as a standalone unit from the Merchant Banking division. It was recently brought back into the Merchant Banking division, which will soon change its name to reflect the merger.
De Boer says these home markets, particularly the Dutch market, are big enough to give Fortis a good franchise. In 2004, the then Information Banking recorded net operating profit of e108m on revenues of e378m. Assets in custody are worth more than e431bn.
Merchant Banking provides integrated services that combine custody, clearing, securities financing, lending and yield enhancement strategies such as structured products and arbitrage. It targets professional traders, institutional investors, banks and alternative funds.
One of the main differentiators Merchant Banking offers over international competitors in the Dutch market is the ability to offer services in the Dutch language (Fortis also offers French language services for its French-speaking Belgian clients). While the Dutch are renowned for their linguistic abilities, being able to talk to institutional investors about the specifics of their home market in their own language is a clear differentiator when compared with the non-domestic banks.
Most global custody services such as performance measurement, compliance monitoring, tax reclamation and reporting have become commoditised and do not provide much scope for
differentiation, says De Boer.
“I think the difference Fortis
can bring to its Dutch and
Belgian clients is that we do have
a global reach, but with local
focus and we can provide local expertise up and down the value chain,” he says.
This expertise includes analysis of the implications of the new regulatory framework for the Dutch market, Financieel Toetsingskader (FTK). This will come into effect from 2006 and will have to be adhered to by pension funds and life insurers. One of the aims of the new regulations is to improve transparency and enable comparisons between different pension products.
“We are holding seminars on the impact of FTK, because this is absolutely key to our Dutch clients,” says De Boer. The impact the framework will have on solvency is uppermost in their minds.”
Fortis has developed a toolkit that helps clients to understand their position regarding assets and liabilities. “We take core data in from clients and show them a snapshot of their assets and liabilities. We can then start working with different parameters, devising solutions for them that will help them to overcome some of the solvency hurdles they now face. We can show how changing investment styles might affect their profile. Finally it will indicate a level of comfort as to how much spare capital they have which they can put to other uses.”
De Boer says the bank’s client group is facing more stringent and changing rules from regulators. To help them understand the implications of these regulations many of the services the bank offers are consultative, such as the seminars. A more consultative approach is a valuable part of the bank’s overall strategy, he says, because it demonstrates to clients that Fortis is more than just a back office services provider.
The client group is also becoming more professional as the market requires more sophisticated approaches. “There is a new breed of manager working at pension funds. They are working in an environment of much more oversight, where plan sponsors are becoming more involved in the pension fund.”
It is much less likely now that a pension fund manager will “just pick a bank”, says De Boer. Their choice of service provider will be supported by consultants and checked by trustees and plan sponsors.
This means that pensions funds and investment managers are more likely to cherry pick services, seeking out the best deal. Fortis offers clients bundled and unbundled services, allowing institutional investors to cherry pick the services they want. “We have clients buying into the whole value chain from brokerage to global custody, including added value products like performance management, investment administration, compliance monitoring, tax reclaim and securities lending. However, we also service clients that use only securities lending. The buyer of services is very sophisticated today and will compare providers. For that reason, we have to be very open about cost structure.”
Securities lending is one area where this approach is taken. Fortis pursues global securities lending and arbitrage mandates from institutional investors but also offers securities lending as part of an overall custody mandate, says De Boer.
Securities lending administration is independent of the bank’s custody administration. The positions of custody clients who
participate in securities lending are included in a lending pool
run by Global Securities Lending and Arbitrage (GLSA), which is a separate unit within Merchant Banking.
The more professional approach taken by pension fund managers
is creating opportunities for
dedicated service providers, says
De Boer. “Changes in regulations are making our clients much more demanding. For example, as a
result of the EU Investment Services Directive we hear asset managers and pension funds discussing
direct market access now. Instead of going to markets via a broker, they want to go the market direct. We are in a position to offer such services including post-trade
processing because we already do so for hedge funds and proprietary traders.” While direct market access is not an immediate priority for Fortis’s current clients, it is likely to be in the future, he says.
By focusing on specific products for a focused client base Fortis can avoid spreading itself too thin across multiple markets. Moreover, as funds move from defined benefit to defined contribution schemes, individual clients of pension schemes gain in importance. Having a local custody provider that understands the vagaries of the market will be a distinct advantage for managers servicing these end clients, says De Boer.
In January, the new chief
executive of Fortis, Jean-Paul Votron, outlined the group’s plans for expansion. In line with this strategy, Fortis is looking to expand its clearing business in Spain, the US and Asia. During 2004, the securities lending and borrowing international branch network was extended with an office in Copenhagen. Prime Fund Solutions, a service for hedge funds, opened an office in Milan.
Fortis’s focus on its domestic clients has paid off – it was given the highest rating among local providers in both the Dutch and Belgian markets in Global Custodian’s 2004 survey of agent banks in developed markets. Prime Fund Solutions has won the GSCS Benchmarks award for best funds service for the past six years.