Shift to global markets
The global custody and services agreement between Nordea and Bank of New York, announced in August this year, signifies a wider trend in the Nordic region, away from domestic banks and towards the international global custodians.
Under the agreement, which covers around €240bn of assets (about half of Nordea’s total of €500bn assets under custody), Nordea will provide the local presence and customer contact while BNY will provide the technology and servicing infrastructure to support Nordea. BNY is no stranger to such deals, having struck relationships with ING and Allied Irish Bank.
Berger Gezelius, head of Nordea’s financial institutions division says the combination of Nordea’s local presence and market expertise with BNY’s product capabilities, will deliver securities services to Nordea’s institutional clients through a local network.
Frank Froud, managing director Europe, banks and insurance at BNY says the alliance with Nordea was the result of 18 months of detailed discussions, covering the challenges, client needs, systems and servicing models. “We now have a very clear roadmap for the partnership,” he says. The alliance will initially provide custody and a very tight set of products targeted at pension funds and buyers of global custody, says Froud. However, there are other market segments that BNY will eventually look to expand into.
Froud’s colleague, Sid Newby, vice-president and head of business development, Nordic markets, says at the point of use, services will be targeted for each country. “One of the reasons we have partnered with Nordea is its ability to cover the whole region,” he says.
“Nordea is developing its securities services range, in recognition that requirements from the local market are becoming much more sophisticated. The alliance will help Nordea to deliver such services into the market maintaining and enhancing its leading position.”
It is the increasing sophistication of institutions in the region that the international global custodians argue is tipping the balance in their favour.
Says Froud: “Pension funds and other sophisticated clients in the region are looking for a strong local service provider backed up by a global partner with strong, world-class securities related products. It is important to have local client servicing teams that understand the different languages, client needs, regulatory environments, systems implications and tax regimes.”
Soren Eberhard, first vice-president and business development manager for the Nordic market at ABN Amro Mellon Global Securities Services, says during the past few years local institution investors have become much more focused on international suppliers such as ABN offering custody for both international and domestic assets. “Three to five years ago you would not see RFPs sent out to international providers that covered domestic business. We are seeing a shift in mandates away from the local players to the international banks,” he says.
One reason is that the local banks are having a difficult time competing on the systems and reporting tools level because of the large investments required in technology, says Eberhard. “Global custodians have spent a great deal on developing very strategic tools for clients. A lot of the local players realise they have missed the boat.”
Based in Copenhagen, Eberhard joined ABN Amro Mellon in September from Danske Bank, where he was head of securities services for six years.
Much of the recent action in the region has centred on the international providers. In late September, Northern Trust picked up a Skr138bn (€14.7bn) sole custody mandate from Fjarde AP-Fondent, the Fourth Swedish National Pension Fund (AP4). The previous incumbent was State Street.
Anne-Lise Winge, head of EMEA sales within Northern Trust’s institutional custody and asset servicing group, says AP4 is typical of institutions in the region that are reviewing their custodial services. “AP4 is a very sophisticated investor and
has a range of investments in its portfolios,” she says. “As a result, its demands are very broad. AP4 has a sizeable share of Swedish assets and has historically used a Swedish bank to custody these. However, its wish was to consolidate all of its assets with one custody provider. It had to be sure that its custody provider could offer high level services on international assets as well as domestic assets. That is one of the key reasons Northern Trust was selected.”
Winge says Nordic institutions are looking to their custodians to provide many more services than they did in the past. They are placing demands on custodians to increase their operational efficiency and as a result global custodians must invest in the technology that will help the client to become much more efficient in their back offices. Institutions also want securities lending, commission recapture, intra-day reporting and performance and risk analysis.
Like BNY, Northern Trust has also looked to alliances as a way of servicing the region. Through its relationship with Svenska Handelsbanken, Northern Trust is the only global custodian in the region that can service mutual funds, says Winge. “Handelsbanken provides the trustee services and we provide global custody services directly to the mutual funds,” she says.
Northern Trust beefed up its presence in the region in May with the appointment of Allan Nedergaard as vice-president, Nordic business development for Northern Trust’s institutional custody and asset servicing business. Like Eberhard, Nedergaard joined the bank from Danske Bank, where he worked for 20 years, most recently in the securities services division as head of sales and client relations.
Nedergaard believes the trend for institutions to switch from domestic custodians to global custodians will continue. “Historically, many pension funds and institutional investors in the region had close ties to domestic banks in each country,” he says. “Our ability as a global custodian to also handle domestic portfolios in each country has been a real eye opener for many institutions.”
JP Morgan Worldwide Securities Services has also enjoyed success of late.In September it was appointed by the Norwegian Banks’ Guarantee Fund (NBGF) to provide custody, fund accounting, compliance, performance measurement and securities lending services.
The NBGF was created in July 2004 by the merger of the Commercial Banks’ Guarantee Fund and the Savings Banks’ Guarantee Fund. Banks with a head office in Norway and subsidiaries of foreign banks operating in the country. The main role of the fund is to cover deposits in member banks.
Stuart Thompson, head of sales and client management, Nordics and Baltics, at JP Morgan Worldwide Securities Services says the investment profile of Nordic companies is becoming more international and they are also moving into more exotic products.
“Historically, a local bank would have looked after all of the needs of institutional clients,” he says. “It has only been in the past 15 or so years that pension funds and insurance companies have been able to invest more in equities and globally. This has led to clients coming directly to global custodians because the local custodians have increasingly lacked the expertise in managing different international markets.”
Local custodians have generally remained custodians for clients' domestic portfolios and global custodians have looked after non-local assets, Thompson says. However, in recent years clients have been consolidating as they look for one method of undertaking reconciliation, communication and other operational processes. “They want global custodians to hold local assets as well as the global assets in one consolidated place.”
JP Morgan and other international banks are therefore moving increasingly into the space that was the preserve of the local custodians, but do continue to rely upon them as sub-custodians to support changing client requirements in their own domestic market.
“The landscape is changing in the region and local banks will compete with global custodians for some domestic as well as international mandates. Although many institutions are using global custodians, particularly the tier one institutions, there always will be some that will prefer to stay with domestic banks.”