The removal of RBS Trust Bank and Lloyds TSB Securities Services from the global custody equation – the first swallowed up by The Bank of New York, the other falling victim to a predictable post-merger realignment of priorities – left a London-shaped hole in the business that a number of players moved quickly to fill. Over the past two years Société Générale, Amsterdam-based KAS-Associatie and National Australia Bank – through its UK subsidiary Clydesdale – have all set up shop in the Square Mile with a view to hoovering up the sort of small to medium-seized mandates that were the departed duo’s bread and butter. There is, however, another new arrival on the scene, one that has a very different – and indeed far bolder – agenda: Merrill Lynch.
It has been oft pointed out that broker-dealers have not exactly covered themselves in glory when it comes to dipping a toe into global custody’s deceptively placid waters – only Morgan Stanley has ever made a real go of it, although having amassed some $400bn in assets it promptly sold out to Chase Manhattan Bank in 1997. This perhaps goes some way to explaining the resolutely low-key approach Merrill has taken with respect to its new baby, known as Securities Services Division (SSD).
Having just celebrated its first birthday, SSD was created to take the investment bank’s existing activities in the clearing, settlement and custody spheres – which have primarily been focused on the US market via specialist subsidiaries such as Broadcourt, ML Pro and Merrill Lynch, Pierce, Fenner, & Smith – to a new, global level. Headed up by Richard Dunn and overseen worldwide by no less an industry luminary than Art Thomas, SSD comprises some 2,700 staff mostly split between the New York office and the London-based European operation, run by Steve Spence.
Spence has strengthened the London team in recent months, bringing on board Liz Nolan, who comes across from BNP Paribas’ European Investor Services Division, and Marco Baggioli, formerly general manager at Monte Titoli, the Italian central securities depository. Indeed, it is something of a reunion – Baggioli is himself an ex-Paribas man, and he also worked alongside Nolan at JP Morgan in the early Nineties.
“SSD was not created from nothing, it was very much carved out of the existing organisation,” says Baggioli. “It basically puts together all Merrill’s fee-based operational businesses, and includes securities lending, softing commission, financing and prime brokerage.” The new entity will be targeting “second and third tier” broker-dealers and banks for the clearing products, in addition to institutional investors and leveraged clients for the financing and custody products. “While we will be servicing them locally – Europe from London, US from New York – our product offering will be global, leveraging the capabilities and sheer volume of the Merrill business,” he adds. “As one of the largest equity players on the planet, we have either direct capabilities in each market or a network of custodian agents on the ground, so adding external client business can be achieved relatively easily.” Trading or executing via Merrill Lynch will not be a prerequisite to gaining access to the SSD product, he stresses.
Baggioli says that with SSD Merrill is looking to position itself more as a global clearer than a global custodian, servicing those clients that cannot or will not shoulder the onerous technology and manpower spend demanded by the ongoing reconfiguration of Europe’s post-trade infrastructure. “While custody is an important part of it, the idea is to provide a service that is firstly settlement focused,” he says. “With consolidation and the emergence of lean and mean online structures at the front end, firms don’t also want to have to deal with the sort of investment required to set up or overhaul their own middle and back offices.”
That has become an ever more pressing concern this year given the downturn in the markets, which has left people facing huge fixed costs and declining revenues. “The ease of access that exists on the trading side as a result of new technology and the Internet does not carry through to the post-trade side, plus the mechanics of settling a trade varies widely across the individual markets,” he notes. “We have been mastering all this for our own business, so it makes sense to leverage our experiences to benefit our clients.”
Establishing that client base in Europe looks on paper at least to be a tough proposition, given the critical mass and momentum already built up by the mainstream custody players. Nonetheless Baggioli is confident SSD will be able to carve its own distinct niche. “We don’t really see a competitor out there offering what we are proposing,” he says. “Certainly, some people will offer the same services, but it will be to a totally different client base.” Of the clients SSD has newly signed up in London – “more than one, less than 10” is as far as Baggioli will be drawn as regards numbers or other salient details – all have been swayed by SSD’s promise of a single point of access into Europe. “When those clients went to the usual providers of these services, they were too fragmented and the client would have to talk to many people in many markets ,” he says. “We are not offering that different a product from a typical settlement agent, but we offer it to a client base that either has difficulty accessing those agents or simply wishes to take a more rational approach and outsource.”
Tim Steele is a freelance editor and consultant