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Small but complex market

As a market for custody and securities services, Belgium doesn’t come very high on the list of most banks; it is a small market with only a handful of large pension funds and investment managers to service. But it does hit the radar screens for banks keen to offer integrated services for the Euronext markets, of which Belgium is one.
Renaud Vandenplas, general manager of BNP Paribas Securities Services in Brussels, says broker dealers now consider Europe as a single market and they seek integrated services for all of the main Euronext markets from their providers. “It is an advantage for a bank to be able to offer harmonised reporting, transaction handling and the same quality and level of service across all four of the Euronext markets,” he says.
Integrated services are now a prerequisite in the Euronext markets, he says, particularly in the smaller markets. “It is very rare for a securities services provider to address only the Belgian market for its clients. If it can’t offer integrated services across the Euro-zone it won’t survive in the business for very long.”
Eric Daubresse, senior sales manager responsible for Belgium at Fortis Information Banking says that, as Euronext evolves, competition will become more intense on the clearing side of the business. “Because Euronext is one market, we expect to see more competition from European banks, as well as from Euroclear.”
As a service provider to the Benelux region, Fortis will continue to invest in Belgium, says Daubresse. Custody services are centralised in Amsterdam but the bank has local sales and client relationship teams in each country.
Consolidation of Euronext markets has occurred on the trading and clearing levels but work remains to be done on the settlement front. Yannic Weber, managing director and head of the commercial division at Euroclear says the ICSD is working to merge all four domestic settlement platforms (the Netherlands, Belgium and France’s Relit batch equities and RGV real-time fixed income settlement systems) on to the RGV platform by 2007. “When this is completed, all domestic settlement in the Euronext markets will be on a single platform. This will mean institutions won’t have to interface with different platforms across the markets.”
It will also help level the playing field for banks. As Weber points out, with a single domestic settlement platform a Belgian bank will be able to provide the same settlement services from a functional standpoint for French stocks as a French bank can. Moreover, a Belgian pension fund will also be able to invest more easily in cross-border securities and be charged the same settlement price as for a domestic security.
While Euroclear will in some cases compete with local Belgian banks in terms of agency services, it will never offer the full range of services typical of an agent bank, says Weber.
Despite the impact of Euronext on the market, local presence is still considered an asset. ING/BNY Securities Services, an alliance between ING Group and Bank of New York (BNY) cites this as a key factor in its recent mandate win at Hamburg-Mannheimer in Belgium. The alliance will provide global custody services for the life insurance company’s e900m assets worldwide. Eric Orlans, head of the ING/BNY commercial alliance says having a strong local presence (ING acquired Bank Brussels Lambert in 1998) while operating in a global market has been crucial to the success of the alliance.
Despite being small, Belgium is complex from a regulatory viewpoint. This has been simplified to some extent with the merger last year of the regulatory authorities covering pension funds and financial institutions into a single banking, finance and insurance commission (CBFA). Wilfried Van Messem, managing director at Heissmann Consultants, a human resources and investor services consultancy joint venture between German company Heissmann and Mellon Financial, says bringing control and regulation under the one organisation should tighten and streamline regulation in Belgium.
“I think the market will see less conflict between the investment controls placed on pension funds and the controls affecting the providers of that investment, the financial institutions. The merger should lead to better control of the entire financial sector,” says Van Messem.

The EC has put Belgium’s taxation regime under the spotlight with the decision in October 2004 to refer Belgium to the European Court of Justice after deciding it has been too slow to change its discriminatory pension taxation rules. Under Belgian legislation, pension contributions paid to foreign funds are not tax deductible whereas contributions paid to domestic funds are.
The EC has identified four main problems with Belgian law. Aside from discriminatory tax deductibility arrangements, the transfer of pension capital to a foreign pension fund attracts a special tax, pensions paid to people who move overseas remain taxable in Belgium, and foreign pension funds are required to designate a tax representative in Belgium before offering their services on Belgian territory.
Belgium was originally asked by the EC to address these issues in December 2003, but the government’s undertaking to set matters right in September has been deemed as too late. The changes must come into place before implementation of the EU’s pension fund directive (PFD), which comes into effect in that month.
Van Messem says Belgium has often dragged its heels when it comes to European legislation. “The Belgian government seems to have been a little blind to the opportunities that the PFD presents for countries. Luxembourg, Ireland and the UK have all made significant progress in addressing the opportunities. The government should act more quickly in adopting legislation that will make Belgium an attractive country for investment funds to set up in.”
Transaction costs are falling in Belgium, although there is “still some fat” that can be removed, says Van Messem. “Traditionally the investment management arms of the large local banks used to act for pension funds with global mandates. Costs were fairly high compared with the UK, for example. But over the past few years there has been increasing pressure on these costs. Some investment managers are using smaller banks and we are also seeing foreign investment managers get a better grip on the market. They have the volumes to enable prices to come down.” Some pension funds are paying up to 60% less than they were a few years ago. “
Pension fund mandates are also becoming more sophisticated and many funds are looking for speciality managers. As a result, the market is no longer the sole preserve of Belgian banks, he says.
Downward pressure on costs can often result in innovative responses. Belgium’s KBC Bank announced early last year that it is developing a common cross-border platform for securities settlement with Rabobank of the Netherlands. The move is expected to significantly reduce costs for the two institutions.
Initially, the joint venture, which is based in Eindhoven, will process securities for Rabobank. In 2006 processing will begin on KBC’s securities. Both banks had been due to replace their processing platforms and decided that sharing the cost of investing in new IT systems made more sense. Ultimately, the two banks hope to attract the business of other financial institutions that will outsource their securities transaction processing to the joint venture.

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