As an investment market, Switzerland belies its small size, garnering around one third of the world’s investment dollars and ranking about fourth in terms of assets under management. Like the UK, it is a mature market in terms of pension funds, both corporate and government run. Unlike the UK, however, domestic banks have more than held their own against the large US bank rivals when it comes to custody and securities servicing.
Because of its size, the custody market is very competitive with the four main local players – UBS, Credit Suisse, Pictet and Julius Baer – competing with the large US custodians, including JPMorgan Chase, State Street, Citibank and Northern Trust. The Swiss custodians hold the majority share of the market.
While some observers may put the Swiss banks’ success in the local market down to a Swiss preference to use only local custodians, Richard Humes, head of global custody at Pictet, believes it is not so simple. “Swiss banks have been able to hold on to the market and fight off the US onslaught because we are much more focused on the domestic market and because of our size, can offer a more personalised relationship with our clients, rather than a more product or transactional-based approach that is more common among the US custodians.”
Swiss pension plans and investment managers are not playing the nationalist card, says Humes, but enjoy the leverage of being “a big fish in a little pond” that they would have with Pictet, for example, than being a small drop in the ocean of a US custodian’s client base.
Humes’ argument bears out when looking at the results of recent global custody surveys among clients. In nine of the past 11 R&M Consultants Global Custody Client Satisfaction survey, Pictet came out on top in the overall rankings and also in the rankings by pension funds and direct investment managers. It again topped the poll in the most recent survey, published in February. The survey is based on more than 1,200 responses received from financial institutions globally, including banks, pension funds and insurance companies. The institutions were asked to assess their degree of satisfaction with the services provided by their global custodians.
Humes says the survey results recognise Pictet’s relationship management culture that is focused on providing its clients with a highly personalised service. “What comes out in the industry surveys is that Swiss institutions are very service oriented. They don’t look upon global custody as a commodity business,” says Humes.
Because of the competitive nature of the market, Humes says local custodians do not rest on their laurels. Custody is not just about service, it also includes the products and technology to service assets. Humes believes the Swiss market is particularly attuned to products that include a large degree of analytics. Performance attribution, analysis, risk reporting and style analysis of the asset manager are all services that pension funds particularly look for. “Pension fund clients also like to be assisted with the interpretation of the information given to them by custodians. They don’t just want a system that gives them a graph and numbers. As part of a relationship with a pension fund, Pictet will help interpret and devise action plans that result from such analysis,” says Humes.
John Gout, securities country manager, Switzerland, Citigroup Global Transaction Services, says most private banks are looking for plain vanilla custody services, often because they have their own securities services systems in place. However he believes this is changing: “With the ongoing cost pressure it remains to be seen how long the private banks can support their own systems and start looking around for outsourcing partners. However, insurance companies and pension funds seek the more value added services from custodians such as performance management, fund administration, compliance and securities lending.”
Technology now plays a pivotal role in the delivery of custody and securities servicing products. UBS, the major player in the Swiss market, recognises this and offers its clients a set of electronic banking tools along with position monitoring and reporting services, risk and performance measurement functions. It provides global custody services for the Sfr10bn (e6.5bn) Swiss Postal Service pension fund, one of the major mandates to be awarded in the country.
Switzerland has proved itself to be innovative in terms of technology with the local CSD, SegaIntersettle, providing extremely sophisticated clearing and settlement services. Through its clearing subsidiary, SIS x-clear, the CSD operates one half of the unique central counterparty (CCP) set up for pan-European exchange Virt-x. The other half is provided by London Clearing House.
In its first week of operation, virt-x’s CCP cleared 186,970 trades, 99.7% of which settled on the due date. The total value of business in the first week was E8.474bn. The CCP has been designed to enable members to pick the CCP with which they wish to do business. Fritz Klein, deputy chief executive, SIS Group, parent of SegaIntersettle, says the market has divided so that institutions based in London have gone to LCH for clearing, while “almost 100% of the Continental European institutions have opted for x-clear”.
Gout says Citibank was the first global custodian to initiate a clearing link with SegaIntersettle for securities to offer remote clearing to broker dealers. Citi now has about 25% of this market, says Gout.
However, the relationship is somewhat muddied by SIS’s own custody activities: “SIS provides the clearing and settlement infrastructure in Switzerland but it is also acting as an agent bank and the implications of this need to be discussed by the market. It should make for an interesting discussion, particularly among foreign market participants,” he says.
SIS offers global custody services in more than 40 markets in addition to its role as the national central securities depository. It has established a network of depositories based on cooperation with custodian banks and central depositories. It is part of what the Swiss refer to as the Swiss value chain that comprises SWX Swiss Exchange, SIS and Telekurs, which operates the Swiss interbank clearing payment system for Swiss franc transactions and euroSIC for euro transactions. These organisations are widely regarded as providing fast processing speeds and low error rates as well as low cost services.
Andrew Tucker, partner at Brown Brothers Harriman, one of the major US subcustodians for Swiss banks and the US subcustodian for SIS itself, believes that SIS’ offering in the custody market is limited because of its business charter, which restricts it to dealing only with banks. It would be unlikely that this would be expanded, as the two main shareholders in SIS – UBS and Credit Suisse, would be loath to broaden their affiliate’s mandate.
Humes says Pictet was the first Swiss bank to start up global custody operations in the country, back in 1985 when Nestlé awarded its mandate to the bank. Within six years the other main Swiss banks had opened their own custody operations. Humes says the depth of Pictet’s experience explains why such a small bank can remain competitive in a market where investment in technology is now so paramount.
“People forget that we have been in this business for a long time and have been able to build up the systems and capabilities, spreading the investment over a long period.”
Indeed, 20 years ago Pictet provided global custody services to Mellon Bank, now one of the world’s largest custodians.