The reform of the French pension fund market will be good for custodians, says Bernard Blaud, head of sales and relationship management for international investor services, France, at BNP Paribas Securities Services. “Pension funds will require a range of services, including daily net asset value calculations and compliance monitoring.”
Bruno Prigent, head of Société Générale Global Securities Services, says retirement products in France have focused on life insurance products, with the more successful having an element of guarantee on the capital, which has required use of sophisticated derivatives instruments. Custodians are in a good position to provide the sophisticated fund administration required by such products, he says, experience that will be put to use on the introduction of laws to encourage more privately provided pension products.
BNP dominates the French custody market, and across Europe it has E1,990bn in assets under custody. In 2002, it processed 25.8m transactions, compared with 22.4m in 2001. However, as Blaud points up, the French market is tiny compared with that of the US and it is this disparity that forms the basis of BNP’s European strategy. “We are three times bigger than our French competitors, but the capitalisation of the US market is many times larger than that of France,” he says.
Unlike its competitors, says Blaud, BNP will provide securities services across Europe, rather than just focusing on its home market. The other important plank in its strategy is to offer a range of services including global custody, fund accounting, securities lending, compliance monitoring, execution services and funds transfer agency. “We may not be able to compete with the largest global custodians in terms of assets under custody, but we hope to compete in terms of revenues from our product line,” he says.
BNP’s strategy is called Multi-Direct Clearing and Custody (MDCC), a pan-European network that covers 13 markets. The idea is that MDCC teams will provide a local presence for clients. In September, it launched its domestic UK securities clearing and custody services with a transfer of almost £5bn (E7.5bn) of assets under custody, with a further £40bn expected by early this year.
MDCC UK services will include local clearing and custody of equity, fixed income and derivatives plus back office insourcing for member firms of the UK stock and derivatives exchanges. A fully automated link with Crest and the London Clearing House will ensure real time processing and account management.
Société Générale is also pursuing a pan-European strategy, based on offering a range of products including global custody, trustee services, fund administration, transfer agency and registrar services and local custody. Prigent says the bank’s December 2002 mandate win at French insurer AGF, a part of the Allianz Group, highlights its global capabilities. “We won that mandate in the face of stiff competition from the major players in both France and the US custodians. These types of deals do not come along too often.” AGF has E70bn in assets and Société Générale will provide a range of services including custody, trustee and transfer agency and registry. “Société Générale was selected based on a number of reasons: custody of all kinds of financial instruments; efficient IT tools and high ratings by Fitch and Moody’s. The geographical coverage of our custody services was also a competitive advantage,” says Prigent.
In 2001, Société Générale acquired Euro-VL, a fund administration services provider. It is now developing fund administration centres in Luxembourg and Dublin and has plans to extend elsewhere. Maurice Nhan, head of the global securities services’ international network, says the division’s strategy is to piggyback off the worldwide strategy of the group’s asset management arm, SG Asset Management.
Until recently, speculation was mounting that BNP would acquire Société Générale – either the group as a whole or its securities services division. However, BNP Paribas chairman Michel Pébéreau said in early February, when announcing the group’s financial results for 2002, that the execution costs of such a merger would be too great and he ruled it out.
Blaud is aware of the perils for domestic custodians as they seek to carve out a business in the face of the dominant US players. “To be in the global custody business, you have to have a European strategy. How many UK banks are left in the custody business? And the UK market is huge in terms of pension funds.”
Unsurprisingly, given the IT intensive nature of securities services, both Blaud and Prigent cite the need for continued investment in IT as part of a global custodian’s arsenal. Société Générale’s Nahn says the bank will invest in IT in order to provide services to clients at the lowest possible cost – a challenge for all custodians, he says. “Clients are demanding straight through processing STP systems and to keep our costs down,” he says.
Credit Agricole also cites STP as a significant driver among clients, particularly for corporate actions. Other drivers include proxy voting and tax reclamation services. The demand for greater STP – the automation of as much of the securities transaction chain as possible to eliminate manual input and the chance of human error causing trades to fail – is recognised by all custodians operating in France.
Overall, the French securities industry is highly innovative. Thierry Misson, securities country manager, Citibank France, says the French market is spearheading a number of Europe-wide initiatives, particularly in terms of technology to support custody, clearing and settlement flows. “Euronext has demonstrated that France has taken the lead in Europe in terms of the consolidation of markets. The settlement infrastructure in France is one of the most efficient I have come across in my career,” he says.
Euroclear merged with the French clearing house, Sicovam, in 2000, renaming it Euroclear France, a wholly owned subsidiary of Euroclear Bank. This enables the Brussels-based group to offer real time settlement in commercial bank and central bank money, with STP functionality from trade through to settlement.
Udo Jenner, a senior executive at Euroclear and responsible for the group’s French operations, says the merger has resulted in cost savings for French participants of up to 70%. “The French market structure provides an example of the single settlement engine and business model that Euroclear provides will apply across the whole of the group.”
Not everyone has welcomed Euroclear into the French market with open arms. BNP has been an outspoken critic of what it sees as a threat from international central securities depositories (Euroclear) expanding into local markets through the acquisition of local CSDs (Sicovam). In a lengthy submission to the European Commission, BNP urged the separation of CSD and agent bank services. Jenner says by consolidating infrastructures in Europe, Euroclear has introduced much needed competition into cross-border equity settlement that has been a rich source of revenue for agent banks for some time. “Following our merger with Sicovam, international investors outside of France with Euroclear Bank accounts can now settle on Euronext Paris on the books of Euroclear Bank, where they will be effectively treated as domestic transactions and therefore charged at a rate as low as E0.55. The alternative until now has been to use an agent-bank intermediary, which can charge between E5-25 for the same service.”