Germany
Despite reports of a slowdown, Germany’s custody market is alive and kicking, awaiting the next big bang from TARGET2-Securities

The German custody market has become a well-oiled machine that is showing no sign of slowing down. As the third largest fund market in Europe, with €1.9 trillion in assets, the market has become a key access point for global custodians looking to expand their market reach.

The market was given a strong foundation in the early 2000s that enabled it to withstand the eurozone crisis in 2008. The work put into the labour market reforms in 2004, created by the then Chancellor Gerhard Schröder, has meant that today market players are benefitting from a strong, structured market.

While recent reports talk of a ‘slow down’ in the German economy, custodians are not viewing this as an immediate threat. Stemming from a period of negative rates, being experienced across Europe, Rafael Moral, head of investor services for global transaction banking at Deutsche Bank, says: “Custodians are impacted by a slow down in the economy resulting from a fall in the fees earned. This is linked directly to two of the key custody revenue streams: assets under custody fees and net interest income.”

Moral adds: “However, custodians have a diverse set of services that can be offered and other revenue streams are less impacted from these macro-economic factors. The larger issue is the impact that any slow down will have on the wider eurozone, how this is perceived in the global markets, how this impacts investment in the region and, subsequently, what this means towards the speed of the overall economic recovery.”

Booming pension fund business has resulted in growth of the custody market. Gerald Noltsch, CEO of BNP Paribas Securities Services for Germany, explains: “For example, the more people who are employed, the more people pay pension into certain third-pillar pensions funds that are existing in the German market. This investing comes, to a certain degree, to the custody market in a very indirect impact.”

Noltsch adds that there is still an inflow from the asset management industry that is growing again, both on the institution side and in aspects of the retail side. He says: “The trend in the area is positive and the investment in the German market is positive. The recent slow down doesn’t have an impact on the custody market, at least not to the degree that we as an organisation in our business could see it.”

The positive trend in the custody market is felt more with the recent selection of BNY Mellon by Marble House Capital to provide custody services earlier this year. This selection adds to BNY Mellon’s 200 strong institutional relationships in Germany, which it views as a key market to offer opportunities and as a good base to develop the firm’s European clients.

Andrea Sturm, head of business development and relationship management for Germany, Austria, Swizerland and Central Eastern Europe region at BNY Mellon, says that Germany’s regulatory set-up is a key driver for its expansion in the country.

She says: “Despite a harmonised regulation with [the Alternative Investment Fund Managers Directive] and UCITS, Germany has a unique regulatory set-up when it comes to the duties of the depository bank in order to give investors in a German regulated retail or institutional fund the highest possible level of asset safety.”

Regulations

The unique set of regulations that gives protection to custodians is, again, a result of the 2004 reforms. Sturm explains that depository banks must fulfil a variety of tasks, such as safekeeping of assets, investment compliance checks and the checking on net asset value calculations, which has resulted in a portion of custody assets to be administered into a fund shell. She adds: “All German custodian banks are organised in the Germany deposit protection fund, which gives investors additional protection in case of the default of the depository bank.”

An all to familiar story has become the implementation of the constantly growing and evolving pan-European and global regulations. Taken on by global custodians, these additional regulations must be translated, broken down and incorporated into the systems that will work along side local legislation.

To get the most from global regulations on a local scale, Noltsch says that BNP Paribas works with local business leaders and regulators to learn all it can about how best to implement requirements.

“It is important to have teams with the local knowledge,” he says, “to ensure what is intended with new regulations, and especially what it means in terms of asset protection for customers. You always have to have these local teams and access to local authorities, which we believe are the key elements you have to have if you want to be successful in the given market.”

Though a unique set-up, Deutsche Bank views Germany as being complex in the global regulatory landscape. Moral says: “There are a number of key themes being implemented simultaneously as a global, regional and local level, but these are being implemented along different timelines and with different interpretations at each level.”

“Quite often,” says Christiane Lindenschmidt, co-head of HSBC Securities Services in Germany, “the German government wants to be ahead of the curve in regulation, as seen with the high frequency trading law or the law for product intervention.” While being ahead of the curve can help to safeguard against defaults, it can mean additional work for firms.

Lindenschmidt adds: “This leads to a situation where German market participants have to implement rules twice, first the German version and afterwards the European one.” If requirements of the local and European regulations are similar then a duplication of efforts is needed, creating complexity where it may not be necessary.

With regulations set to remain high on the agenda, attention is turning to the impending start of TARGET2-Securities (T2S) and final preparations.

Third wave

Europe has been in a state of preparation for the T2S programme since its creation in 2006 by the European Central Bank, though not for much longer. The first wave of the ‘go live’ phase will happen in under a year, with Germany scheduled to go live with the third wave in 2016.
For global custodians, whether based in Germany or not, T2S will be live from the first phase in 2015, depending on where they are based around Europe. “We operate our custody business across a global footprint and are impacted by each wave of T2S,” says Moral. “When we formulated our strategy for T2S we wanted our clients to make the most of the opportunities the new platform is providing.”

To do this, Deutsche Bank will be directly connecting to T2S for cash using the firm’s central bank account at Deutsche Bundesbank in conjunction with a new single technical platform to utilise local market presence.

Moral adds: “This means not only will we be active participants in the first two waves of T2S, but we will be bringing experience of those early implementations into the German market.”

Similarly, BNP Paribas will be going live in during the first wave, which Noltsch says will benefit Germany as all that is done in the first two within the company will mean a smoother ride the third time around. “When it comes to the third wave, we will have a big bang of trade, which then have to be migrated over the week … but having Italy [in the first wave means] our business and migration has started.”

“Our plan,” adds Noltsch, “is to become, organisationally, a direct member where we have a common platform for all T2S markets … from the client feedback we have so far, we are well ahead in terms of our competition and look forward for T2S to start and, again, for Germany it doesn’t only just start in wave three, it starts when it starts.”

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