Bank of America Merrill Lynch
Stephanie Colaric of Bank of America Merrill Lynch explains how custodians are responding to the current environment, and asks whether now is a good time to explore new markets
Does the current economy provide an advantageous environment to clients interested in global expansion?
Currently, the economy is not very conducive to exploring new markets due to the economic and regulatory environment which is having an effect on all investors and participants. The main focus for custodians today is on managing and meeting the amount of regulatory and market infrastructure change that’s happening. For example, Target2-Securities brought very significant infrastructure changes across Europe. This type of change is dominating the agenda.
The role of the network manager has changed significantly since the global financial crisis. It is now more akin to that of a risk manager, so the expansion of networks and moving into new markets is treated differently. Previously, the number of new markets in which a global custodian operated was a competitive edge. Today, sub-custodians no longer move straight into new markets at the behest of their global custodians because they want to protect those relationships. Both global custodians and sub-custodians are taking a more measured approach.
There is a constant and ongoing revaluation of business strategies along with a rationalisation of the sub-custody business. We have seen that in the Middle East among the smaller regional providers, which I don’t necessarily think was the case before the global financial crisis, and can therefore be attributed to the economic environment.
Of course, custodians will continue to evaluate new markets, but the process will consider meaningful volumes and other factors before they are taken onboard.
Are there any growing markets of particular interest?
Emerging markets of Asia and Latin America— India, Indonesia, South Korea, Malaysia, Mexico and Brazil—are showing promise. There is also keen interest in African markets. Recent events have caused a bit of a slow down but I think it is just temporary. Increased focus will be on Africa.
In terms of new markets, there is interest in Saudi Arabia, as well as Hong Kong. With the Shanghai-Hong Kong Connect Program, which aims to broaden investors’ access to Chinese markets, there is a lot of uncertainty around how it is going to play out, but all eyes are on it and the feeling is that it has significant growth potential.
What would you attribute growth to in these markets?
A lot of it has to do with growth in the middle class markets, which has a positive impact on both inbound and outbound investment. Foreign fund managers are investing in those markets to buy domestic companies in order to benefit from domestic consumerism. At the same time, outbound investments from those markets are growing as domestic investors want to invest their savings and increase their wealth.
In Asia, there have been developments in the management space, such as the mutual recognition initiative between Hong Kong and China that would allow fund managers based in Hong Kong to sell domestic funds to Chinese investors and vice versa. Similar regional discussions are taking place across Asia around passport schemes and cross-border distribution. There is still some way to go before these fall into place, but they are going to have positive long-term implications.
How should business adapt to meet the demand of new markets?
Global custodians are very practiced at opening in new markets. Generally, there are established and reliable sub-custodians and the markets already have the right infrastructure and practices in place.
This might not always be the case. The Shanghai-Hong Kong Connect Program, for example, will be challenging for the industry as a whole, from brokers to global custodians, because of the level of changes required around operational processes and technology. Aspects such as the pre-delivery of shares to the broker have put a strain on the market.
However, global custodians have the advantage because they can link to their internal brokers and offer integrated execution custody. Globalisation has driven a lot of change. Operating globally, you must work 24/7 and have regional operations and service. Additionally, your platform must be flexible and meet the requirements of different regulators
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