Standard Chartered
Alan Naughton of Standard Chartered tells AST how the bank is moving beyond its primary perception as a sub-custodian
What is Standard Chartered’s focus for 2014?
We have been perceived primarily as a sub-custodian bank in Asia, the Middle East, and Africa, but want to make it clear that we also provide securities services locally (through our local offices) to asset managers, insurance companies and pension funds for their local investment fund businesses
Recently, we set up a depository bank in Luxembourg that will allow us to offer a full suite of investor services to Luxembourg funds. This is in response to increasing client demand for the bank’s support of Luxembourg domiciled UCITS structures distributed in our footprint markets of Asia, Africa and the Middle East.
We are not aspiring to be a global custodian. We are an international custodian with services in 39 countries. We do not provide local services in developed countries in the Americas or Europe, and nor do we intend to be so. We’re focused on supporting clients operating in or looking for opportunities in Asia, Africa and the Middle East, and that is where all of our time and investment is going at the moment.
It is a combination of being on the ground to support the large local banks and their clients seeking growth in these regions, and also being on the ground to support our clients who operate in those countries
How are you moving away from being primarily known as a sub-custodian?
By collaborating strongly with our clients to deliver a holistic approach to service provision where we offer a fully integrated link between custody, cash, clearing and foreign exchange across our footprint markets.
I think there is room for many models. The traditional point-to-point model that many of the large custodian banks operate in terms of procuring domestic market services may not change materially. Equally, broker/dealers having direct access may not change materially in the short term.
But, particularly in the smaller markets, the desire to have regional access and to be able to quickly and efficiently add markets is certainly a trend that we are seeing.
Do you worry about global custodians revoking sub-custody mandates with you?
Yes, we do. And there has been some development on that front with some of the custodian banks. Generally they may decide to insource in some of the more mature markets, where it is possible—with automation and standardisation—to be able to do that. But it really does depend on whether these banks have the expertise and infrastructure on the ground to develop these operations. Part of it is driven by regulation. We all know the regulatory acronyms. Whatever regulation you can care to name, they are driving developments in order to mitigate the risks banks face as a result of supporting their end-clients.
However, I suspect that the number of custodians bringing sub-custody in-house may be limited, because it requires a huge amount of time, investment and infrastructure to be able to do that. So yes, some have done, and I expect some will do a little more in certain of the markets we operate in. But equally, the current risk-diversification requirement of many institutions, that means they can’t be wholly reliant on one provider, means that firms will have to have live contingency arrangements. This will throw up different opportunities.
What are your views on UCITS V and its taking of liability provisions from AIFMD? What will this mean for emerging market funds?
I think there is a risk that you may see as a result of the increased regulation, whereby the responsibility of liability and risk transfers. I am sure that this may not be what was originally intended, but this is what will likely happen.
You may see a reduction in appetite from the European-regulated funds, because the risk-return and risk-reward may not necessarily be there. I think we’ll have to see how this one works out. The principles around UCITS V are intended to ensure that the client has full asset protection, segregation, that you can identify the stocks and shares they own, and that these stocks and shares are available to them in the event that they need to get hold of them.
These are the basic principles that we operate to in any event. The emerging markets will continue to fluctuate, and we can see that there has been a little bit of retrenchment in terms of emerging market investment flows as a result of the threat of The Federal Reserve easing off. But over the longer term we continue to expect growth in these markets.
We are seeing growth in local fund business in many of the countries in which we operate, particularly in the likes of Hong Kong and greater China driven by the anticipated mutual recognition of funds. You could well see a lot of assets migrating out of UCITS funds into domestic Hong Kong funds, as managers think about what they need to do in order to access greater China distribution opportunities.
What’s the most unusual market you’ve got into?
I think all markets have their own subtleties and quirks. If you were to look at India, South Korea or Taiwan—they all have some very unusual characteristics that set them apart, even though the principles may be similar. The ones that I find particularly interesting for the future are the African markets. We are focusing very heavily on Africa, for a number of reasons. Earlier this year we announced the acquisition of the trust and custody business of Absa Bank in South Africa. There were a couple of very good reasons for doing so—particularly the fact that it was a natural fit for both firms in terms of our strategic objectives, and we already had a small business in South Africa. We were looking to grow. We had, and still have, extensive coverage across many of the material markets in sub-Saharan Africa, and will be looking to expand further. In the last 3 years we have gone from 17 to 39 markets, as others have been retreating.
It is a matter of public record that the bank is investing heavily across the continent. Angola and Mozambique are countries that we’re looking at from a banking perspective, and we are getting back into Myanmar, where we were a very sizeable bank years ago. Equally, several other frontier markets are very much on our radar.
What processes need to be worked on with regards to Africa?
There are some similarities to issues we had in the Middle East. In the Middle East, many of the countries had previously operated a broker custody market; there wasn’t necessarily the need for segregation. If you look at Saudi Arabia, it’s still very much direct holdings on the exchange, so there are lots of differences—it’s a T+0 market, you can’t get any better, but there are still challenges.
In Africa, there are significant infrastructure challenges. Power generation—the lights go out quite regularly. Some of the practices in terms of moving title of securities from one party to another—it’s not always simultaneous. A lot of these things vary by country, and you still have to be aware of them. There isn’t a ‘United States of Africa’ to impose commonality of regulation. You’ve got the East African bloc, West African French-speaking bloc, South Africa, which is closely linked with Namibia—various grouping between the 54 countries, but no ‘one market’. You have to look at each individually. It will take time, because there isn’t the liquidity that exists in more developed markets. While there’s a lot of foreign direct investment, the securities market investment, outside of South Africa—is not of the size that you see elsewhere. But again, that will change over time.
Foreign direct investment has been a huge benefit. Interestingly, FDI in South Africa from the UK is roughly seven times greater than FDI from the US, and China dwarfs everyone else—their investment in South Africa has been phenomenal, across mineral, arable and other resources
What were some recurring themes at Sibos, and how did they match up to your perceptions?
The Africa forum, which was chaired meticulously bv Goolam Ballim, the chief economist, at Standard Bank, was entirely consistent with what we’re seeing. The things that stood out from the presentation were the stark statistics: the average age of a European is 40, and the median age of an African is 20. Fifty percent of the population of Nigeria is aged 17 or less. By 2050, 50 percent of the top 20 countries in the world (ranked by population) will be African countries.
And by 2050, Nigeria is projected to be the third largest country after India and China. The latter is starting to age, and India is still growing and will, in a matter of years, overtake China as the largest country in the world by population.
‘The Africa story’ seemed to be continuously recurring as a theme at Sibos. It is a frequent discussion with clients, and banks and investors alike are asking how to take advantage of the opportunities that appear to be there. Everybody’s trying to figure out what they should be doing. Because we’ve been in sub-Saharan Africa for 150-plus years, and have 9000 staff over 20 countries, I think people naturally gravitate to us a source of information.
We are very focused on Africa, more so compared to other banks (with the exception of Standard Bank). The other theme was around coverage between the different corridors of investment and trade. We are in China, the Middle East, and Africa: that is our heritage. The trade flows between China and Africa have gone up exponentially over the last decade, and patterns would indicate that this will in turn lead to growth in the financial services industry.
