It’s a long grocery list by anyone’s standards. As NeMa 2013 kicked off in Warsaw, Tim Faselt of HSBC Securities Services looked at the industry’s to-do list.
It’s a long grocery list by anyone’s standards. As NeMa 2013 kicked off in Warsaw, Tim Faselt of HSBC Securities Services looked at the industry’s to-do list. This included (but was not limited to): preparation for compliance with the Alternative Investment Fund Managers Directive (AIFMD); ensuring the directive also covers UCITS V obligations; helping to roll out the TARGET2-Securities strategy with correct partners; agreeing on parameters for outsourcing; reviewing various phases of various regulations; signing off a final implementation of framework for sub-custodians; and finally, reviewing external prime broker risk assessment.
As he wryly said, the conference continues to see growth only because “misery loves company.”
Quoting recent figures from The Heritage Foundation, a conservative think-tank, Faselt said that in this year alone, the US had added four times the number and five times the cost of the major regulations that were issued in the three years prior.
“There are flattening transaction volumes globally, and until recently, lower asset valuations,” he said. “No matter where you are in the custody food chain, it is safe to assume that every custodian wants to win business from the right clients. The frustrating thing is, we don’t control interest rates of FX volume ... we can influence assets under custody, but that doesn’t have much affect on the market. So what do we do? What we’ve always done: we continue to adapt.”
The keynote guest address was given by CEO of the Warsaw Stock Exchange, Adam Maciejewski.
Pointing out that Poland is slap-bang in the centre of Europe, he attempted to sum up 1200 years of Poland with a short film—which served, if anything, as a startling illustration of how much war has played a part in European history.
He stated that cumulative GDP growth over the last five years was the biggest in Europe—and that Poland has a dominant position in equity trading.
Tomasz Grajewski of UniCredit was up next, discussing how to organise the custody and network function in this new environment.
“Clients are changing the structure and content of their portfolios; regulators are making us reconsider long held assumptions; and governments are looking for more money. We are no longer custodians, we are derivatives back office, fund administrators, tax agent, transfer agent ... the list goes on.”
He added that the network space is changing with a broadening range of portfolio assets being seen, both geographically and by asset class.
“A few decades ago, hedging was barely known, but now there is a growing complexity of portfolio constructs such as leverage and hedging. Also, there is greater volatility in stock, derivatives and currency markets.”
Major drivers such as regulation and infrastructure change are also shaping the future of network management, he said.
A network manager is no longer an equity dominated expert on global markets, a tri-annual fee re-negotiator, a buy and hold support service, he said.
“Now a network manager is a key member of the risk management process; a critical expert on global market structures across multiple asset classes; and a business executive accountable for sound contracts and best fees.”
The tasks for the foreseeable future, he said, are to understand supplier balance sheets and structures, discuss whether buyer and supplier strategies are compatible, and ensure commitment to decisions such as intraday lines, capacity appetite, and what-if scenarios.
His words of wisdom for the sell-side were to maximise communication with the client without drowning them in information, learn that it is okay to say no, and to train staff in complex market needs.
A loving partnership
The first panel took the slightly unusual route of discussing what makes a good relationship, as well as the new types of relationships that network managers should be looking for.
When asked if regulatory matters had stressed relationships of network managers, James Levi of Morgan Stanley said that if you get stressed by uncertainty and the volume of work—then yes. But, he remarked, his firm’s relationship with agent banks is getting stronger—with one exception to this being AIFMD.
Andrew Osborne of Northern Trust took a no-prisoners stance on regulation, telling the audience that stricter liability simply means that firms have to intensify what they should have been doing all along.
When moderator Colin Brooks of HSBC Securities Services asked the audience and the rest of his panel who would be most affected by regulations, Osborne replied that there was no clear winner.
However, 61 percent of the audience begged to differ, thinking that investors will gain most out of recent regulatory changes.
On the question of who is more difficult to keep happy—internal or external relationships—the panel was mostly in agreement.
Caroline Godwin of RBC Investor Services was of the stance that internal is more important and more tricky. Whereas external tends to allow for a more honest, open and factual discussion, with internal there is more emotion.
Levi, who primarily deals with traders and the front office, said internal is more of a challenge because of the triumvirate of front office, operations and compliance.
“They think you have one job and that’s to save them money. It feels like they hang you up in the playground and see what falls out of your pockets.”
Osborne, who is in the arguably quieter world of global custody, said that the biggest gripe he gets is clients complaining about high sub-custody fees: “Their only reason for this is that it’s a big number.”
In a world that looks to make the roles of network managers increasingly complex, an anonymous question from the audience made the point that inspired much amusement in the room: does increasing complexity mean higher salaries for network managers?
As Osborne said: “It’s not a group which historically has been much invested in, but I think there will be increased demand for them as the industry evolves. I hope the shortage of network managers will translate to premium cost!”
