Industry experts earmarked the Alternative Investment Fund Managers Directive (AIFMD) and TARGET2-Securities (T2S) initiative as potential plot changers for custodian banks. Setting the scene at a recent forum in London, they outlined what to expect, and how they are being treated at the moment.
Industry experts earmarked the Alternative Investment Fund Managers Directive (AIFMD) and TARGET2-Securities (T2S) initiative as potential plot changers for custodian banks. Setting the scene at a recent forum in London, they outlined what to expect, and how they are being treated at the moment.
AIFMD: mistaken for a MacGuffin
A speaker at the forum, Patrick Colle of BNP Paribas Securities Services, singled out the ever-looming spectre of AIFMD implementation as being the custodian bank’s greatest concern, with fewer than 100 days to go until the compliance date.
With the launch of the AIFMD on 22 July 2014, regulators are trying to create a level of investor protection through promoting the use of alternative investment funds.
Despite the time that managers, brokers and custodians have had to prepare for AIFMD, a great deal of uncertainty still remains. According to Colle, it is depository banks that are destined to play a key role in the transition to a post-AIFMD industry.
This is due to the fact that every alternative investment fund will be required to have a depository bank—giving bank managers an opportunity for solidity similar to that which has been traditionally available with long-only funds.
Depository banks will also have to make sure they are up to the asset restitution and cash monitoring obligations imposed by AIFMD, as well as mobilising cross-asset expertise.
Deus ex T2S
T2S is an initiative that has passed the point of no return, but Colle claims his bank is ready, and has been for some time.
“We were starting to feel a bit lonely two years ago when we were the only one in the securities industry who were sure that T2S would happen. We have spent more than €200 million on investments in the past few years in order to get ready for it,” says Colle.
T2S is intended to create further harmonisation in terms of settlements and settlement cycles. This means changes in agent banking model, but Colle claims that less change is required than was originally expected.
Although not as imminent as AIFMD, the T2S scheme is scheduled to go live in some European countries as early as 2015.
Alan Cameron, who heads the global strategic UK broker-dealer and bank relationship management teams at BNP Paribas, says: “We are looking forward to the first wave of T2S migration next year—the most significant market in the first wave (by a long stretch) is Italy, which is also one of our largest markets.”
“For us, T2S is not just about settlement—there are significant liquidity benefits as well, that come from centralising all cash requirements into one pool, for example, and from the fact that auto collateralisation will spread from currently being used in around a third of European markets, to the entire T2S network.”
Despite this impending change, broker-dealers and custodian banks are to carry on prioritising AIFMD, and wait to see if they will need more direct connection to the system for T2S. Some clients may eventually even be required to unburden their assets from their settlements.
An important point for Colle regarding T2S is related to intraday liquidity. Colle says: “This is a real opportunity to look at how to reduce intraday credit exposure, leverage netting and auto-collateralisation. This will be achieved by bringing more companies together.”
Aside from these regulatory issues, Colle also claims that the largest growing item for custodian banks to consider is the consumption of data. In other words, while IT development and product development expenses can be managed, controlling the exponential increase of data being used and processed is proving arduous.
An analysis by a consultancy firm recently predicted that, by 2020, the consumption of data will be multiplied by 20, meaning that it will become a huge cost driver for the industry.
Big budget blockbusters
Even with these challenges ahead, custodian banks such as BNP Paribas are continuing to grow and invest.
Between 2009 and 2013, BNP Paribas’s assets under custody grew by slightly more than 10 percent per annum, and this percentage was the same for assets under administration. Over the same period, the bank’s revenue grew at annual rate of 6.4 percent.
For the first time in BNP Paribas’s history, half of its mandates from 2013 were comprised of new clients from outside of the EU.
“We have expanded our network of depository bank jurisdictions and added three key areas—a year ago we added the UK, and since then we have added the Netherlands and Switzerland,” says Colle.
“As a result we have a total network of 12 depository banking jurisdictions, with €900 billion of assets under depository. We are also pursuing a very aggressive acquisition agenda in this area, in which we completed the acquisition of Commerzbank only last year.”
Although this front-foot approach to upcoming changes is not universal within the industry, custodians such as BNP Paribas make it clear that adversity and opportunity can quite often be one and the same.
