Nordics
08 August 2012
The safe-haven status of the Nordics extends itself to custody, but low liquidity remains a potential obstacle, as AST finds out
Image: Shutterstock
Even as most Nordic banks outperformed market expectations in Q2 2012, with revenue trends developing nicely despite the falling interest rate levels, analysts warned that most countries in the region still face declining economic growth.
Nordea reported a 17 percent rise in Q2 net profit to $1.01 billion, while Swedbank reported an 8.4 percent drop in net profit, to $450.5 million. Both banks said that they attracted new customers in the quarter, even though the effects of the European debt crisis are starting to show in the Nordic region as well.
The strong market performance will affect custody in the region, both positively and negatively. Nordic countries are becoming increasingly popular as bases for global custody offices, but some fear that there will be too much demand on a finite pool of talent. In setting up their offices, heavy hitters such as BNY Mellon tend to hire locals, or relocate staff members who have a good knowledge of the region, as well as working relationships already in place.
Anders Tvilde, senior product manager at Nordea, disagrees that internationals are increasing pressure on local resources. He says: “As there is a certain degree of harmonisation within custody, and also redundancy in the local broker community, we don’t experience any major strain on reserves.”
Nordic differences
As with any region, countries may hold differing strategies and financial systems. Tvilde says: “The main difference between the Nordic markets is the segregation of trading venues, where Denmark, Finland and Sweden are using Nasdaq OMX, and Norway uses Oslo Børs. Since the termination of the Norex [Nordic exchanges] agreement, Norway has been focused on cooperation with London Stock Exchange while the other markets have become a part of Nasdaq. Equally the clearing differs as Norway has appointed an internal CCP [central counterparty] as the incumbent.”
However, he maintains that despite having separate legislation and central securities depositories (CSDs), the processes and custody service offering across the countries is fairly harmonised.
Ulf Norén, global head of sub-custody at SEB, states that although there are tight credit conditions and available liquidity is drying up, the effects in the Nordics and the Baltics have, in comparison to most other European markets, been less dramatic, following good fundamental conditions for the Nordics, and a severe adjustment during the early years of the crisis for the Baltics.
“As a bank we have, like a few of our competitors, a situation where we look robust and have increased agency ratings,” says Norén. “How a continued euro crisis affects us is hard to say. Sovereign exposure and counterparty exposure to the crisis countries is minimal but worries are of course that other counterparties from other countries have significant exposure in Greece, Italy, Spain and Portugal.”
“The sub-custody environment is vibrant, will be subject to changes of scale and will have to cope with a record high and forced adoptions of new rule books. In addition to this, customer demand will be increasing and razor sharp, with very low patience levels for adoption. The development of sub-custody services is intimately connected to a bigger picture European trend—our analysis stems from looking at life from that angle.”
A perhaps unwelcome neighbour to customer demand is the continuous squeezing of custody fee margins. Norén comments: “We will see a general tendency towards true unbundling of fees but that is not a big shift: we will also continue to see relationships set up according to current bundled model, we will see cost plus models and fixed fees, infrastructure cost distribution plus margin and models where you operate with capped fees. It is though important to always face this from the difficult equation where both agent banks and clients are looking to reduced cost bases and reduced risk. Can one have both?”
T2S and CCPs
Implementation of CCP clearing in all Nordic markets is moving forward, with the Nasdaq OMX markets having CCP clearing for more than 90 percent of their cash equity trading.
Tvilde says: “Currently EMCF is the only CCP clearing from the exchange but EuroCCP and SIX X-Clear have been appointed to take part in competitive clearing. The interoperability should have been implemented in April 2012 but it has been postponed until further notice due to regulatory issues and lack of level playing field. Oslo Børs has full clearing of cash equities, using Oslo Clearing. Oslo Clearing of course is a part of the Oslo Børs VPS Holding company. LCH Clearnet has been appointed as the second CCP and expects to be interoperable by the end of 2012.”
As for how T2S playing out in the region, “only Finland has expressed a clear yes,” comments Norén. “I think that T2S effects will come out no matter whether it is introduced in a particular market or not. The clients’ options for how to deal with the cross border flows with T2S will increase, and those T2S benefits will be desirable also in markets standing on the outside. VP in Denmark will go early with their EUR activity in VP LUX while the DKK activity preliminary is scheduled for 2018.”
“Regarding Denmark and T2S,” says Tvilde, “VP has signed the FA with T2S and the Central Bank has promised to make DKK available as from 2018. The Danish market, inclusive VP Securities and VP Lux, will join with EUR from the start and DKK from 2018.”
Blurring the lines
Despite the harmonising effects that T2S could bring to the Nordic region, distinctions exist between custodians and sub-custodians, although this may be reducing.
“Although the boundary between sub-custody and global custody is blurring, there is still a clear distinction between them,” says Tvilde. “Clients have different requirements on their sub-custodian compared with their requirements of their global custodian. There’s a reason why the major players still use sub-custodians as these have a strong local market experience and knowledge of local market practice.”
“However, projects such as T2S will most likely have an effect on the number of market players. High IT development costs, in combination with clients’ requirement of reducing number of providers to be able to reduce risk, will likely decrease the number of single market sub-custodians. However, we believe the sub-custodians will continue to play a major part in the Nordic infrastructure for the years to come.”
Norén disagrees, asserting that sub-custodians will continue to play a considerable role and will actually increase their contribution to the value chain as a whole. “But the industry will consist of fewer players with a wider geographical reach.”
The region is also seeing a trend of moving from a single market provider to regional providers. Tvilde says that the trend has been ongoing for a few years, and is continuing towards the implementation of T2S.
Norén underscores the high client focus on provider consolidation, with the past seven to eight years seeing shifts by the client in its choice of sub-custodian. “In our region, we now see less than five major names using more than two providers in the region and in no case where the reason for a shift has been anything but reciprocity or a strategic cooperation deal have we seen clients moving anywhere else than to SEB or Nordea.”
“This will continue and the major reasons can be summoned up to be a result of even more fee and competitive pressure, the fact that regionals are a better fit for the cross border client needs in almost all dimensions, and finally, that regionals have a superior ability to run a clients influence and change agenda over multiple country borders.”
Nordea reported a 17 percent rise in Q2 net profit to $1.01 billion, while Swedbank reported an 8.4 percent drop in net profit, to $450.5 million. Both banks said that they attracted new customers in the quarter, even though the effects of the European debt crisis are starting to show in the Nordic region as well.
The strong market performance will affect custody in the region, both positively and negatively. Nordic countries are becoming increasingly popular as bases for global custody offices, but some fear that there will be too much demand on a finite pool of talent. In setting up their offices, heavy hitters such as BNY Mellon tend to hire locals, or relocate staff members who have a good knowledge of the region, as well as working relationships already in place.
Anders Tvilde, senior product manager at Nordea, disagrees that internationals are increasing pressure on local resources. He says: “As there is a certain degree of harmonisation within custody, and also redundancy in the local broker community, we don’t experience any major strain on reserves.”
Nordic differences
As with any region, countries may hold differing strategies and financial systems. Tvilde says: “The main difference between the Nordic markets is the segregation of trading venues, where Denmark, Finland and Sweden are using Nasdaq OMX, and Norway uses Oslo Børs. Since the termination of the Norex [Nordic exchanges] agreement, Norway has been focused on cooperation with London Stock Exchange while the other markets have become a part of Nasdaq. Equally the clearing differs as Norway has appointed an internal CCP [central counterparty] as the incumbent.”
However, he maintains that despite having separate legislation and central securities depositories (CSDs), the processes and custody service offering across the countries is fairly harmonised.
Ulf Norén, global head of sub-custody at SEB, states that although there are tight credit conditions and available liquidity is drying up, the effects in the Nordics and the Baltics have, in comparison to most other European markets, been less dramatic, following good fundamental conditions for the Nordics, and a severe adjustment during the early years of the crisis for the Baltics.
“As a bank we have, like a few of our competitors, a situation where we look robust and have increased agency ratings,” says Norén. “How a continued euro crisis affects us is hard to say. Sovereign exposure and counterparty exposure to the crisis countries is minimal but worries are of course that other counterparties from other countries have significant exposure in Greece, Italy, Spain and Portugal.”
“The sub-custody environment is vibrant, will be subject to changes of scale and will have to cope with a record high and forced adoptions of new rule books. In addition to this, customer demand will be increasing and razor sharp, with very low patience levels for adoption. The development of sub-custody services is intimately connected to a bigger picture European trend—our analysis stems from looking at life from that angle.”
A perhaps unwelcome neighbour to customer demand is the continuous squeezing of custody fee margins. Norén comments: “We will see a general tendency towards true unbundling of fees but that is not a big shift: we will also continue to see relationships set up according to current bundled model, we will see cost plus models and fixed fees, infrastructure cost distribution plus margin and models where you operate with capped fees. It is though important to always face this from the difficult equation where both agent banks and clients are looking to reduced cost bases and reduced risk. Can one have both?”
T2S and CCPs
Implementation of CCP clearing in all Nordic markets is moving forward, with the Nasdaq OMX markets having CCP clearing for more than 90 percent of their cash equity trading.
Tvilde says: “Currently EMCF is the only CCP clearing from the exchange but EuroCCP and SIX X-Clear have been appointed to take part in competitive clearing. The interoperability should have been implemented in April 2012 but it has been postponed until further notice due to regulatory issues and lack of level playing field. Oslo Børs has full clearing of cash equities, using Oslo Clearing. Oslo Clearing of course is a part of the Oslo Børs VPS Holding company. LCH Clearnet has been appointed as the second CCP and expects to be interoperable by the end of 2012.”
As for how T2S playing out in the region, “only Finland has expressed a clear yes,” comments Norén. “I think that T2S effects will come out no matter whether it is introduced in a particular market or not. The clients’ options for how to deal with the cross border flows with T2S will increase, and those T2S benefits will be desirable also in markets standing on the outside. VP in Denmark will go early with their EUR activity in VP LUX while the DKK activity preliminary is scheduled for 2018.”
“Regarding Denmark and T2S,” says Tvilde, “VP has signed the FA with T2S and the Central Bank has promised to make DKK available as from 2018. The Danish market, inclusive VP Securities and VP Lux, will join with EUR from the start and DKK from 2018.”
Blurring the lines
Despite the harmonising effects that T2S could bring to the Nordic region, distinctions exist between custodians and sub-custodians, although this may be reducing.
“Although the boundary between sub-custody and global custody is blurring, there is still a clear distinction between them,” says Tvilde. “Clients have different requirements on their sub-custodian compared with their requirements of their global custodian. There’s a reason why the major players still use sub-custodians as these have a strong local market experience and knowledge of local market practice.”
“However, projects such as T2S will most likely have an effect on the number of market players. High IT development costs, in combination with clients’ requirement of reducing number of providers to be able to reduce risk, will likely decrease the number of single market sub-custodians. However, we believe the sub-custodians will continue to play a major part in the Nordic infrastructure for the years to come.”
Norén disagrees, asserting that sub-custodians will continue to play a considerable role and will actually increase their contribution to the value chain as a whole. “But the industry will consist of fewer players with a wider geographical reach.”
The region is also seeing a trend of moving from a single market provider to regional providers. Tvilde says that the trend has been ongoing for a few years, and is continuing towards the implementation of T2S.
Norén underscores the high client focus on provider consolidation, with the past seven to eight years seeing shifts by the client in its choice of sub-custodian. “In our region, we now see less than five major names using more than two providers in the region and in no case where the reason for a shift has been anything but reciprocity or a strategic cooperation deal have we seen clients moving anywhere else than to SEB or Nordea.”
“This will continue and the major reasons can be summoned up to be a result of even more fee and competitive pressure, the fact that regionals are a better fit for the cross border client needs in almost all dimensions, and finally, that regionals have a superior ability to run a clients influence and change agenda over multiple country borders.”
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