Italy
10 Nov 2021
It is no surprise that the COVID-19 pandemic dealt Italy and its economy a hard blow in the first half of 2020. Industry experts explain why 2021 has been a different story and outline what the future holds for the country’s asset servicing
Image: scaliger/stock.adobe.com
When we look back to Italy, March 2020, it is perhaps the amateur videos and pictures of natives singing in unison resolutely from their balconies in the very early days of the pandemic that will rest most fervently in our minds, when all seemed uncertain. For it was Italy that bore the brunt of COVID-19 first and the most severely, from a European perspective.
The country’s then Prime Minister, Giuseppe Conte, was one of the first European leaders to initiate a national quarantine, putting the country on a hiatus as early as 9 March 2020.
The following week a video, released by the Italian Air Force, exhibited a coordinated flypast and a plume displaying the country’s flag colours. Soundtracked by Pavarotti’s Nessun Dorma, the display, though originally filmed in 2019, was widely reposted on social media to lift the national spirit, but that spirit was violently shaken as Italy’s economy plummeted in the immediate months following.
In July 2020 Italy’s economy had shrunk by 5.4 per cent year-on-year in the first quarter, but thankfully, more than 18 months on, it is a different story, with wide vaccine rollouts across the country having done much to aid economic recovery since.
As of October 2021, Pfizer, Moderna and AstraZeneca vaccines have been used to vaccinate more than 44.6 million people over the age of 12 in Italy. “The vaccination coverage has exceeded 80 per cent of the population and this has allowed the reopening of economic activities,” notes Franco Carulli, Italy head of securities services at Citi. “As a result, Italy’s GDP will grow by six per cent in 2021,” he predicts, with the S&P recently moving Italy’s economic outlook from “stable” to “positive”.
As well as the vaccine rollout, the Draghi government, sworn into power in February of this year, has done much to bring economic stability to the country. A change that Denis Dollaku, country head Italy at State Street, indicates has influenced the “Italian GDP [to grow more] than many other European area economies”, proving it still to be a linchpin of economic power for the wider European Union.
Similarly, the European Commission in its economic forecast for Italy (released in July 2021) reflected this notion when it found that since the start of the year, Italy’s economic activity “proved more resilient than expected and increased slightly in the first quarter, despite stringent containment measures” necessitated by the ongoing pandemic.
The points of action now, as Italy goes forward in the months ahead, are well encapsulated by Citi’s Carulli. As he explains: “On the intermediaries’ side, there will be a need to further optimise processes and operating systems to cope with the increase in volumes.”
“On the market side, there will be a strong need to harmonise the rules of asset servicing at European level as much as possible,” he adds.
“The combination of these two initiatives will bring benefits that will enable the securities services industry to face the challenges that it will encounter along the way.”
Domestic investment and cross-border flows
“The strength of cross-border and domestic investment flows in Italy is owed partly to private assets, which by their nature are a precious resource in times of crisis as they are sheltered from market fluctuations,” says Elena Giordano, head of business development, Italy at CACEIS, meaning they have “proven to be more capable than other asset classes of addressing the current pandemic as well as its long-term effects”.
Giordano adds that the economic volatility the COVID-19 pandemic caused in Italy helped “characterise the last two years”, highlighting “the increasing reorientation of institutional investor asset allocation to alternative asset classes, a solution that is both key to supporting the real economy and the post-pandemic recovery of the Italian market”.
The most recent data from the Italian Asset Managers Association (Assogestioni), highlighted to Asset Servicing Times by State Street, shows that the asset management industry has recorded slightly over €67 billion in net new cash since the beginning of this year.
Of course, it is a truth universally acknowledged that during times of volatility, money is simply saved and not spent. And this was no different for Italy as the first lockdown took hold. However, looking to the long-term, this is not necessarily a bad thing, as Roberto Pecora, CEO for Italy at Société Générale Securities Services (SGSS), indicates when he considers the local dynamics.
“The 2020 prolonged lockdown led to a high propensity to save (which doubled compared to 2019, rising to 15.8 per cent), but also [gave] a rise of assets under management, (which increased by 5.7 per cent in August of this year compared to December 2020). This was a positive climate recorded by the Italian market.”
From a cross-border perspective, Citi found an increase of around 20 per cent in assets under custody held by foreign investors. This increase concerns both government bonds and shares, which is also a trend that may “further expand in light of the potential of the Italian economy”, affirms Citi’s Carulli.
Clearing, settlement and regulation
Money is on the move in Italy, a notion reflected by SGSS’ Pecora who indicates: “We have seen an extraordinary increase in volumes and in the number of transactions.”
He adds: “This growth challenge was managed extremely well within SGSS, even in a context of full remote working, which involved 98 per cent of employees and the entire SGSS IT system accordingly adjusted. A proof of very strong resilience and capacity to adapt.”
This resilience and capacity to adapt, however, though not unique to Italy, is prudent to document when the country was one of the first European countries to go into a national lockdown suddenly in March 2020.
Italy’s financial institutions were able to show levels of high resilience in operations, and this resiliency was advanced by the advent of both Target 2 Securities (T2S), as well as the introduction of T+2 settlement in line with CSDR, the latter becoming more of a standard and crucial step towards real-time settlement cycles.
The former, says Citi’s Carulli, “has brought a great deal of harmonisation regarding the settlement of domestic securities, though not cross border ones as these are still subject to local nuances, which sometimes prevent straight-through processing”.
From a central securities depositories (CSD) perspective, there is more to be done in the cross-border settlement space, according to Stéphane El-Gharbi, head of relationship management, Southern Europe at Clearstream.
He says: “Italy is a very strong issuer market but currently only has direct cross-CSD links to Germany and Spain. Today, there is the expectation that the ‘already matched’ cross-CSD T2S change request will be implemented in Italy. This would help CSDs such as Clearstream as the reduced complexity of cross-border settlement would lead to a reduction in fails and manual interventions.”
A sign of the times, manual interventions are slowly but surely being eradicated across the asset servicing space from a European-wide perspective, but with Italian asset servicing specifically “the pandemic helped turbo-expedite the pace of digital innovation,” says State Street’s Dollaku. “Hybrid working models are now reality, even though organisations, including ours, are still trying to figure out what the right balance is.”
Major international players with a solid presence in Italy have been able to successfully respond to the critical issues raised by the global pandemic and its resulting financial low in 2020.
However, the sudden move to hybrid working, through necessity that year, shone a light on the need for accelerated adoption of new tools that will drive innovation and growth in the asset servicing space, not just in Italy but across Europe.
A bank or broker’s reputation to keep up with this acceleration of technology and the ability to streamline the settlement cycle will be reflected in their levels of compliance when considering the next injection of change coming in 2022, this includes the buy-in regime under the Central Securities Depositories Regulation (CSDR). Of course, Italy, along with the majority of Europe, will be included in meeting this governance.
“As in other European markets, Italian banks are particularly interested in the usage of new technology and digital solutions to streamline their securities and cash operational workflows,” reflects Clearstream’s El-Gharbi.
On this point, SGSS’s Pecora states: “The technological developments implemented over the last two years have already fostered harmonisation of certain back-office processes both domestically and with the rest of Europe”, in preparation for such regulations as CSDR.Though of course, Europe does not stand in complete harmony when its comes to this particular regulation, as the UK’s decision, after Brexit, to pull out of this implementation will likely cause further fragmentation, which State Street’s Dollaku highlights will undoubtedly have “repercussions on Italian asset servicers and investors”.
For its part, Monte Titoli (part of the network of Euronext CSDs, located in Milan), “will upgrade its current process for the detection and the execution of market claims and transformations in 2022, in line with CSDR,” indicates Alessio Mottola, head of operations at the exchange.
He adds: “This is considered by Euronext Securities Services Milan and its participants as a great opportunity to further enhance accuracy and timeliness,” he adds.
The road ahead
Though Italy was one of the first countries to go into lockdown, it was one of the first to come out, and as early as 3 June 2020, the country began welcoming back foreign tourists from the wider EU and the UK — a matter of economic survival for a country that relies so heavily on its internationally renowned lakes, ski slopes and sunshiny south to be visited yearly by millions.
As Italy and wider Europe go through what will no doubt be dubbed in history books as the post-pandemic period, Clearmstream’s El-Gharbi asserts that spanning the last year and a half, Italy “passed the test as there was no noticeable disruption in asset servicing”.
Through 2021 this strength has been underpinned by an “unprecedented effort in Italy and Europe on expansive monetary policy and fiscal policy issues”, says Giorgio Solcia, managing director of Italy at CACEIS, which encouraged investment, spearheaded by the stability of Draghi’s new government.
Though, it is important to remember that every area of Italian asset servicing is not well polished and some processes are still strongly characterised by local particularities which “can still give rise to likelihood of risks and inefficiencies in the back-offices of local intermediaries”, states Citi’s Carulli, the most pressing of these risks being “tax management, corporate actions and proxy voting”, he adds.
The need to refine the business processes and workflows relevant to the management of corporate actions and meeting events is also a concern for CSDs, notes Monte Titoli’s Mottola, particularly where foreign markets are concerned.
He adds: “This area of improvement also encompasses the widespread use of domestic proprietary messaging that hinders the seamless processing of cross-border securities services as opposed to standardised messaging that is available to support the integration of European financial markets.”
Looking to the future, Clearstream’s El-Gharbi affirms that following the completion of the regulatory technological implementations, “Italy will be in a strong position to benefit from leveraging the direct access to T2S via ISO 20022 with direct links to all the other European markets”, which will allow Italian asset servicing to offer “better cut-offs and a wider range of services” as well as “widening and reinforcing Italy’s accessibility to global markets as a European T2S entry point”.
From a national economic perspective, Citi’s Carulli concludes that the European Commission’s Recovery and Resilience Facility plan will “free up more than €200 billion, which will be assigned to Italy by 2026”.
This will, Carulli vows, “further attract domestic and foreign investments in Italy in the years to come”.
The country’s then Prime Minister, Giuseppe Conte, was one of the first European leaders to initiate a national quarantine, putting the country on a hiatus as early as 9 March 2020.
The following week a video, released by the Italian Air Force, exhibited a coordinated flypast and a plume displaying the country’s flag colours. Soundtracked by Pavarotti’s Nessun Dorma, the display, though originally filmed in 2019, was widely reposted on social media to lift the national spirit, but that spirit was violently shaken as Italy’s economy plummeted in the immediate months following.
In July 2020 Italy’s economy had shrunk by 5.4 per cent year-on-year in the first quarter, but thankfully, more than 18 months on, it is a different story, with wide vaccine rollouts across the country having done much to aid economic recovery since.
As of October 2021, Pfizer, Moderna and AstraZeneca vaccines have been used to vaccinate more than 44.6 million people over the age of 12 in Italy. “The vaccination coverage has exceeded 80 per cent of the population and this has allowed the reopening of economic activities,” notes Franco Carulli, Italy head of securities services at Citi. “As a result, Italy’s GDP will grow by six per cent in 2021,” he predicts, with the S&P recently moving Italy’s economic outlook from “stable” to “positive”.
As well as the vaccine rollout, the Draghi government, sworn into power in February of this year, has done much to bring economic stability to the country. A change that Denis Dollaku, country head Italy at State Street, indicates has influenced the “Italian GDP [to grow more] than many other European area economies”, proving it still to be a linchpin of economic power for the wider European Union.
Similarly, the European Commission in its economic forecast for Italy (released in July 2021) reflected this notion when it found that since the start of the year, Italy’s economic activity “proved more resilient than expected and increased slightly in the first quarter, despite stringent containment measures” necessitated by the ongoing pandemic.
The points of action now, as Italy goes forward in the months ahead, are well encapsulated by Citi’s Carulli. As he explains: “On the intermediaries’ side, there will be a need to further optimise processes and operating systems to cope with the increase in volumes.”
“On the market side, there will be a strong need to harmonise the rules of asset servicing at European level as much as possible,” he adds.
“The combination of these two initiatives will bring benefits that will enable the securities services industry to face the challenges that it will encounter along the way.”
Domestic investment and cross-border flows
“The strength of cross-border and domestic investment flows in Italy is owed partly to private assets, which by their nature are a precious resource in times of crisis as they are sheltered from market fluctuations,” says Elena Giordano, head of business development, Italy at CACEIS, meaning they have “proven to be more capable than other asset classes of addressing the current pandemic as well as its long-term effects”.
Giordano adds that the economic volatility the COVID-19 pandemic caused in Italy helped “characterise the last two years”, highlighting “the increasing reorientation of institutional investor asset allocation to alternative asset classes, a solution that is both key to supporting the real economy and the post-pandemic recovery of the Italian market”.
The most recent data from the Italian Asset Managers Association (Assogestioni), highlighted to Asset Servicing Times by State Street, shows that the asset management industry has recorded slightly over €67 billion in net new cash since the beginning of this year.
Of course, it is a truth universally acknowledged that during times of volatility, money is simply saved and not spent. And this was no different for Italy as the first lockdown took hold. However, looking to the long-term, this is not necessarily a bad thing, as Roberto Pecora, CEO for Italy at Société Générale Securities Services (SGSS), indicates when he considers the local dynamics.
“The 2020 prolonged lockdown led to a high propensity to save (which doubled compared to 2019, rising to 15.8 per cent), but also [gave] a rise of assets under management, (which increased by 5.7 per cent in August of this year compared to December 2020). This was a positive climate recorded by the Italian market.”
From a cross-border perspective, Citi found an increase of around 20 per cent in assets under custody held by foreign investors. This increase concerns both government bonds and shares, which is also a trend that may “further expand in light of the potential of the Italian economy”, affirms Citi’s Carulli.
Clearing, settlement and regulation
Money is on the move in Italy, a notion reflected by SGSS’ Pecora who indicates: “We have seen an extraordinary increase in volumes and in the number of transactions.”
He adds: “This growth challenge was managed extremely well within SGSS, even in a context of full remote working, which involved 98 per cent of employees and the entire SGSS IT system accordingly adjusted. A proof of very strong resilience and capacity to adapt.”
This resilience and capacity to adapt, however, though not unique to Italy, is prudent to document when the country was one of the first European countries to go into a national lockdown suddenly in March 2020.
Italy’s financial institutions were able to show levels of high resilience in operations, and this resiliency was advanced by the advent of both Target 2 Securities (T2S), as well as the introduction of T+2 settlement in line with CSDR, the latter becoming more of a standard and crucial step towards real-time settlement cycles.
The former, says Citi’s Carulli, “has brought a great deal of harmonisation regarding the settlement of domestic securities, though not cross border ones as these are still subject to local nuances, which sometimes prevent straight-through processing”.
From a central securities depositories (CSD) perspective, there is more to be done in the cross-border settlement space, according to Stéphane El-Gharbi, head of relationship management, Southern Europe at Clearstream.
He says: “Italy is a very strong issuer market but currently only has direct cross-CSD links to Germany and Spain. Today, there is the expectation that the ‘already matched’ cross-CSD T2S change request will be implemented in Italy. This would help CSDs such as Clearstream as the reduced complexity of cross-border settlement would lead to a reduction in fails and manual interventions.”
A sign of the times, manual interventions are slowly but surely being eradicated across the asset servicing space from a European-wide perspective, but with Italian asset servicing specifically “the pandemic helped turbo-expedite the pace of digital innovation,” says State Street’s Dollaku. “Hybrid working models are now reality, even though organisations, including ours, are still trying to figure out what the right balance is.”
Major international players with a solid presence in Italy have been able to successfully respond to the critical issues raised by the global pandemic and its resulting financial low in 2020.
However, the sudden move to hybrid working, through necessity that year, shone a light on the need for accelerated adoption of new tools that will drive innovation and growth in the asset servicing space, not just in Italy but across Europe.
A bank or broker’s reputation to keep up with this acceleration of technology and the ability to streamline the settlement cycle will be reflected in their levels of compliance when considering the next injection of change coming in 2022, this includes the buy-in regime under the Central Securities Depositories Regulation (CSDR). Of course, Italy, along with the majority of Europe, will be included in meeting this governance.
“As in other European markets, Italian banks are particularly interested in the usage of new technology and digital solutions to streamline their securities and cash operational workflows,” reflects Clearstream’s El-Gharbi.
On this point, SGSS’s Pecora states: “The technological developments implemented over the last two years have already fostered harmonisation of certain back-office processes both domestically and with the rest of Europe”, in preparation for such regulations as CSDR.Though of course, Europe does not stand in complete harmony when its comes to this particular regulation, as the UK’s decision, after Brexit, to pull out of this implementation will likely cause further fragmentation, which State Street’s Dollaku highlights will undoubtedly have “repercussions on Italian asset servicers and investors”.
For its part, Monte Titoli (part of the network of Euronext CSDs, located in Milan), “will upgrade its current process for the detection and the execution of market claims and transformations in 2022, in line with CSDR,” indicates Alessio Mottola, head of operations at the exchange.
He adds: “This is considered by Euronext Securities Services Milan and its participants as a great opportunity to further enhance accuracy and timeliness,” he adds.
The road ahead
Though Italy was one of the first countries to go into lockdown, it was one of the first to come out, and as early as 3 June 2020, the country began welcoming back foreign tourists from the wider EU and the UK — a matter of economic survival for a country that relies so heavily on its internationally renowned lakes, ski slopes and sunshiny south to be visited yearly by millions.
As Italy and wider Europe go through what will no doubt be dubbed in history books as the post-pandemic period, Clearmstream’s El-Gharbi asserts that spanning the last year and a half, Italy “passed the test as there was no noticeable disruption in asset servicing”.
Through 2021 this strength has been underpinned by an “unprecedented effort in Italy and Europe on expansive monetary policy and fiscal policy issues”, says Giorgio Solcia, managing director of Italy at CACEIS, which encouraged investment, spearheaded by the stability of Draghi’s new government.
Though, it is important to remember that every area of Italian asset servicing is not well polished and some processes are still strongly characterised by local particularities which “can still give rise to likelihood of risks and inefficiencies in the back-offices of local intermediaries”, states Citi’s Carulli, the most pressing of these risks being “tax management, corporate actions and proxy voting”, he adds.
The need to refine the business processes and workflows relevant to the management of corporate actions and meeting events is also a concern for CSDs, notes Monte Titoli’s Mottola, particularly where foreign markets are concerned.
He adds: “This area of improvement also encompasses the widespread use of domestic proprietary messaging that hinders the seamless processing of cross-border securities services as opposed to standardised messaging that is available to support the integration of European financial markets.”
Looking to the future, Clearstream’s El-Gharbi affirms that following the completion of the regulatory technological implementations, “Italy will be in a strong position to benefit from leveraging the direct access to T2S via ISO 20022 with direct links to all the other European markets”, which will allow Italian asset servicing to offer “better cut-offs and a wider range of services” as well as “widening and reinforcing Italy’s accessibility to global markets as a European T2S entry point”.
From a national economic perspective, Citi’s Carulli concludes that the European Commission’s Recovery and Resilience Facility plan will “free up more than €200 billion, which will be assigned to Italy by 2026”.
This will, Carulli vows, “further attract domestic and foreign investments in Italy in the years to come”.
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