The markets of Denmark, Sweden, Norway and Finland have long been identified collectively as a single destination but they do remain four completely separate markets.
The markets of Denmark, Sweden, Norway and Finland have long been identified collectively as a single destination but they do remain four completely separate markets.
There are similarities though. The financial crisis increased the focus on transparency and risk management within the market, and has led to the introduction of a CCP and a single-platform CSD. These have increased liquidity and driven down costs, but have had a knock-on effect on the custody business, where margins have been squeezed and value added services now the norm.
EMCF and Nasdaq OMX Nordic agreed to implement CCP clearing for cash equities in 2009. In a statement EMCF said: “The introduction of a CCP, in contrast to fragmented bilateral settlements, will benefit market participants by driving liquidity and lowering costs. Most European markets today are centrally cleared, and this move ensures that the Nordics keep pace with international standards. Most crucially in the current climate, a CCP acting as counterparty to both the buyer and seller will significantly reduce counterparty risk.”
“The introduction of the CCP was driven by the crisis and competition from MFTs,” says Christel Leonhard, head of customer services, group trading and investment support at Danske Bank. “There had been talk about implementing it for at least 10 years but in 2008/9 we drove forward to be able to implement it in three markets by October 2009, with Norway following in July 2010.”
“The introduction of CCP in 2009 was undoubtedly the biggest event in the post trade market for the past five years,” says Ulf Noren, global head of sub custody at SEB. “This has completely re-shaped the operative models and also the revenue situation. Going from a situation where exchange trades where settling bilaterally in 1:1 relationship to a situation with netting has not made great wonders to sub-custodian’s gross revenues.
“[It] has made the market more attractive from a cross border cost perspective,” Noren continues. “It might also have contributed to a safer and more predictable market even if all current European clearing models leaves a few things to be desired on that account. A related effect of CCP is that banks have developed more sophisticated and advanced risk management models, partly in response to the nature of a clearing environment but equally so in response to market supervisory requirements and the same for their own management for counterparty risk control. A surprising effect of the CCP introduction (even if apples not necessarily are compared with apples here)is the lowered settlement rates - an issue that is addressed by an informal CSD/Bank consultation process at this very moment.”
The Nordic Central Securities Depository (NCSD) was acquired by Euroclear from the previous main shareholders, Nordea, SEB, Svenska Handelsbanken and Swedbank. The purchase also included the Finnish and Swedish CSDs, which meant that transaction processing activities for the region will transferred to Euroclear’s multi currency platform that allows clients to settle all trades - including settling cross-border transactions as if they are domestic trades, and with reduced costs. There’s no set date for the transfer, but it’s expected to take place some time this year.
Nordic custodians are also having to deal with the introduction of the Target 2 Securities regulation, which aims to centralise the settlement of euro denominated securities on a single European platform by 2013. This could mean that competition for custody business will move from an inter-custodian battle to include CSDs as well - again reducing margins.
Similarities
While it’s not uncommon for funds to think of the Nordic region as one, there are significant differences in the markets. Of the four countries, only three are part of the European Union, with Norway having close links to the federation while remaining completely independent. And there are four separate currencies, with only Finland opting to become part of the eurozone. And although the EU is moving towards a more harmonised regulatory structure, each country has its own regime.
“International asset managers do consider the Nordics to be one region, at least initially,” says Leonhard. “But when they go into more detail, they realise it’s four very different markets. They do expect you as a back office provider to be able to cover all four countries.
“Most asset managers have Nordic shares in their portfolios. It’s not a large market, but you can diversify, and the economics in each of the four markets are very different, which means you can spread the risk.”
The players
It’s a competitive market. Northern Trust is making significant inroads, while other multinationals also have a presence. Domestically, Danske Bank, Handelsbanken, Nordea and SEB all have a significant regional footprint, while DnB is a major player in Norway.
“Margins have been cut so tight that it’s almost not worth our while offering custody services in the region,” says one manager at a regional provider. “If our clients only took our custody service, we would end up making a loss. So it’s the value added services that are more important to us as well as the relationships we are building with our clients that offer spread into other areas of our business.”
Corporate actions, proxy voting and tax reclamation have become key components of any service offering. “The demand is from the underlying clients who want to use and exercise their rights and optimise their revenues - hence the increased need for voting and tax reclaim services,” explains Leonhard.
The future
While custodians in the region continue to remain positive about the coming years, especially with increased inflows from both domestic and international asset managers, issues do remain. Custody fee margins will continue to be squeezed, potentially leading to mergers or acquisitions within the smaller providers, while the increasing regulation will place a further burden on banks.
“I think that 2011 & 2012 will continue to be financially challenging and that whatever is happening thereafter very much will be dependent of how the regulatory scene plays out,” says Noren. “On a positive note, I think that a few banks (in which league SEB intends to stay) will benefit from positional changes primarily driven by T2S (whether or not T2S happens according to plan). This will inevitably lead to further consolidation and pair that with infrastructural changes, you will see a future where every card must be played carefully.”
Whether the Nordic region will continue to be considered a market in its own right is up for debate, says Leonhard. “In the future, I don’t think the Nordic market will be seen so much as a region, it will simply be seen as part of the European market,” she explains. “The harmonisation with regulations will increase the likelihood of that.”
