Middle East
19 September 2012
Despite reporting and process deficiencies, the Middle East is being primed for business, as AST finds out
Image: Shutterstock
Dubai is a prime location for the second annual custody, clearing and settlement Middle East conference, which is being held in a swooping, glass-fronted hotel on the affluent Jumeirah beach. The November event will focus on newfound opportunities in the Qatar and Saudi Arabia securities markets, proving that rapidly growing markets in the Middle East leave little time for beach-lounging.
Like parts of Asia and Africa, processes in the Middle East still need to be systemised and streamlined to reduce human error and improve trade success rates. Reporting also needs to be improved, with a focus on the delivery versus payment (DVP) model.
But there are sunnier sides to the story. Upcoming changes in capital market regulations will increase security and market opportunities, and regional exchanges are both increasing trading volumes, and heightening investor security.
Like so many other markets in the region, custodial activities have also undergone significant change in the last five years.
“While the role of the custodian has been fairly well defined in countries like Egypt even in the 1990s, the same was not the case in the Gulf Cooperation Council (GCC) countries till the last five to seven years,” says Arindam Das, regional head of HSBC Securities Services for the Middle East and North Africa.
“In most countries in the region, HSBC was the first international bank to offer custody, and as part of that, we had to engage very closely with the central securities depositories (CSDs) to introduce the concept of a custodian, and outline the rights, duties and operating models of the same.”
He adds that in the last few years, custody has become a more formally regulated activity with eligibility and licensing requirements, as well as clearly defined roles and responsibilities.
The scope of custody activities in the region now covers the standard functions, ranging from account opening to settlements, corporate actions, reconciliation, reporting, client service and market advocacy.
Eyeing the competition
Qatar has been the fastest-growing economy among the rapid growth markets in the Middle East in the last 10 years, with an average growth of 13 percent a year.
Though, according to the International Monetary Fund, Qatar’s economic growth will slow next year as well as face an increased risk of lower oil and gas pricing, custodians took note of rapid growth in Qatar and Saudi Arabia, leading to global custodian banks attempting to build critical mass in the region.
Das states that he has seen an increasing number of service providers, both international and local, setting up custody businesses in the various Middle East and North African countries, but their coverage of the region still remains fragmented. “HSBC remains the only institution that offers a comprehensive sub-custody proposition with local market presence in all the GCC and Levant markets.”
“We have more than 100 employees in HSBC Securities Services locally in the Middle East and North Africa region, who are supported by teams in our various offshore locations.”
Until recently, HSBC was the sole non-domestic custody provider and asset servicing company to hold and service its clients’ assets in the region, with competitors exporting servicing of Middle Eastern client assets to offshore centres. HSBC “does carry out some back-end processing activities in our offshore service centres,” states Das.
“However, we believe that a critical component of our service proposition is our physical proximity to the markets, that enables us to gain in-depth market knowledge, develop relationships with market participants, and drive change in the markets, and hence we have been very conscious not to dilute the strength of our local teams. In fact, by offshoring some of the back end processing, we have enabled our local teams to focus more on local market related and client service oriented activities, which is what we believe differentiates us from competition.”
As a result, the custodian provides sub-custody to most of the large global custodians and international broker dealers that invest in or provide access to investments in the region, with a number of regional clients domiciled in the Middle East and North Africa region.
But both Citigroup and Deutsche Bank withdrew their sub-custody mandates from HSBC in favour of going in-house.
“While we cannot comment on decisions of specific clients or competitors,” says Das. “We believe that this decision would depend on the size of one’s portfolio in a particular country, and unless there is a critical minimum size of assets and transactions on a sustainable basis, there is certainly a case for outsourcing.”
Citigroup is the main competitor of HSBC in the Gulf region, and offers three main services—depository receipt issuance, asset servicing for investors and local sub-custody. It signed a deal with the Bahrain Stock Exchange in 2010 to act as depository to local and international investors.
Standard Chartered is another rival, and it is well placed to provide custodial services in the region, seeing as its logo remains a familiar sight in the Middle East after 150 years of serving retail customers there. After launching its asset-servicing business in the region four years ago, in July of this year the bank announced the expansion of its regional custody coverage for investors and intermediaries from its Middle East and North Africa regional hub in the Dubai International Financial Centre.
The service now covers more than 40 markets across Asia, Africa and the Middle East, along with a few select countries from other regions, “making it the most comprehensive regional custody coverage offering of any service provider in the Middle East,” said a statement that was released at the time.
“The expanded coverage leverages the bank’s custody capabilities in Africa and enables Standard Chartered to provide custody solutions to Middle East investors and intermediaries in the world’s fastest growing regions.”
State Street, BNY Mellon, Northern Trust, Deutsche Bank, Standard Chartered and J.P. Morgan have all made the step to provide some form of custody in the Middle East. As global players put their faith in these developing economies, it would be remiss not to regard the region with the seriousness that it deserves.
Like parts of Asia and Africa, processes in the Middle East still need to be systemised and streamlined to reduce human error and improve trade success rates. Reporting also needs to be improved, with a focus on the delivery versus payment (DVP) model.
But there are sunnier sides to the story. Upcoming changes in capital market regulations will increase security and market opportunities, and regional exchanges are both increasing trading volumes, and heightening investor security.
Like so many other markets in the region, custodial activities have also undergone significant change in the last five years.
“While the role of the custodian has been fairly well defined in countries like Egypt even in the 1990s, the same was not the case in the Gulf Cooperation Council (GCC) countries till the last five to seven years,” says Arindam Das, regional head of HSBC Securities Services for the Middle East and North Africa.
“In most countries in the region, HSBC was the first international bank to offer custody, and as part of that, we had to engage very closely with the central securities depositories (CSDs) to introduce the concept of a custodian, and outline the rights, duties and operating models of the same.”
He adds that in the last few years, custody has become a more formally regulated activity with eligibility and licensing requirements, as well as clearly defined roles and responsibilities.
The scope of custody activities in the region now covers the standard functions, ranging from account opening to settlements, corporate actions, reconciliation, reporting, client service and market advocacy.
Eyeing the competition
Qatar has been the fastest-growing economy among the rapid growth markets in the Middle East in the last 10 years, with an average growth of 13 percent a year.
Though, according to the International Monetary Fund, Qatar’s economic growth will slow next year as well as face an increased risk of lower oil and gas pricing, custodians took note of rapid growth in Qatar and Saudi Arabia, leading to global custodian banks attempting to build critical mass in the region.
Das states that he has seen an increasing number of service providers, both international and local, setting up custody businesses in the various Middle East and North African countries, but their coverage of the region still remains fragmented. “HSBC remains the only institution that offers a comprehensive sub-custody proposition with local market presence in all the GCC and Levant markets.”
“We have more than 100 employees in HSBC Securities Services locally in the Middle East and North Africa region, who are supported by teams in our various offshore locations.”
Until recently, HSBC was the sole non-domestic custody provider and asset servicing company to hold and service its clients’ assets in the region, with competitors exporting servicing of Middle Eastern client assets to offshore centres. HSBC “does carry out some back-end processing activities in our offshore service centres,” states Das.
“However, we believe that a critical component of our service proposition is our physical proximity to the markets, that enables us to gain in-depth market knowledge, develop relationships with market participants, and drive change in the markets, and hence we have been very conscious not to dilute the strength of our local teams. In fact, by offshoring some of the back end processing, we have enabled our local teams to focus more on local market related and client service oriented activities, which is what we believe differentiates us from competition.”
As a result, the custodian provides sub-custody to most of the large global custodians and international broker dealers that invest in or provide access to investments in the region, with a number of regional clients domiciled in the Middle East and North Africa region.
But both Citigroup and Deutsche Bank withdrew their sub-custody mandates from HSBC in favour of going in-house.
“While we cannot comment on decisions of specific clients or competitors,” says Das. “We believe that this decision would depend on the size of one’s portfolio in a particular country, and unless there is a critical minimum size of assets and transactions on a sustainable basis, there is certainly a case for outsourcing.”
Citigroup is the main competitor of HSBC in the Gulf region, and offers three main services—depository receipt issuance, asset servicing for investors and local sub-custody. It signed a deal with the Bahrain Stock Exchange in 2010 to act as depository to local and international investors.
Standard Chartered is another rival, and it is well placed to provide custodial services in the region, seeing as its logo remains a familiar sight in the Middle East after 150 years of serving retail customers there. After launching its asset-servicing business in the region four years ago, in July of this year the bank announced the expansion of its regional custody coverage for investors and intermediaries from its Middle East and North Africa regional hub in the Dubai International Financial Centre.
The service now covers more than 40 markets across Asia, Africa and the Middle East, along with a few select countries from other regions, “making it the most comprehensive regional custody coverage offering of any service provider in the Middle East,” said a statement that was released at the time.
“The expanded coverage leverages the bank’s custody capabilities in Africa and enables Standard Chartered to provide custody solutions to Middle East investors and intermediaries in the world’s fastest growing regions.”
State Street, BNY Mellon, Northern Trust, Deutsche Bank, Standard Chartered and J.P. Morgan have all made the step to provide some form of custody in the Middle East. As global players put their faith in these developing economies, it would be remiss not to regard the region with the seriousness that it deserves.
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