Germany
09 January 2012
Though their may be reasons to be gloomy, German investor confidence has rebounded vigorously. AST looks at custody in the country, and how to attract a demanding institutional investor
Image: Shutterstock
In an effort to develop its asset servicing business in Germany, BNY Mellon bought BHF Asset Servicing from BHF-Bank Aktiengesellschaft for $343 million in 2010.
The deal made the bank the second largest asset servicing provider in Germany, with $642 billion in assets under custody and administration at the time. In addition, the acquisition expanded BNY Mellon’s existing capabilities to include German domestic custody services and KAG fund administration.
The transaction included the purchase of BHF Asset Servicing’s wholly-owned fund administration affiliate, Frankfurter Service Kapitalanlage-Gesellschaft.
Originally run by Michelle Grundmann from BNY Mellon and Juergen Frank and Christopher Friedrich from BHF Asset Servicing, in August this year the roles were switched up, as Frank became chairman of the supervisory board of the KAG business, and Grundmann left the bank completely, with Laura Ahto and Thomas Brand overseeing the bank’s asset servicing and investment services in Germany respectively.
Brand explains that the acquisition of BHF Asset Servicing provided access to a top-tier client base and expanded cross-selling opportunities, enabling BNY Mellon to increase its presence and offering within Germany, which is a core target market.
“Moreover, the purchase expanded BNY Mellon’s existing capabilities to encompass the provision of German domestic custody and also extended—via FSKAG—our capabilities in respect of German-compliant fund administration. And of course, BNY Mellon had a successful relationship with BHF-Bank since 2002, which was a well-established and robust business that we knew very well, and so this deal was a natural ‘next step’.”
“This summer saw the completion of our post-merger integration project in record-time, well ahead of industry benchmarks for such undertakings. The German business continues to show good growth rates, with the BNY Mellon Service KAG leading the way with several new key client wins in 2011 and 2012—for instance, the provision of outsourced accounting and data management solutions to a range of discretionary mandates international portfolios (including both securities and derivatives) managed by Allianz Global Investors.”
Owing to its enviable position as the largest economy in Europe, Germany is a natural playing space for the bank, Brand adds.
“German fund volumes still show considerable growth rates due to two factors: a stable economic environment nationally and a favourable regulatory environment, which attracts money from abroad. Recent reforms have also helped to make Germany a more attractive fund domicile and so have narrowed the gap with other established European fund destinations such as Luxembourg and Ireland.”
The finishing touch
A BNY Mellon-sponsored study from consulting firms itechx and Faros concluded that there was increasing demand among German institutional investors for sophisticated services. The study, which was called ‘Cost pressure—Financial Service Providers at a Dead End?’, identified key service areas where clients are seeking additional support from their providers, which included performance and risk management, as well as proxy voting services.
Oliver Draeger, senior investment consultant at Faros, said at the time: “The market survey clearly shows what institutional investors currently demand from depotbanks. We can answer the initial question—are depotbanks at a ‘dead end’—with a definite ‘no’.”
The survey—of 31 institutional investors representing a volume of almost €400 billion depotbank AUA—acknowledged that the German market has witnessed a significant decrease in fee levels over the past five years, but stated that at the same time, fee structures remained somewhat opaque and have historically often been based on cross-subsidisation across core and so-called ‘value-added’ services.
Today, the majority of institutional investors have a growing need for sophisticated services, particularly in the fields of transaction cost analysis, performance management and risk measurement.
Clients increasingly see innovative solutions as value creating, and according to the survey, institutional investors are willing to pay separately for these services as and when they are introduced. The study concluded that custodians are not taking full advantage of available opportunities to sell new services on a stand-alone basis.
“The findings of the study go hand-in-hand with what we are seeing in our day-to-day contacts with our German client-base in terms of current appetite and emerging needs,” says Brand. “As in other markets, we are also seeing a renewed focus on collateral management as institutional investors recognise the changes that EMIR (European Market Infrastructure Regulation) and Dodd-Frank (US act) will bring to the European industry.”
However, while German investors are scrupulous when it comes to quality of service, the cost of such a service must still be competitive, says Brand.
“Germans are very focused on, and sensitive to, costs. This attitude is borne out by the tough competitive nature of the environment in which German asset servicing industry must do business. In the depotbanking sector, for example, there are more than 50 players competing for market share. In addition, local German investors are looking for long-term, committed relationships with their providers, and will think long and hard before considering any switch.
“Last but not least, the very clear division of the German banking industry into three sectors is something which makes this market unique. Whether they are private banks, savings banks or cooperative banks, they always tend to prefer third-party providers that are specialists in servicing their particular proprietary sector.”
Holger Sepp, co-head Germany and member of the management board at CACEIS, agrees that institutional investors are looking for sophistication, along with low fees.
“Many institutional investors are looking for reliable and attractive securities lending services and collateral management solutions as they search for possibilities to earn more money and—at the same time—maintain the safety of their assets.
“Moreover, they are interested in sophisticated reporting solutions in order to have an overview of their investments, even those managed by several asset managers and a number of different trustees.
He adds: “In times of low level interest rates, it is especially important for institutional investors to find reasonable opportunities to park short-term liquidity, so sophisticated and competitively priced FX money-market services are a key service to deliver.”
CACEIS, whose predecessor companies have provided trustee services in Germany since 1959, acquired UniCredit’s group-wide asset servicing operations at the beginning of 2008 from Hypovereinsbank—the German arm of UniCredit.
Four years down the line, Sepp says that the embedding of European law is the biggest challenge for asset servicing providers in the country.
“A common European law will have to be transferred into local legislation, as with the AIFM (Alternative Investment Fund Managers) directive. As such, the responsible government department decided to implement an entirely new piece of legislation called ‘Kapitalanlagegesetzbuch’ (KAGB), which is planned to come into effect from 22 July 2013. It will replace the former German Investment Act by including the new AIFMD requirements. The first draft of KAGB has gone beyond the scope of the original European regulatory requirements.”
“Therefore, it has attracted some criticism from the funds industry, which fears losing substantial parts of their business to other European countries, for example, through the abolishment of open-ended real estate funds. Since the publication of the first draft of the KAGB, an updated draft was published at the end of October, which now takes into account most of the German fund industry’s concerns.”
Whether it be adapting far-reaching European legislation, demanding lower fees, or updating services, regulators, clients and custodians have a lot on their to-do lists. But a surge in December’s economic expectations (despite the government predicting a loss of momentum) ensures that even though those in charge may be gloomy, investor confidence will be present to push the country through difficult times.
The deal made the bank the second largest asset servicing provider in Germany, with $642 billion in assets under custody and administration at the time. In addition, the acquisition expanded BNY Mellon’s existing capabilities to include German domestic custody services and KAG fund administration.
The transaction included the purchase of BHF Asset Servicing’s wholly-owned fund administration affiliate, Frankfurter Service Kapitalanlage-Gesellschaft.
Originally run by Michelle Grundmann from BNY Mellon and Juergen Frank and Christopher Friedrich from BHF Asset Servicing, in August this year the roles were switched up, as Frank became chairman of the supervisory board of the KAG business, and Grundmann left the bank completely, with Laura Ahto and Thomas Brand overseeing the bank’s asset servicing and investment services in Germany respectively.
Brand explains that the acquisition of BHF Asset Servicing provided access to a top-tier client base and expanded cross-selling opportunities, enabling BNY Mellon to increase its presence and offering within Germany, which is a core target market.
“Moreover, the purchase expanded BNY Mellon’s existing capabilities to encompass the provision of German domestic custody and also extended—via FSKAG—our capabilities in respect of German-compliant fund administration. And of course, BNY Mellon had a successful relationship with BHF-Bank since 2002, which was a well-established and robust business that we knew very well, and so this deal was a natural ‘next step’.”
“This summer saw the completion of our post-merger integration project in record-time, well ahead of industry benchmarks for such undertakings. The German business continues to show good growth rates, with the BNY Mellon Service KAG leading the way with several new key client wins in 2011 and 2012—for instance, the provision of outsourced accounting and data management solutions to a range of discretionary mandates international portfolios (including both securities and derivatives) managed by Allianz Global Investors.”
Owing to its enviable position as the largest economy in Europe, Germany is a natural playing space for the bank, Brand adds.
“German fund volumes still show considerable growth rates due to two factors: a stable economic environment nationally and a favourable regulatory environment, which attracts money from abroad. Recent reforms have also helped to make Germany a more attractive fund domicile and so have narrowed the gap with other established European fund destinations such as Luxembourg and Ireland.”
The finishing touch
A BNY Mellon-sponsored study from consulting firms itechx and Faros concluded that there was increasing demand among German institutional investors for sophisticated services. The study, which was called ‘Cost pressure—Financial Service Providers at a Dead End?’, identified key service areas where clients are seeking additional support from their providers, which included performance and risk management, as well as proxy voting services.
Oliver Draeger, senior investment consultant at Faros, said at the time: “The market survey clearly shows what institutional investors currently demand from depotbanks. We can answer the initial question—are depotbanks at a ‘dead end’—with a definite ‘no’.”
The survey—of 31 institutional investors representing a volume of almost €400 billion depotbank AUA—acknowledged that the German market has witnessed a significant decrease in fee levels over the past five years, but stated that at the same time, fee structures remained somewhat opaque and have historically often been based on cross-subsidisation across core and so-called ‘value-added’ services.
Today, the majority of institutional investors have a growing need for sophisticated services, particularly in the fields of transaction cost analysis, performance management and risk measurement.
Clients increasingly see innovative solutions as value creating, and according to the survey, institutional investors are willing to pay separately for these services as and when they are introduced. The study concluded that custodians are not taking full advantage of available opportunities to sell new services on a stand-alone basis.
“The findings of the study go hand-in-hand with what we are seeing in our day-to-day contacts with our German client-base in terms of current appetite and emerging needs,” says Brand. “As in other markets, we are also seeing a renewed focus on collateral management as institutional investors recognise the changes that EMIR (European Market Infrastructure Regulation) and Dodd-Frank (US act) will bring to the European industry.”
However, while German investors are scrupulous when it comes to quality of service, the cost of such a service must still be competitive, says Brand.
“Germans are very focused on, and sensitive to, costs. This attitude is borne out by the tough competitive nature of the environment in which German asset servicing industry must do business. In the depotbanking sector, for example, there are more than 50 players competing for market share. In addition, local German investors are looking for long-term, committed relationships with their providers, and will think long and hard before considering any switch.
“Last but not least, the very clear division of the German banking industry into three sectors is something which makes this market unique. Whether they are private banks, savings banks or cooperative banks, they always tend to prefer third-party providers that are specialists in servicing their particular proprietary sector.”
Holger Sepp, co-head Germany and member of the management board at CACEIS, agrees that institutional investors are looking for sophistication, along with low fees.
“Many institutional investors are looking for reliable and attractive securities lending services and collateral management solutions as they search for possibilities to earn more money and—at the same time—maintain the safety of their assets.
“Moreover, they are interested in sophisticated reporting solutions in order to have an overview of their investments, even those managed by several asset managers and a number of different trustees.
He adds: “In times of low level interest rates, it is especially important for institutional investors to find reasonable opportunities to park short-term liquidity, so sophisticated and competitively priced FX money-market services are a key service to deliver.”
CACEIS, whose predecessor companies have provided trustee services in Germany since 1959, acquired UniCredit’s group-wide asset servicing operations at the beginning of 2008 from Hypovereinsbank—the German arm of UniCredit.
Four years down the line, Sepp says that the embedding of European law is the biggest challenge for asset servicing providers in the country.
“A common European law will have to be transferred into local legislation, as with the AIFM (Alternative Investment Fund Managers) directive. As such, the responsible government department decided to implement an entirely new piece of legislation called ‘Kapitalanlagegesetzbuch’ (KAGB), which is planned to come into effect from 22 July 2013. It will replace the former German Investment Act by including the new AIFMD requirements. The first draft of KAGB has gone beyond the scope of the original European regulatory requirements.”
“Therefore, it has attracted some criticism from the funds industry, which fears losing substantial parts of their business to other European countries, for example, through the abolishment of open-ended real estate funds. Since the publication of the first draft of the KAGB, an updated draft was published at the end of October, which now takes into account most of the German fund industry’s concerns.”
Whether it be adapting far-reaching European legislation, demanding lower fees, or updating services, regulators, clients and custodians have a lot on their to-do lists. But a surge in December’s economic expectations (despite the government predicting a loss of momentum) ensures that even though those in charge may be gloomy, investor confidence will be present to push the country through difficult times.
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