How would you describe the current state of the Canadian asset servicing market?
Canada is a relatively smaller market, but it is definitely in a position of strength right now, which is reflected in the current state of our asset servicing market. Domestic and global investors are not only looking to Canada as a desirable investment destination, but also as an opportunity to hedge portfolios against the US dollar, euro or yen by diversifying into one of the world’s most stable and fiscally sound markets. Custody providers have consolidated in recent decades, so foreign or domestic financial institutions looking to safe-keep client assets in Canada have a choice of three or four mature custodians depending on the segment.
The strength of Canada’s financial sector is receiving a lot of global attention, and all five of Canada’s major banks continue to top various rankings as some of the best-capitalised and safest institutions in the world. Bloomberg recently named our Canadian parent CIBC as the strongest bank in Canada, and third strongest in the world—with all five of Canada’s banks appearing in the top 25.
The regulators are another area that sets Canada apart—not only because of our regulators’ acclaimed prudence and effective stewardship, but also because Canada actually has a very complicated regulatory framework. We have 13 different jurisdictions, which can create challenges for both domestic and foreign investors.
Given the complexity of the Canadian market, the obvious choice for foreign asset servicing providers coming to Canada is to partner with a Canadian sub-custodian with a track record of longevity, commitment to the business and ability to invest in technology across all client segments. Backed by the massive scale of the world’s largest custodian, BNY Mellon, the local expertise of CIBC, and our growing share of the domestic market, CIBC Mellon stands out in this regard.
Have there been any major changes in the way business is conducted since the financial crisis?
In Canada, as elsewhere, we’ve seen a tremendous focus on appropriate risk mitigation and a bull market in regulation. The ever-increasing appetite for transparency and reporting is driving many clients to refocus on their core capabilities and instead meet these substantial administrative challenges through outsourcing. Even some of the largest financial institutions are balking at making the necessary technology and system investments in-house, and so they are looking to their asset servicing providers to provide a bundled back- and middle-office solution.
There has always been a strong focus on cost efficiency in the asset servicing space, which continues to intensify as a result of diminishing returns in the stock market and persistent low interest rates, but post-crisis we have seen a substantial premium placed on stability and capital ratios. In working with both current and prospective clients, the question has often become ‘what price premium do you attach to quality of balance sheet?’
Many large global institutions are looking very carefully at their counterparts to determine which providers are integral to their business beyond the base custody requirements, such as the cost of settling a fully automated, straight-through-processed trade. Asset servicing providers with global scale, resources to invest and a sound balance sheet should fare better than those willing to discount Canada as a loss leader or simply compete on price alone.
Are there any major regulatory or market developments being introduced that affect how business is being conducted?
Cross-border regulations like FATCA and Dodd-Frank will have a substantial impact in Canada and around the world, so we are working with our clients and stakeholders to prepare. We are seeing regulatory evolution in many areas, for example around derivatives, where the G20 nations have all made commitments around collateralisation and central clearing. While the province of Quebec has legislation in place, Canada currently lacks national derivatives regulation, so we are watching this space carefully.
More than regulation, however, I think the Canadian industry will be affected by infrastructure changes—in particular the Maple Group consortium’s bid to take over Canada’s stock market operator, and the Bank of Canada’s mandate to create a central counterparty for derivatives trading.
Maple’s offer for the TMX Group has been extended a few times and currently expires on June 30. While the offer may be further extended, several of Canada’s regulators, as well as the federal competition bureau, have indicated that their concerns have been suitably addressed, so I think Maple will likely be able to proceed with the purchase of the Canadian Depository for Securities (CDS) clearing house and Alpha Trading, an online trading exchange that was set up by the banks to compete with the TMX. The intended consequence of this takeover is an integrated trading and clearing group whose success will be based on its ability to meet the needs of participants in Canada’s capital markets and to compete more effectively abroad for listings. Hopefully, the transaction will proceed, as it will bring such benefits as an opportunity to leverage infrastructure that already exists through the depository to net fixed income transactions in line with the Bank of Canada’s requirement for a central counterparty (CCP).
Our market will also see an improvement when Canadian Derivatives Clearing Competition (CDCC) develops its fixed income CCP, which launched this past February. As CDCC is owned by the TMX group, it remains to be seen whether the new system might be bundled with the current system of netting fixed income trades that already exists within the CDS should the Maple acquisition proceed.
Are there any areas you are actively looking to strengthen or new services that you are looking to offer?
Certainly, the ever-growing appetite from clients, regulators, boards and other stakeholders for increasing transparency, reporting and assurance around the strength of our governance are areas where we are focusing on continuous improvement. This is the ‘new normal’ for our industry, I think that making a strong one-time investment into a new system or product is not enough to deliver what clients need. They need to invest substantially and keep on investing to keep up with the constantly advancing target of client needs.
I would also point to growing demand from clients to tap into investment information though mobile devices; we responded last year with an app for the iPad. We are of course committed to continuous improvement, and we will continue to roll out regular improvements to our information-delivery platforms to better serve our clients.
How important are the European market and your relationships for CIBC Mellon?
Canada continues to benefit from a relatively healthy economy, but we are not immune to events that occur beyond our borders. What happens in Europe affects us as well, so we are monitoring the situation in Greece and the eurozone with great interest. That said, we continue to maintain a very strong focus on the US; it is our biggest trading partner and any recession there ultimately affects our economy.
We do have a high concentration of clients in Europe and those relationships are key to our business. We are dedicated to understanding the concerns and challenges of our clients, and we work very hard to anticipate their needs and exceed their expectations.
Will CIBC Mellon be at NeMa 2012 and what will you be looking to accomplish?
I am definitely looking forward to attending NeMa. I think the conference will be a great opportunity to tap the minds of senior industry experts and veterans. Network managers have the enviable job of benchmarking sub-custody services across different markets. This means that although Canada may be considered to be a fairly stable and low-risk market from an asset servicing perspective, there is still an opportunity to learn about some of the risks facing other markets and to identify best practices that could be implemented here in Canada.
If you could change one thing about the industry, what would it be?
From a global perspective, I would advocate for more jurisdictions to embrace regulation as an opportunity for dialogue and collaboration, in particular as new regulation is under consideration. Here in Canada, market participants tend to prefer a collaborative approach to working with the regulators, which works well to help ensure the cost of implementation does not outweigh the benefits derived. A good recent example of this is when local regulators agreed to delay the implementation of same-day trade matching in Canada as a direct result of industry feedback.
From a Canadian perspective, if I could change one thing it would be putting a national securities regulator in place. Our federal government recently mounted an effort to make this change, but some of the provincial jurisdictions objected and the case went to the Supreme Court of Canada, which unfortunately denied the federal government the authority to unilaterally implement a national regulator. This was a setback for the industry, as the fragmented regime of 13 provincial regulators plus other regulatory bodies is one of the major challenges for both domestic institutions and global financial institutions looking to invest in this country. Simplifying our regulatory environment with a single set of rules across the country would further bolster Canada’s strength as an investment destination.
All in all, there are positives to be taken away from the way the asset servicing industry in Canada and around the world has coped well in the wake of the recent financial turmoil. We should continue to collaborate to ensure that we are well prepared for the road ahead. I look forward to discussing current industry challenges and trends with my industry colleagues, peers and friends at NeMa.
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