HSBC is seeking to be more streamlined and to align its businesses more closely—how has this plan been put into action?
HSBC has developed a strategy that involves the bank reviewing its businesses in order to focus on its core strengths and make it a simpler organisation to manage and control. From a securities services perspective, we also regularly review client relationships as part of our everyday business activity and we’re making some adjustments to the mix of clients, so that we are more focused on large, institutional clients that benefit most from the breadth of HSBC’s product set.
I think the positive thing as a service provider is that we will be able to focus much more on those services and those clients that are core to us, and we will be able to spend more time satisfying their evolving requirements. There are regulatory changes such as the Alternative Investment Fund Managers Directive coming in, and that is going to require clients to put a lot more focus on areas such as risk management, which has a knock-on impact on sub-custodians. This has a financial impact. Regulations already require us to have a tight grip on KYC (know your client), and that comes at a cost. If you have a client where you’re earning $10,000 a year but it’s costing you $30,000 to $40,000 to do the KYC, you have to ask yourself the obvious question.
How are you feeling about T2S?
I think that—with any new regulation or change in a market—there are both threats and opportunities. As a sub-custodian, HSBC has a limited presence in the EU countries that are participating in T2S (TARGET2-Securities). We see it as possibly an opportunity for us to provide a pan-European service, but we have yet to make a decision on that.
How have you seen the relationship between custodian and sub-custodian change over the years?
I was at the London Stock Exchange up until 1990. I went out to Hong Kong to help build up the securities services business there, so I’ve been in and out of the sub-custody business for 20 years.
With that said, over the years I’ve seen that global custodians have come to view sub-custodians as much more than a simple service provider or a simple processor of transactions. It’s a bit of a cliché, but I think that they’re seeing it as more of a partnership now, and in particular seeing the sub-custodians as their advocates and as their representatives on the ground and in the market.
There is much greater value placed on what the sub-custodians can offer in terms of inter-relationships with the regulators, the stock exchange, the central securities depository (CSD) and other market infrastructure than probably there was previously. Also, clients see sub-custodians as a key source of information; looking at what’s happening in the market, seeing how that’s affecting the global custodians, the broker-dealers, and providing them with that analysis. So in many ways, the sub-custodian acts as an extension of the global custodian itself.
At the moment, with new regulations coming in, there is an increased expectation that sub-custodians will identify risks in the local markets, and explain how we manage those risks on behalf of global custodians and broker-dealers. I would say that some years ago it used to be “right, we settle trades, we process corporate actions, we report back to clients and then we pack up and go home”, but it has evolved into a much more complex relationship. It’s more of a consultative-type of relationship, and I see that increasing.
Is a limited number of regional or global providers better than a lot?
Well I of course would say a limited number! In all seriousness, I don’t think, with the attrition that we continue to see in margins, there is scope for a large number of custodians in a market, whether they’re single market, regional or global sub-custodians. I think that our clients want to see us continuing to invest in new risk management measures, new systems, new reporting methods and so on, and for that to happen in an environment of falling margins, there’s really only room in the long-term for a limited number of custodians in a market. I would say three is probably the optimal number to ensure that there is choice in a market but that returns are sufficient to continue to fund investment.
There aren’t enough dollars to go around in many marketplaces, and as a result, we’ve seen a huge amount of consolidation in Asia, and we’ve seen it in Europe as well. If you look at the number of sub-custodians that were in Asia 10 years ago, the number has reduced drastically. We’ve seen something similar in Europe, but I suspect that with T2S coming in we’re likely to see more consolidation. And I think it makes a lot of sense from the point of view of buyers.
If you have a different sub-custodian in every market, it is a huge amount of effort to effectively manage all of the different relationships. Whereas, if you have, for example, one provider in a region, then it becomes much easier to manage one regional relationship than a multitude of single market relationships.
What about CSDs?
If you look at it from an Asian perspective, in most cases there is one CSD per market. That CSD is an integral part of the local infrastructure and it will take some time before we start to see consolidation at the CSD level in Asia. Markets in the region are all at very different stages of development, and one model doesn’t necessarily suit all. Countries want to be masters of their own destinies in regards to the development of their capital markets, so it is unlikely that we’ll see one country giving up its own local CSD or its own stock exchange.
How are sub-custodians coping with unbundling of services?
I’m not sure that we are yet seeing an unbundling of services. In Europe, the advent of T2S will inevitably result in some unbundling because T2S covers settlement but not corporate actions—this will leave questions on how corporate actions are processed and in particular how they are priced in isolation, because that is the riskier side of custody.
But generally, taking T2S out of the equation, I don’t see any real move towards unbundling. There is a lot of discussion about it, but if you talk to a client about what that would actually involve, ie, charging for a lot of services that are at the moment all bundled into the asset fees, it could mean that they either pay more, or they get such a complex bill that it’s impossible to reconcile and that becomes an industry in itself.
Twenty years ago, the charging structure within the sub-custody business was unbundled and in some markets we had what we used to call ‘cafeteria’ pricing: a whole long list of services each with its own price. Because of the complexity of it, people moved towards a bundled fee, which is where we are now.
Are there any new projects in the offing at HSBC?
First of all, we are investing a lot in our IT infrastructure. We are moving from a distributed structure where, even though each market uses the same system, there is a set of programs and databases for each market, to a regionalised architecture, which will provide faster development and therefore quicker time to market for new functionality. It will also offer an enhanced ability to provide regional and global reporting to our clients.
We’re also investing in further development of our broker-dealer outsourcing services. We already offer the account operator and third-party clearing models in a number of markets, but we’re also pursuing opportunities for moving much further into the broker-dealers’ back- to middle-office space. We are developing the ability to insource all activities once a trade has been executed. Frankly, for a broker, the post-execution space gives them little, if any, competitive advantage—it’s the execution speed, price and quality of research that sets them apart. No one selects a broker on its ability to settle a trade.
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CSOB
Marek Zacal
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