Could you describe how Deutsche operates in the Middle East?
We have a client service team based in Dubai, and use this team to offer our Middle East and North Africa (MENA) hub product, as well as servicing the three direct markets within the United Arab Emirates (UAE). But as we’ve also expanded into Saudi, and will soon be heading to Qatar, We have staff on the ground in Saudi Arabia from a securities and cash perspective, and we will replicate that in the Qatar office in Doha as well.
We have five markets in the Middle East, which equates for 80 percent market cap and probably closer to 90 percent of the direct Gulf Cooperation Council (GCC) flow.
What are you feelings on MSCI’s upgrade of UAE and Qatar?
Although the work has been tiresome and somewhat painful at times to get the MSCI upgrade across the line, I think there is a real value add in terms of getting things moving and the effort put in. I hasten to add that I think MSCI is not the end-game; it’s the starting point. It has been interesting going to different conferences over the last couple of years. Everyone almost got MSCI as this huge delivery objective rather than actually thinking about what the objective of the MSCI upgrade is—is it to tick all the boxes, or are we trying to do something that enhances the local markets and develops the capital markets infrastructure?
I think at some point, we lost that message. Exchanges and regulators were trying to tick boxes. But over the last two years, there has been more drive as to wanting to see what these markets can actually deliver. That’s been shaped with work done from our side, as well as local participants. Now we have a model, which, although maybe not 100 percent liked by international investors, is a model that they are more akin to and a model that they now more prepared to use.
What is your opinion on Saudi Arabia opting out of the index?
To my mind, Saudi never opted in. Saudi Arabia is on a T+0 market and there are certain requirements it needs to fill before it meets index criteria. Foreign ownership is a big obstacle obviously.
I don’t know if Saudi want to be in the MSCI index—that would be a discussion between the two parties.
If you look at the MSCI criteria, Saudi is missing a couple of key points before it can enter, foreign ownership restriction being one, and T+0 potentially being another. However if it were to join the index, it would be a game-changer. I’m not an analyst but the numbers they throw out there have the same potential size as Turkey in terms of the weightings on the index.
If you added that to a UAE, Qatar and possibly Kuwait scenario, then the GCC has a real meaningful contribution to the emerging markets index, and possibly beyond, as we are told some of these markets are keen to move on to a more mature status as well.
Over the last two or three years, there has been concentration on both the MSCI upgrade, and the development to a more sustainable capital markets. I think that is the other thing the MSCI gives us. Whether it’s passive managers who have to track, or managers who want to track the index, the upgrade will mean a significant uptick in portfolio flows.
We’ve also got the other added benefit, which is that if they’re going to be in the index, they have to have analysts tracking and providing research on the stocks in the MSCI index. Therefore there are more analytical decisions being made on the stocks, rather than emotive decisions—and that will filter down to the retail. In a market where you have a 70:30 split—70 percent being retail and 30 institutional—if you then get the MSCI changing that dynamic and also changing the dynamic with real analysis in there, that will filter down to retail and there will hopefully be less volatility, more sustainability, and give the markets more of a mature perspective.
Two of the criteria MSCI use to classify markets includes securities lending and short selling. How do you see growth of these two practices in the Middle East?
I think we need to be careful with the usage of securities lending in the Middle East, because whilst the UAE and Qatar are developing their lending capabilities they are for securities fails and not strategic lending. It is not the strategic lending you see in mature markets.
Short selling is interesting, as UAE and Qatar still do not really allow this in practice. You still have to have the assets in the account for the orders to go through to the market but we should note there is now more protection for security sales in that a level of asset protection now exists. The receive versus payment/delivery versus payment (RVP and DVP) and processes are recognisable, and as stated there is far more control for the global custodians and their clients than it ever has been. But, we still have a little way to go.
How have you seen the concept of a custodian be introduced in the Middle East?
Five to seven years ago, a lot of regional clients did not see the value of a custodian. Why pay for something that the central securities depository already does? This has started to change.
I think using the term ‘introduce best practice’ is not fair to the local market— as many of the domestic processes work in terms of what [the local markets] are looking to achieve—but some of the international practices that Deutsche Bank and our peers in the custody world bring to the market do help to push the governance in the markets. You see it from the top down. We now have greater governance through the local markets here, which can only help transparency and stability and continual growth.
Deutsche Bank’s decided to revoke its sub-custody mandates from HSBC in 2008 and bring client assets in-house. How has sub-custody progressed for the bank since then?
When we entered the market it was with the intention of supplying value-add to our internal business, and then looking at the cross border business, globally and then seeing regionally and locally what business we could penetrate. We knew that it would take a while locally for the custody market to mature, and for us to be accepted as the preferred model. Literally as soon as we went live in UAE, the markets in the Middle East (and internationally) went through a state of turmoil, and assets under custody dropped dramatically which in effect saw the need for additional providers was not as urgent as it had previously been.
Clients moved their business away from what was still a pretty small region. However, Deutsche has continued to push forward and meet the clients, develop its product and assist with the development of our local client service team, but in the interim, actually changed focus in looking at some of the regional and local mandates, specifically on the fund administration side. This change is with reference to regulations in the Middle East, which are looking to force managers locally to split management, brokerage, admin, transfer agency, and not have all in house, and use a more traditional model by appointing a custodian or administrator.
So that was a specific focus for 2009 and 2010, where we built assets under custody up from that perspective. In the last 18 months to two years we’ve seen growth come back to the region, and are starting to pick up new clients, and have migrated two or three clients to the platform Our growth story is good, we continue to add more clients, more market share, and have started to chisel away at HSBC in terms of the markets where we are direct providers.
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