Europe is only just coming to terms with the second Markets in Financial Instruments Directive (MIFID II), the aftermath of which some in the industry dubbed “MiFID flu”. Biting at the heels of MiFID II is the European legislation of the General Data Protection Regulation (GDPR), as well as the forthcoming Securities Financing Transactions Regulation (SFTR), expected in 2019.
Synonymous with meeting these regulation deadlines is the industry-wide worry of cost consideration, as firms grapple with doing the calculations while complying with the aforementioned regulations beyond their implementation dates.
Sean Tuffy, head of market and regulatory intelligence for Europe the Middle East and Europe (EMEA) at Citi custody and fund services, advises: “As regulation looks set to be a continuing challenge for the industry, the ability to clearly articulate the impact of regulation to clients is a core skill that asset services need to develop.”
While Clive Bellows, head of global fund services for Northern Trust EMEA, surmises: “Across Europe, asset managers are assessing their investment strategies and expertise. Increased requirements for data, governance and transparency drive the development of cutting-edge technology solutions that help both institutional investors and asset managers.”
So how did MiFID II change asset servicing?
Gerard Walsh, head of business development and institutional brokerage at Northern Trust Capital Markets, says: “[MIFID II] was aimed at driving transparency into front office execution and research commissions, and became so large in scope that it had knock on impacts all the way through the asset management, broking and asset servicing ecosystem.”
With this in mind, what does the future hold for Europe and asset servicing in the region? Bellow’s predicts that technology is the future.
He says: “Whether it is artificial intelligence, the rise in automation and data analytics, or the development of scalable platforms, technology has dramatically altered the investment landscape, and will continue to do so.”
He adds: “Due to the complexities of the European market and multiple jurisdictions, asset servicers operating in this market need to differentiate themselves with the breadth of solutions and services they can offer.”
Looking a little closer
France, in particular is one of Europe’s heavyweights, as it grows its physical presence of asset administration and asset custody.
France stands strong, with firms such as AxiomSL expanding its European presence to Paris, while OFI Asset Management completed their first transactions in Paris using blockchain last year.
“And there’s also the introduction of the Europe wide TARGET2-Securities (T2S) initiative, which according to Jeff King, head of custody product development at Citi Custody and Fund Services, “has enhanced the asset servicing industry coordination efforts with the formation of working groups such as the T2S Corporate Actions Sub Group (CASG).”
CASG is focused on the drafting and agreeing of common market standards for Corporate Action processing.
T2S is growing in popularity in Europe, especially in the Nordics. Bo Thulin, head of the Nordics for Northern Trust, confirms that Denmark is scheduled to join T2S with DKK in October this year, while Finland has also planned to join, though an implementation date has not yet been announced.
Also in Scandinavia last year, one of the world’s largest Nordic banks, SEB, joined forces with Nasdaq to test and further develop a prototype mutual fund trading platform based on blockchain technology.
And in the Finnish financial market, Municipality Finance implemented Acumen, a treasury solution platform created by Login SA, to manage and automate its operations.
Also in 2017, SIX x-clear, the clearing arm of SIX Securities Services, extended its services to the Nasdaq Nordic cash markets, and offered an interoperable clearing solution for Denmark, Finland and Sweden.
But the Nordics, like the rest of its European neighbours, have been bogged down, not just by MiFID II and GDPR, but also by the Alternative Investment Fund Managers Directive (AIFMD).
Roel Van De Wiel, commercial director for the Netherlands and the Nordic Region at Societe Generale Securities Services, explains “AIFMD and UCITS V all refer to the role of a global custodian and therefore have been challenging regulations”.
And you cannot mention UCITS V, without mentioning UCITS adoptive home and biggest benefactor, Luxembourg.
As of November 2017, The Association of the Luxembourg Fund Industry reported that Luxembourg held over 4,000 separate funds. So it’s no wonder then that Luxembourg is the second investment funds market after the US, representing 9.3 percent of the investment funds market worldwide. As Bellows mentions: “Europe is better placed than most other markets when it comes to asset servicing due to the power of the UCITS brand as it is recognisable and transferable globally.”
Luxembourg has the chance to be the world’s highway into Europe but it is competing with several other major markets for that honour, most notably Germany and Ireland, who withhold a massive physical asset servicing space in Frankfurt and Dublin, respectively.
Although many industry experts think Luxembourg is up to the task of remaining relevant on the global asset servicing stage, could the small country benefit from Brexit? As was said by a panellist at the recent Guernsey Funds Forum, the buzzword surrounding most aspects of Brexit is “uncertainty”.
And as Daron Pearce, CEO of asset servicing for EMEA at BNY Mellon, reflects: “The biggest high-risk factor we are witnessing in financial services is uncertainty, and this is being felt in all sectors and in the wider economy.”
He advises: “Both the future framework of relations between EU27 and the UK, and the transition period towards that future framework, need to be designed in such a way that they minimise systemic risk.”
The little matter of Brexit
At Sibos 2017, an audience poll predicted that Frankfurt, Germany could be set to displace London as a global financial centre after Brexit. Over 45 percent of audience members said they think Frankfurt will be the next big financial centre. Could this possible shift to the German financial hub affect Europe’s financial future?
As we’ve seen, Northern Trust and Liberty Speciality Markets are just some of the big global firms to move their back and middle offices Luxembourg bound, while other big players, such as NEX are planning to move its European Market Infrastructure Regulation (EMIR) platform from London to Stockholm for its trade operations post-Brexit. In terms of location change, another panellist at this year’s Guernsey Funds Forum, suggests there may be a mass movement toward Paris.
He also warned that movement away from London “could break down the fabric of the city of London” and questioned the financial value of the city in the future. He stated in that sense, “Paris and Frankfurt would be delighted to steal our thunder”.
Elsewhere, an ESMA representative at this year’s European Asset Management Conference in Luxembourg stated that the association is “prepared for the UK to become a third party”.
However, Bellows concludes that location may not even matter. He predicts: “Today we work in a 24/7, always-on environment and as long as asset servicers are embracing technology and striving for solutions that will genuinely work for clients, location will become less important.”
He affirms: “[Northern Trust’s] London office remains our regional headquarters for our business in Europe, Middle East and Africa.”
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