The great game
06 July 2016
In the world of network management, challenges are coming from all directions, but the industry came together in Dubrovnik to discuss solutions, and to find ways to adapt to a new European landscape
Image: Shutterstock
Amid political upheaval, regulatory change and the ongoing saga
that is Target2-Securities, Dubrovnik, newly famed as the capital and throne of Westeros, the fictional country in which Game of Thrones is set, may have been the perfect place to draw battle lines and address some of the many issues affecting network management
in Europe.
At NeMa 2016, as in King’s Landing, changes to legislation were a recurring, if not popular topic among attendees, with one panel analysing the ways in which the regulatory onslaught in Europe has led to a change in the way custodians price their services.
In a survey on the evolution of the custody cost model, 71 percent of audience members said that regulation is affecting profitability and pricing, and that their institution is considering increasing its prices.
While a further 18 percent said profitability is affected, but not to such an extent that they are increasing prices, 8 percent said they have in fact already started making these price increases. Only 1 percent answered that regulatory change has not affect profitability at all. One panellist suggested that in the current environment, “you’re delivering custody but it’s not just custody”, adding that what is really going to add value for clients is data—that is, having an exact view of investments and how funds are performing.
Another pointed out that the regulatory burden, and associated cost increases, are showing no sign of slowing down, as markets continue to bring in local sanctions and regulations for foreign investors.
When the audience was asked whether they believe clients will be willing to pay more for custody the results were more evenly split. The most popular answer, with 39 percent of the vote, was that clients
will not be willing to pay more, but that any reduction in price will be very limited.
Almost a quarter, 24 percent, said that prices will increase in all areas, while 19 percent said they believe prices will remain stable. A further 10 percent said the cost of custody will be significantly reduced, and 8 percent said they think customers will be willing to pay more, but only for global custody.
In response to this, one panellist argued that if asset protection and sustainability are to remain an important part of the business, everyone has to accept that the cost of doing business has changed.
Another speaker noted a move towards unbundling of prices, suggesting that the core, underlying product can be relatively cheap, with additional, bespoke ‘extras’ built around it, a system that would allow for different models and different pricing schedules.
Another panellist expanded on this, noting that the rise of financial technology could help clients to tailor their own services, again, through giving them access to more of their own data. This way, a model would exist where net costs are reduced, asset managers can select their own services, and there will be more flexibility in the way custody is priced.
In another session, representatives from the realm of asset management addressed whether their network managers were meeting their needs. In another audience poll, when custodians and sub-custodians were asked what they perceive to be the most important part of their relationship with network managers, 61 percent answered that it was seeing full collaboration across the value chain.
The importance of receiving timely, relevant and real market information was considered the most important aspect by 32 percent of respondents, while 7 percent thought the most important thing for asset managers was to be listened to by global custodians.
However, one panellist, Lisa Martinez of asset manager Capital Group, pointed out that “we’re not even the end clients”, suggesting that it should be a common goal of asset managers and custodians to make sure shareholders get the value they want.
She added that, although it takes a lot of resources, knowledge of client needs is also an important part of the custody service. Specifically, asset managers want someone with regional expertise, and who is available in their time zone to answer questions, she said.
Gretchen Larson of Franklin Templeton Investments noted that collaboration is key to keeping asset managers informed about the markets they’re invested in, noting that passing on an element of local knowledge can be helpful for knowing what is happening, or what is about to happen in a market.
“That is where we look to have the discussions,” Larson said, stressing that with the responsibility for asset safety comes the need for accessing powerful information.
Talk later turned to the Target2-Securities (T2S) project, and wave three of implementation battle plan, scheduled for September. Although this will represent the half-way point of the implementation, panellists agreed that there is still a lot of work to be done to achieve such a significant overhaul, and to reach the level of pan-European harmonisation intended.
Edwin de Pauw, a representative of Euroclear, which is implementing T2S in its Belgian, French and Dutch central securities depositories (CSDs) in wave three, suggested that although the T2S rollout began almost a year ago, the industry is still only in the beginning stages of the story.
He added, however: “When we get beyond the waves we can start to swim in the ocean of opportunities ahead of us.”
Another poll asked audience members to rate the importance of harmonisation in T2S. Almost half, 48 percent, named harmonisation as the project’s biggest benefit, while a further 33 percent said it is as important as T2S itself.
De Pauw warned that custodians should not ignore the benefits that harmonisation brings, suggesting that it will also mean better interoperability between different markets. He added that there are still concerns around harmonising tax and registration processes, and that it will be a challenge to even define standards in these areas.
He suggested that the industry should focus on achieving efficiency in cross-central securities depository settlement before developing anything new. If custodians get too ahead of themselves, this could create additional problems.
“Let’s focus [on getting] to the end of the avenue on which we have started,” he said.
Regarding the future of the T2S network, the European Central Bank’s Dirk Bullman outlined the bank’s ‘Vision 2020’ strategy, which includes working to increase volumes on T2S, and ensuring that the infrastructure is in line with clients’ needs.
Bullman also addressed the increasing hype around blockchain technology but suggested that, although it could be helpful in some areas, it may be wiser to be patient, identifying specific problems and then assessing what could be the best way to correct them.
The easiest fix is not always going to be blockchain, he said, adding: “When you have a hammer, everything looks like a nail.”
Expressing a similar reserve around the blockchain technology, one not usually seen at such events, speakers in a distributed ledger session suggested that the technology is not likely to disrupt the industry too heavily, at least in the near term.
When the audience was asked which custody services are likely to adopt blockchain first, 58 percent of respondents identified settlement services, compared to 13 percent who said it will be asset servicing. However, 28 percent said it will be a different, new service.
HSBC’s Stephen Bayly suggested that blockchain will be adopted in areas that are not currently very automated, and where revamping technology would not mean increasing costs, while Euroclear’s Angus Scott agreed that it will be adopted in areas where there is value to be gained from using it.
Scott suggested this is likely to be in areas where currently data is not shared efficiently, and that through adoption and usage, industry standards will evolve. Firms will “find ways to make it operate, find ways to make it valuable”, he said.
However, the regulatory dragon was to return to the floor, with the audience identifying this as biggest barrier to adoption of blockchain.
In a final audience poll, 49 percent of attendees identified regulation as the biggest ‘blocker’, while 22 percent said their main issue was finding a compelling business case. Security and interoperability were also identified as barriers, receiving 16 percent and 13 percent of the vote, respectively.
Although panellists generally agreed that regulators themselves
have been supportive of blockchain developments, Scott pointed out that there are not currently many concrete use cases for the technology, nor many concrete business strategies for regulators to either approve or reject.
Another barrier to adoption was identified by Bayly, who suggested that, as the technology is still relatively young, “there isn’t a large pool of expertise to draw from”.
Currently, he said, the technology is not in a position to completely change the industry, and that in this regard, firms should be careful not to try to run before they can walk.
The stakes are high and the future unclear, but, network managers are changing with the times and, at least in Croatia, winter is a way off yet.
that is Target2-Securities, Dubrovnik, newly famed as the capital and throne of Westeros, the fictional country in which Game of Thrones is set, may have been the perfect place to draw battle lines and address some of the many issues affecting network management
in Europe.
At NeMa 2016, as in King’s Landing, changes to legislation were a recurring, if not popular topic among attendees, with one panel analysing the ways in which the regulatory onslaught in Europe has led to a change in the way custodians price their services.
In a survey on the evolution of the custody cost model, 71 percent of audience members said that regulation is affecting profitability and pricing, and that their institution is considering increasing its prices.
While a further 18 percent said profitability is affected, but not to such an extent that they are increasing prices, 8 percent said they have in fact already started making these price increases. Only 1 percent answered that regulatory change has not affect profitability at all. One panellist suggested that in the current environment, “you’re delivering custody but it’s not just custody”, adding that what is really going to add value for clients is data—that is, having an exact view of investments and how funds are performing.
Another pointed out that the regulatory burden, and associated cost increases, are showing no sign of slowing down, as markets continue to bring in local sanctions and regulations for foreign investors.
When the audience was asked whether they believe clients will be willing to pay more for custody the results were more evenly split. The most popular answer, with 39 percent of the vote, was that clients
will not be willing to pay more, but that any reduction in price will be very limited.
Almost a quarter, 24 percent, said that prices will increase in all areas, while 19 percent said they believe prices will remain stable. A further 10 percent said the cost of custody will be significantly reduced, and 8 percent said they think customers will be willing to pay more, but only for global custody.
In response to this, one panellist argued that if asset protection and sustainability are to remain an important part of the business, everyone has to accept that the cost of doing business has changed.
Another speaker noted a move towards unbundling of prices, suggesting that the core, underlying product can be relatively cheap, with additional, bespoke ‘extras’ built around it, a system that would allow for different models and different pricing schedules.
Another panellist expanded on this, noting that the rise of financial technology could help clients to tailor their own services, again, through giving them access to more of their own data. This way, a model would exist where net costs are reduced, asset managers can select their own services, and there will be more flexibility in the way custody is priced.
In another session, representatives from the realm of asset management addressed whether their network managers were meeting their needs. In another audience poll, when custodians and sub-custodians were asked what they perceive to be the most important part of their relationship with network managers, 61 percent answered that it was seeing full collaboration across the value chain.
The importance of receiving timely, relevant and real market information was considered the most important aspect by 32 percent of respondents, while 7 percent thought the most important thing for asset managers was to be listened to by global custodians.
However, one panellist, Lisa Martinez of asset manager Capital Group, pointed out that “we’re not even the end clients”, suggesting that it should be a common goal of asset managers and custodians to make sure shareholders get the value they want.
She added that, although it takes a lot of resources, knowledge of client needs is also an important part of the custody service. Specifically, asset managers want someone with regional expertise, and who is available in their time zone to answer questions, she said.
Gretchen Larson of Franklin Templeton Investments noted that collaboration is key to keeping asset managers informed about the markets they’re invested in, noting that passing on an element of local knowledge can be helpful for knowing what is happening, or what is about to happen in a market.
“That is where we look to have the discussions,” Larson said, stressing that with the responsibility for asset safety comes the need for accessing powerful information.
Talk later turned to the Target2-Securities (T2S) project, and wave three of implementation battle plan, scheduled for September. Although this will represent the half-way point of the implementation, panellists agreed that there is still a lot of work to be done to achieve such a significant overhaul, and to reach the level of pan-European harmonisation intended.
Edwin de Pauw, a representative of Euroclear, which is implementing T2S in its Belgian, French and Dutch central securities depositories (CSDs) in wave three, suggested that although the T2S rollout began almost a year ago, the industry is still only in the beginning stages of the story.
He added, however: “When we get beyond the waves we can start to swim in the ocean of opportunities ahead of us.”
Another poll asked audience members to rate the importance of harmonisation in T2S. Almost half, 48 percent, named harmonisation as the project’s biggest benefit, while a further 33 percent said it is as important as T2S itself.
De Pauw warned that custodians should not ignore the benefits that harmonisation brings, suggesting that it will also mean better interoperability between different markets. He added that there are still concerns around harmonising tax and registration processes, and that it will be a challenge to even define standards in these areas.
He suggested that the industry should focus on achieving efficiency in cross-central securities depository settlement before developing anything new. If custodians get too ahead of themselves, this could create additional problems.
“Let’s focus [on getting] to the end of the avenue on which we have started,” he said.
Regarding the future of the T2S network, the European Central Bank’s Dirk Bullman outlined the bank’s ‘Vision 2020’ strategy, which includes working to increase volumes on T2S, and ensuring that the infrastructure is in line with clients’ needs.
Bullman also addressed the increasing hype around blockchain technology but suggested that, although it could be helpful in some areas, it may be wiser to be patient, identifying specific problems and then assessing what could be the best way to correct them.
The easiest fix is not always going to be blockchain, he said, adding: “When you have a hammer, everything looks like a nail.”
Expressing a similar reserve around the blockchain technology, one not usually seen at such events, speakers in a distributed ledger session suggested that the technology is not likely to disrupt the industry too heavily, at least in the near term.
When the audience was asked which custody services are likely to adopt blockchain first, 58 percent of respondents identified settlement services, compared to 13 percent who said it will be asset servicing. However, 28 percent said it will be a different, new service.
HSBC’s Stephen Bayly suggested that blockchain will be adopted in areas that are not currently very automated, and where revamping technology would not mean increasing costs, while Euroclear’s Angus Scott agreed that it will be adopted in areas where there is value to be gained from using it.
Scott suggested this is likely to be in areas where currently data is not shared efficiently, and that through adoption and usage, industry standards will evolve. Firms will “find ways to make it operate, find ways to make it valuable”, he said.
However, the regulatory dragon was to return to the floor, with the audience identifying this as biggest barrier to adoption of blockchain.
In a final audience poll, 49 percent of attendees identified regulation as the biggest ‘blocker’, while 22 percent said their main issue was finding a compelling business case. Security and interoperability were also identified as barriers, receiving 16 percent and 13 percent of the vote, respectively.
Although panellists generally agreed that regulators themselves
have been supportive of blockchain developments, Scott pointed out that there are not currently many concrete use cases for the technology, nor many concrete business strategies for regulators to either approve or reject.
Another barrier to adoption was identified by Bayly, who suggested that, as the technology is still relatively young, “there isn’t a large pool of expertise to draw from”.
Currently, he said, the technology is not in a position to completely change the industry, and that in this regard, firms should be careful not to try to run before they can walk.
The stakes are high and the future unclear, but, network managers are changing with the times and, at least in Croatia, winter is a way off yet.
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