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Domestic custodians come to grips with a fast changing enviroment
Over the past decade, major organisational and technical changes have been introduced as a French markets geared up for greater efficiency
These come on top of a 15-year drive that completely transformed the securities industry in France. Milestones ranged from the dematerialization of securities to development of a fully electronic DVP securities settlement system (Relit), plus the introduction of real-time cash settlement systems (CRI / PNS & TBF for, respectively, real-time net and gross settlement) with automated collateralisation of securities, the merger of French depositories for all debt instruments, and a new real-time DVP securities systems designed to handle cash settlement systems.
These changes were driven by demand for increased market efficiency and competitiveness. They also reflect the implementation of recommendations by International Securities Working Groups, including the well-known Group of 30, as well as efforts to prepare domestic circuits and procedures for Europe's switch to the new single currency.
Early developments such as dematerialization and Relit forced many small institutions to revamp their back-office structures, generating financial strains that increased their willingness to consider new cost-sharing solutions. As a result, a range of options emerged in the early 1990's, from systems outsourcing to private labelling.
With hindsight, the cost in terms of resources was actually rather limited at this early stage, especially when compared with the amounts later spent to gear up for the euro switchover and testing/developments for Y2K compliance.
Yet as the years passed, many banks came to view the seemingly endless stream of resources allocated to support back-office operations as a drain on competitiveness. And in the late 1990's, a new wave of back office outsourcing and private labelling appeared.
Over the same period, French Bourse authorities restructured brokerage activities into three lines of business--trading, clearing and custody--each of which could be exercised separately.Several brokers opted to outsource their clearing and custody activities to service providers, a trend that gathered strength following
implementation of the European directive on financial services, which led to the creation of remote members in other countries.
Changes faced by the securities industry in the years ahead will be even more wide-reaching, incorporating as they do fundamental upheavals in domestic structures and the rapid development of cross-border trading.
Against this backdrop, there are three major forces driving deployment of industry participants and the emergence of new service providers: globalisation of markets, real-time / STP standards and new communication technologies.
One direct spin-off is that traditional custodians will be forced to reposition themselves with regard to cross-border settlement circuits. More specifically, the distinction between "domestic" and "regional" custodians is set to disappear as pan-European depository organisations begin handling cross-border transactions from a single entry point.
New communication technology
The pace of implementation across all three fields-trading, clearing and custody-is uncertain, however, since participants are likely to press ahead at different speeds. Yet to remain competitive, custodians must be able to take sudden surges in investment in their stride. And it is clear that developing the capacity to do so will lead to increased strains up front, as resource allocation planning tightens up.
The result is likely to be greater specialization, with a decrease in the number of traditional custody/clearing agents and the emergence of securities processing specialists dedicated to servicing other institutions. These specialists will give banks and brokers access to a European depository supplying all or part of the services needed for indirect participation using an approach similar to outsourcing of brokerage operations, with which they have established a direct link.
To succeed in this business, service providers will need at least two skills:
Expertise in the legal and fiscal environment of stocks traded, since these domains will remain nation-specific for a while even as other barriers crumble
The ability to adapt in-house resource organisation and allocation continuously to take into account changes in market structures and clients' needs.
By the same token, successful service providers will have versatile technology platforms able to deliver bespoke solutions to a variety of client profiles: global custodians dedicated to pension and mutual funds, private banking institutions and brokers.
The range of services on offer will be as competitive as possible and cover all cash and securities circuits in Europe: trade execution, clearing, fund transfer and cash management facilities.
CCF/NATEXIS BANQUES POPULAIRES
case in point
CCF's decision was driven by its analysis of trends shaping the European market, and of the level of investment required to remain profitable in the custody business.
Management came to the conclusion that the bank's operations were too small to generate the level of revenues-and thus resources-required to maintain service at the level expected by clients.
CCF's choice of Natexis Banques Populaires as partner was based the latter's acknowledged position as France's best-qualified expert in outsourcing services, including technology capable of delivering the service required by CCF.
For Natexis Banques Populaires, CCF was a perfect match for very similar reasons: based on the same analysis of future trends, it plans to use market leadership at home as a springboard for expansion in Europe. The acquisition of CCF's business in a spirit of partnership offered an excellent opportunity to strengthen its position in subcustody, where CCF was a reputed player.
In any event, CCF's operations and marketing teams have brought with them a sizeable client base and market expertise that can be used to shape Natexis Banques Populaire products and services to meet changes in the market.
by Jacques Blancard
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