on el III s a B t of mpac i e ng h T leari c t d n e n em sa anag bank M n o s sacti ution Tran instit MIR ean E ices p v o r r e S Eu y for ublic a p D – D aper es een P r s t G ul idelin s u EU e g r e ion llenc ultat e s c n x o E c ng n ive o venti t n i c e e p R pers man r e G A II ency Solv on Pensi m u i ank Prem BeFr n o i ut Instit
KAS Selections KAS Selections is a quarterly newsletter from KAS BANK N.V. Although the information in this issue is drawn up with the utmost precision, no rights can be derived from it. Volume 18, Issue 2, July 2011
Editorial Governance. In discussions surrounding pension schemes, this word crops up with clock-like regularity. The future and tenability of our pension schemes (and of the pension schemes in other European countries) does not solely depend on a different way of financing, increased or constant pension contributions, a higher pensionable age or indexed payments. The
Contents: Transaction Management Services 3 EU Green Paper – public consultation results 4 A German perspective on Solvency II 6 Laurens Vision 8 Personnel notes 9 Client Wins 9 Premium Pension Institution BeFrank 10 The impact of Basel III on banks and clearing institutions 15 D-Day for European EMIR guidelines 18 Global Custody Network News 20 Reinventing Excellence 22
administrative set-up of the pension funds is just as
Comments on this issue, suggestions for future articles and mailing list requests should be addressed to:
our iPad app. But also by providing speakers at seminars or by organising
Netherlands Clearing & Banking Services Associate director: jeroen.duijn@kasbank.com
Whitepaper on pension fund governance, in which we discuss the challenges
important. What do they or, better said, what do trustees do to gain and maintain control? How do they manage risk? Who is responsible for assessing the asset manager’s mandates? These are all significant questions to ensure that the pension promise made to active participants and pensioners is actually fulfilled. KAS BANK often applies its expertise in the pursuit of answers to these questions. Practically, by providing a broad range of risk products, including workshops on this subject. In this context we have recently published our first to which pension fund managers are exposed in the governance arena, and how independent securities services providers can support them to establish
Fund & Investment Services Associate director: sicco.plesman@kasbank.com
their compliance and risk functions. You can download the Whitepaper via
Institutional Services Associate director: tamis.stuker@kasbank.com
We would like to exchange thoughts with you on this subject, for which
Sub & Core custody Associate director: erwin.hoedeman@kasbank.com
www.kasbank.com. purpose we will contact you shortly. In this edition of KAS Selections we will update you on Basel III, Solvency II
Sales & Business development (S&BD) Head of S&BD: mark.van.weezenbeek@kasbank.com
and the Green Book from the European Committee covering pensions in
German Branch Managing director: frank.vogel@kasbank.com
particular. By outsourcing the counterparty risk of a securities transaction to
KAS Investment Servicing GmbH CEO & Managing director: joerg.sittmann@kasbank.com
without having to raise additional capital. And of course Laurens Vis gives his
UK Branch Director, Sales and Bussiness Development: peter.rouwen@kasbank.com Translation: Interpret Tekst & Vertalingen Text editor: Matthew Binnington Editor: Carla Boogers KAS BANK N.V. Marketing & Communication P.O. Box 24001, 1000 DB Amsterdam The Netherlands +31 20 557 5812 carla.boogers@kasbank.com Graphic Design: Ebbenhorst Design, De Meern Print: KAS BANK, Document & Systems Services
Europe. We will also consider Model B, which is paramount to brokers in a third party, the broker can focus on the further growth of their business inimitable vision on developments in the pension and securities industries. It is beyond dispute that the pension industry will face numerous changes. One of these is the arrival of Premium Pension Institutions (PPIs). BeFrank is the first Dutch PPI that is ready to start. Founders BinckBank and Delta Lloyd Asset Management and Folkert Pama, director of BeFrank, explain this initiative in an article on PPIs and KAS BANK’s role as Fund Agent of the new investment funds. We are looking forward to receiving your feedback on the subjects in this edition of KAS Selections. Sikko van Katwijk KAS BANK Managing Board
Transaction Management Services In the aftermath of the financial crisis, the broker
Benefits
community in Europe is facing changing regulatory
By outsourcing the counterparty risk, the broker is able to
requirements (MiFID II and Basel III) as well as post-trade
further grow their business without having to increase
infrastructural changes at both the central counterparty
their capital. At the same time, the broker’s clients and
and central securities depository level. They must deal with
counterparties are assured that the Model B provider
an increasingly complex post-trade landscape, resulting in
becomes the counterparty of the transaction. The
an upward pressure on their internal and external costs. At
associated risk for the Model B provider will be mitigated
the same time, end investors are becoming more and more
via a framework of trading limits and minimum fixed
aware of the need to mitigate the counterparty risk on the
deposits. At the same time, by outsourcing the back- and
execution side.
middle office to the Model B provider, the broker no longer has to deal with day-to-day operational issues and can therefore focus entirely on their core business.
Transaction Management Services KAS BANK has developed an integrated solution combining Model B clearing and settlement with a back-office Peter Rouwen
outsourcing service for the Model B broker. With
Director, Sales and Bussiness
KAS BANK’s Transaction Management Services you will
Development UK
have direct access to all the major European markets and MTFs. We facilitate both trading support and settlement
As a result, a trend has developed in the market whereby
processing for on- and off-exchange transactions. We also
management of the counterparty risk and the full back-
offer a modular back-office solution that includes deal
office are outsourced to a specialist provider in the
capture, settlement enrichment, data management, trade
clearing and settlement arena. Such an arrangement
accounting and provides complete cash & stock records.
already exists in the UK, commonly known as Model B, but
In addition, KAS BANK will provide transaction reporting
the same principles can also be adopted in the continental
directly to the regulatory supervisors.
European markets.
By using KAS BANK’s Transaction Management Services, brokers will be able to outsource counterparty and
Model B
operational risk, while at the same time benefiting from a
Under a Model B arrangement, the counterparty risk of the
variable cost structure.
transactions introduced by an agency broker on behalf of
Should you wish to receive further information on our
its (institutional) clients is handled by the Model B
Transaction Management Services, we would be happy to
clearing / settlement provider.
explain how we can support your business.
In other words: the Model B provider offers a ‘tradingservice’ (via a ‘give-up arrangement’) to another broker. The give-up is achieved by the introducing broker citing the Model B provider’s settlement account as the settling account at the time of trade execution.
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EU Green Paper – public consultation results In KAS Selections issue no. 3 of September 2010 we covered
reforms to support sustainability of public finances and
the European Commission’s Green Paper ‘Towards adequate,
adequacy of pensions, with higher retirement ages a
sustainable and safe European pension systems’. The
necessity.
purpose of the Green Paper was to initiate a European
Most respondents conclude that insurance companies and
debate on the key challenges concerning pensions, and how
pension funds offer different pension products and
the EU can best support the efforts of member states to
therefore they need different rules. Many underscored that
ensure adequate, sustainable and safe pensions for their
changes to the rules for funded pension schemes should
citizens both now and in the future. The Green Paper was
not raise the costs of operating such schemes. Some
followed by a public consultation due to report in November
stakeholders support the idea in the Green Paper to
2010.
restrict the pensions label to products with predefined
The Green Paper on pensions has furthered the debate over
characteristics, and a clear distinction between pensions
how pension funds should be regulated, including solvency
and other financial products should be drawn in any
rules, and the role insurance companies should have in
current and future legislative initiatives.
private retirement provision.
The last question of the consultation paper: “Should the creation of a platform for monitoring all aspects of pension
Public consultation
policy in an integrated manner be part of the way
The European Commission received almost 1,700 responses
forward?”, was carefully supported.
from across the EU including around 350 from
While all EU member states face major challenges in the
representatives of the pensions industry, business and
pensions arena, notably due to an ageing population,
trade union organisations, civil society, national
respondents generally expressed the view that there is no
parliaments and member state governments. Results from
‘one-size-fits-all’ solution for pension policies and pension
the public consultation highlighted the need for pension
scheme design, given the heterogeneity of the EU
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economies and diversity in this policy field in the EU. Notwithstanding this, because of the different circumstances in which member states find themselves, the sharing of best practice, peer reviews, collection of statistics and the identification of indicators at the EU level are widely supported.
Towards an integrated pension policy? Some view favourably a deepening of policy coordination and implementation at EU level and the creation of a new platform, a European Pension Platform, which would monitor all aspects of pension policy in an integrated manner, in line with the approach adopted by the Commission in the Green Paper. The European Parliament and other respondents share the opinion that such a platform should consider all aspects of pensions and convey information from public authorities, social partners, civil society and the pension sector with the aim of highlighting best practice and comparing the situations of member states and the living standards of retired people using a raft of indicators. This should, however, be
member states, believed it would be appropriate to update
achieved in compliance with the subsidiarity principle and,
current minimum requirements for disclosure of
to avoid overlap, take into account the existing advisory
information on any pension product, and that this must be
committee on supplementary pensions (the Pension
accompanied by promoting financial education. At the
Forum).
same time others suggested that it would be useful to
However, a more common view is that the competence on
provide a default option for people who do not have the
pension policy should remain at the member state level
knowledge or confidence to make their own investment
and that existing coordination frameworks are satisfactory
choices. The European Commission will present a follow up
at the EU level, notably the Open Method of Coordination,
from this consultation after summer 2011, including
but also the Pension Forum and more broadly the Stability
possible legislative initiatives at EU level.
and Growth Pact and the Europe 2020 strategy. Nevertheless, a large proportion of respondents felt that there was room for improvement within the existing coordination structures.
Further results In general many respondents, including a number of
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A German perspective on Solvency II Solvency margin requirements have been in place since the
final will cover Disclosure requirements. The first sets out
1970s, were reviewed in the 1990s through Solvency I and
the requirements for the calculation of capital which will
are due to be overhauled with effect from 1 January 2013 as
have to be held against market risk, the second sets out
a response to the lessons of the financial crisis; that
the requirements for the governance and risk-management
insurance companies were not able to predict and prepare
of insurers and the third pillar covers supervisory reporting
for the worst as well as they first thought.
and disclosure.
The magnitude of this European regulation is not to be
Germany
underestimated. For the first time EU member states will
So what impact will Solvency II have in Germany? The
have economic risk-based solvency requirements thrust
answer appears to be not as great an impact as compared
upon them which, although this makes good sense, will
to other countries in the EU. This is thanks to the strength
cause a few headaches. In a nutshell, the idea is that
of the German market enjoyed by German insurers.
managers should have an exact understanding of the risks
Insurers are well-capitalised, some believe excessively so,
in their business, in order that resources are used more
which leads to the danger of lulling some companies into
efficiently so that better decisions are made – which is
a false sense of security. It may be easy not to worry
theoretically what should be happening now.
about compensating for a shortfall of capital, however management issues remain a challenge for many firms;
The regulation is split into three “pillars” of regulation
reporting, checks and balances procedures will all need to
and has therefore been compared to Basel II. The pillars
be put into place in order to satisfy the second and third
are: Quantitative requirements, Supervisor review and the
pillars of regulation. What makes this currently more of a
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challenge is that insurance firms simply do not know what
requirements and mutually develop a strategy on how best
the regulators will want to see come January 2013. We
to support and cope with the upcoming changes.
have an idea but no concrete guidelines. To this end, so-
In Germany, we have a proven track record in successfully
called Quantitative Impact Studies (known as QISs) were
servicing the insurance sector. KAS BANK can build on that
established. These were tests that insurers carried out that
expertise and become a trusted “Solvency II advisor”, with
enabled them to see how they will cope with the financial
a range of products and services that can be a strong
demands of Solvency II. Even though these do not set out
foundation for the three pillars supporting the Solvency II
the actual demands of the regulator, they can be used as a
roof.
guideline and one which approximately 75 percent of insurers in Germany have taken part in.
KAS BANK en Solvency II What is KAS BANK doing in preparation for Solvency II? KAS BANK and the KAS BANK German Branch in Wiesbaden have joined forces and established working groups, which are busy carrying out fact-finding missions to investigate the effects of Solvency II on KAS BANK and more importantly on our clients. We continue to approach our clients pro-actively, begin a dialogue, discuss future
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Laurens Vision interest of society at large more effectually than when he really intends to promote it! And he duly observes that, “It is the maxim of every prudent master of the family, never to attempt to make at home what it will cost him more to make than to buy.” And so it has been to date. But we call this ‘outsourcing’ in our corporate life and are reminded ‘not to try this at home’ in our private life. In the pension industry we find the role of the pension fund trustee at this corporate and private cross-roads. Tossing and turning over what to outsource and what not. And while the industry is flooded with providers who praise their merchandise, it is the trustee who remains behind holding the one thing that cannot be outsourced:
Laurens Vis, Managing Director KAS BANK UK
the responsibility to provide the money for the According to Adam Smith, every man is rich or poor
‘necessaries, conveniences and amusements of human life’
“according to the degree in which he can afford to enjoy
(long) after retirement.
the necessaries, conveniences, and amusements of human In doing so, trustees must put the best interests and
life”.
financial future of the beneficiaries first, while relegating In the days of Adam Smith it was labour that represented
their own personal interests and views. True, the Prudent
the original basis for the purchase of all these good and
Man Rule has largely been forgotten in the financial
wonderful things. But under his watchful eye, labour
industry at large, but still stands firm in the pension
proved not to be the real measure of the exchangeable
industry.
value of all commodities. As Adam Smith observed, there could be more labour in an hour’s hard work than in two
And help is always at hand. Trustees must obtain and take
hours of easy business. Indeed, the “different degrees of
heed of proper expert investment advice. Without simply
hardship endured, and the ingenuity exercised, must
following suit, that is. Such as putting all their eggs in
likewise also be taken into account”.
one basket, which holds true for the basket when the eggs are already there as well as for the hen producing them!
An accurate measure was, however, hard to find and ‘some’
Success attracts high acclaim, failure the risk of being
allowance was made for supposedly different sorts of
sued for breach of trust. Unlike in banking of course,
labour. A distinction brought about by the ‘haggling and
where the tax-payers rush in to bail out the bankers who,
bargaining’ of the market.
having wasted all the eggs and more, then carry on as if nothing has happened.
A notion that Adam Smith, after introducing the factor of capital in his Inquiry into the Nature and Causes of the
For now, let us examine the eggs and baskets conundrum a
Wealth of Nations (1776), famously enriched with the
bit further. Expressed in monetary terms, there are many
concept of the Invisible Hand. Because, by pursuing his
eggs but a surprisingly small number of baskets (never
own interest, the individual ‘frequently’ promotes the
mind the hens for the moment). There is more than one
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Personnel notes hundred trillion worth of assets invested in the global markets of which 80 per cent is to be found in the vaults
Mark Schilstra has been appointed to lead KAS BANK’s
of only two hands full of global providers, otherwise
Client Management team with effect from 1 August 2011.
known as the runners and riders of the global markets.
Before joining KAS BANK, he was employed at ABN AMRO
Although most of the running and riding is done by local
and Fortis as Head of Operational Risk and Director,
sub-custodians or country specialists.
Central Risk Management respectively.
But the global providers do not sit back and relax, because
Egon Tibboel has been appointed Head of Marketing and
they, as competent professionals are supposed to do,
Commercial Development with effect from 1 August 2011.
monitor the qualifications and solvency of the subcustodian. As such the ‘global basket’ ensures that the
As of 15 August Tamis Stuker will be appointed Head of
eggs do not deteriorate or perish in the underlying
Institutional Services.
baskets, while not insuring this as such. Jeroen Duijn was appointed on 1 June as Head of For this to happen we have to go one basket further,
Clearing and Banking Services.
namely to the ultimate basket called the national or central depository where the co-ownership of the eggs is
As of 1 August Mark Stoffels has been appointed Head of
sorted under national law on behalf of the hens who have
Institutional Management Services (IMS).
produced them and where any lost and stolen eggs are At the same date Remko Dieker will be appointed to Head
replaced against the face value of the egg.
of Corporate Strategy. There is bad news for the hens in prospect though. Increasingly, these depositories are becoming completely dematerialised and only promise the hens (which goes also for the non egg-laying species) that their eggs are there but will only be recorded in a book-entry format. And there is more. In an ultimate attempt to make the
Client Wins
European market a better place for us all, a system development called Target to Securities (T2S) was
St Bedrijfspensioenfonds Rijn- en Binnenvaart Risk monitor, asset administrator and custody
launched to link all of Europe’s central depositories to shift the eggs happily throughout Europe irrespective of
Beaufort International Custody clearing and settlement
which individual basket the hens will choose as their ‘home-base’. And so, as you can imagine, the introduction
Lek Securities Custody and settlement
of T2S has been somewhat slow. Because not only does Smith’s invisible hand seem to have
Ons Vermogensbeheer Order execution, Custody and settlement
lost its magical touch on the utility side of the market, but also, as the saying goes, you cannot make an omelette
Coronation Fund Managers Custody, settlement and treasury
without breaking eggs. And this is precisely what the depositories of Europe are afraid of. For the sake of their own hens, of course.
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Best of both worlds
Premium Pension Institution BeFrank At the beginning of July 2010 Delta Lloyd and BinckBank
How did the cooperation between Delta Lloyd
announced their cooperation in the pension market and
and BinckBank begin?
founded BeFrank, the first Premium Pension Institution
Walgemoed: ”Delta Lloyd and BinckBank are both listed
(PPI) in the Netherlands. Since 1 January 2011, PPIs have
organisations. The senior management of both
been able to act as executing parties of defined contribution
organisations meet regularly. During these meetings they,
schemes for employers across Europe. KAS BANK supports
among other things, consider the future of the pension
the Dutch pension sector in setting up PPIs by providing
market. Based on their expertise both parties have their
services relating to securities, administration and risk
own view on the future. That is how it all started.”
1
management, for example by fulfilling the custodian function (please refer to KAS Selections, April 2011). Peter
Pama: “At the end of 2008, beginning of 2009,
van den Dam (Delta Lloyd Asset Management), Folkert
exploratory conversations were held about a possible
Pama (BeFrank) and Joost Walgemoed (BinckBank
cooperation in the area of the PPI. There was an
Professional Services) explain the working method and
immediate click when it appeared that the ideas of both
philosophy of BeFrank.
organisations regarding the pension market corresponded.
V.l.n.r.: Peter van den Dam, Hoofd Corporate Development Delta Lloyd Asset Management, Folkert Pama, CEO van BeFrank en Joost Walgemoed, directeur BinckBank Professional Services
1 BeFrank focuses on the execution of pension schemes for large organisations (with over 100 employees) and pension funds with a collective pension based on an available contribution scheme. BeFrank provides a full online execution of collectively available contribution schemes with individual investment options.
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Offensive Lifecycle
Risik
Neutral Lifecycle
Defensive Lifecycle
Age: 21
45
50
55
65
Ideas were then converted into concrete plans. In 2009, a
Furthermore, we also determined the current discussion
letter of content was signed and product development was
items. These particularly concern making or not making
started. On 1 July 2010, the legislative proposal regarding
obligatory investments in home stocks, i.e. the choice
the PPI was adopted in the Dutch Lower House after which
between active and passive investing. We do not want to
we announced our cooperation. The PPI was new to the
restrict our clients, but we wish to provide them with
market, which gave us a headstart over the competition.”
options.”
Walgemoed: “Over 18 months ago, we started developing
What was the most significant motive for
the platform for the securities side as well as the pension
setting up the joint venture?
administration. We particularly considered what the
Van den Dam: “Our motive is based on a strategic
pension product should be like in the future. This implies
perspective. We have observed that providers of
options for both the employer and employee,
investment pensions in the pension market are
transparency, lowest possible costs and an online service.
experiencing difficulties with the product or the execution thereof. Furthermore, innovation in the pension industry is limited. We also observe that the indignation among
Joost Walgemoed is Director of
employers and employees about how pensions are dealt
BinckBank Professional Services.
with in the Netherlands is increasing. We believe there is
Professional Services provides
sufficient space for a different approach and the
securities services/solutions to
possibility to share our vision on pensions. And that is by
over 100 professionals in the
providing a transparent and accessible product with a
Netherlands and Belgium. Joost
simple structure, low costs and real-time insight for the
Walgemoed and Folkert Pama –
participants. By removing the complexity we have created
together with their teams – have invented and
simplicity.”
developed BeFrank. Now that BeFrank is ready to launch, Professional Services will support BeFrank as
Pama: “As PPI we provide investment options on both
supplier and partner.
employer and employee level. The employer determines the extent of optionality of the employee: none, restricted
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of BeFrank. We have set up three funds in the risk Peter van den Dam, is Head of
categories offensive, neutral and defensive. In the future,
Corporate Development and
participants will probably require funds that meet the
within Delta Lloyd Asset
wishes and values of the investor. For example, green
Management responsible for
investments. Furthermore, we have observed an increasing
corporate development of
demand for socially responsible investing. At Delta Lloyd
investment funds. Van den Dam
Asset Management socially responsible investing has
has been employed at Delta Lloyd
already been structurally embedded in our investment
Asset Management since 1997. In this period he has
policy. We do not invest in organisations that do not meet
held different positions. In his current role he is
corporate social responsibility criteria. That is why we
closely involved in significant strategic projects at
have drawn up exclusion criteria, which are based on,
Delta Lloyd Asset Management.
among others: – Sustainalytics, an international institute for durability investigation, which publishes a list of organisations where controversial weapons are produced and traded.
or extensive. The employer also determines the choice between actively and passively managed funds. No
– United Nations Global Compact Principles. Organisation
investment option implies that the employee enters a
that asserts human rights, working conditions,
neutral life cycle. Restricted options mean that the
environment and anti-corruption.
employee can choose, within the life cycle, offensive,
– United Nations Principles for Responsible Investment
neutral or defensive investments. In case of extensive
(UNPRI). This international and strongly growing group
options the employee can also decide to leave the life
of investors dedicates itself to the integration of
cycle to invest in the investment funds themselves. These
issues relating to environment, society and good
funds are selected on the basis of the same criteria as
corporate governance in their investment policy.”
other investment funds in the life cycles: transparency, low costs and good tradability. BeFrank does not receive compensation from the funds. We do not use kick-back
Folkert Pama is CEO of BeFrank.
fees and must earn our money through the execution.”
With a long career in the pension industry Folkert Pama can be
Where and how do Delta Lloyd and
called an expert. After he started
BinckBank complement one another?
his career at BEON Pensioen &
Walgemoed: ”Delta Lloyd has broad expertise in the area
Vermogensbeheer, where he
of pensions, the core business of BinckBank is securities
learnt the business, he made the
and making online investments by means of an ICT
switch to ABN AMRO where he advised large
platform. These areas of expertise can be perfectly
organisations on the set-up and execution of pension
combined in the PPI. The platform has been realised, the
schemes. Since ABN AMRO Verzekeringen formed a
clients are waiting and as soon as the required licenses
joint venture with Delta Lloyd, Pama has been busy
from the Dutch Central Bank (DNB) and the Netherlands
converting that entity into a pension insurer.
Authority for the Financial Markets (AFM) have been
Approximately 2.5 years ago he made the switch to
received we can start servicing them.”
Delta Lloyd Levensverzekeringen where he was responsible for a number of strategical projects, which
Van den Dam: “Because of our cooperation DLAM was
became the first step towards BeFrank.
triggered to set up three new funds that fit the life cycles
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How do you look back upon the past period?
BeFrank has been nominated for the
Pama: “Now that we have prepared the products and
Financial Services Award 2011 for the Golden
services we are very eager to start. In past months we
Shield in the category ‘Pension product of
have had intensive consultations with the Netherlands
the year’.2 Why have you been nominated ?
Authority for the Financial Markets (AFM) and the Dutch
Pama: “Thanks to the quality and distinguishing
Central Bank (DNB) as supervisory institutions on the PPI.
characteristic of our product and because we, like all other
The PPI is a new financial entity with which the
nominees (Avéro Achmea, Zwitserleven and Brand New
supervisory institutions do not have any experience. In
Day), focus on client interests. It would be a great honour
case of market access the interpretation of the new
to receive the award and we will do our utmost to win it.
legislation is thoroughly investigated. This is a paramount
The Golden Shields are like the Oscars of the financial
process, however I prefer to devote this energy to our
services industry.”
clients.”
In these turbulent times risk management is What is the future vision of BeFrank on the
a significant issue, as are transparency and
PPI market?
communication with the participants. What
Walgemoed: “In the future we plan to admit other PPIs to
approach will BeFrank choose with regards
our platform. They will have their own management,
to its participants?
however BeFrank will be responsible for the
Walgemoed: ”In the first place it is the duty of the
administration. However, we first wish to gain sufficient
employer and their advisers to explain that a PPI is a safe
experience in the market. Our platform is scalable and
method to build up pension contributions. We aim to
suitable for white labeling. In the end it is all about
provide clear information about the product. A PPI is not
sufficient volume. In the future we will certainly face a
allowed to take insurance risks; these risks are placed with
price war that we must try to survive. BeFrank sets high
Delta Lloyd.”
requirements and aims to become and remain market Pama: “BeFrank has appointed reputable asset managers
leader.”
that are under the supervision of the Netherlands
What roles do BinckBank and Delta Lloyd
Authority for the Financial Markets (AFM). The risk in the
play?
PPI is restricted for the participant, for example in terms
Pama: They fully support our ambitions. Both parties have
of bankruptcy risk. However, the participant is liable for
great distribution strength and are prepared to invest in
the investment risk regarding the type of pension scheme.
BeFrank. The platform is set up in such a manner that
That is where we have a duty of care as administrator.”
growth is taken into consideration. Not only as to IT but also in terms of governance. However, it is paramount that
Van den Dam: “BeFrank uses the life cycle and technical
you provide a very good product. Therefore we believe that
solutions like the pension stabilisator, which manages the
client satisfaction is paramount, as satisfied clients are
interest risk within the life cycle. The participants can use
the best ambassadors you can wish for.”
our forecast tool to make an online calculation of the expected return of the portfolio, as well as the expected pension on the expiry date.
2 The Golden Shields are an initiative of Kluwer and For All Finance. They are awarded to organisations or individuals that have been indisputably shown to belong at the top of their disciplines within the financial industry and that focus on the interests of their clients.
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We provide employers and employees with full insight into
scheme, we will not walk away, however we first wish to
all investments and cash flows, which makes our product
focus on the Dutch market. Don’t forget that you must
completely transparent. Each pension euro is invested.
comply with the local social and labour-law related
Execution costs, administration compensation and possible
legislation during the execution, which requires a
custody fees are paid by the employer. These costs do not
considerable amount of expertise. I actually don’t see a
form part of the pension contribution, which enables us to
foreign party being able to meet our Dutch regulations
provide transparency to the employee.”
that easily. But BeFrank would be the pre-eminent party to provide
What is the vision of BeFrank and/or
international services. We currently have a securities
initiators with regards to a pension
platform which can be serviced from a window, which is
custodian?
unique.”
Pama: “BeFrank has chosen the construction of an investment organisation with an underlying PPI. The PPI has outsourced all activities to the investment
KAS BANK as pension custodian
organisation, as a result of which the PPI acts as
KAS BANK considers the Premium Pension Institution
depository. In our specific case we do not deem it
(PPI) an excellent opportunity for the Dutch pension
necessary to appoint a separate pension custodian. The
sector to raise its profile internationally. To support
appointment and/or set up of a pension custodian role is
the PPIs in expanding their business we have
the specialisation of the fund manager.”
developed a new service for PPIs: the pension custodian.
KAS BANK acts as Fund Agent for the new
To prevent the ‘co-mingling’ of pension assets, it is
investment funds of Delta Lloyd Asset
recommended that the PPI segregates these, for
Management. What were the principal
which an independent pension custodian is needed.
reasons for using this KAS BANK service and
The appointment of a pension custodian also meets
how is the cooperation progressing?
the PPI’s need for independent supervision,
Van den Dam: “We have been working with KAS BANK for
transparency and risk management.
a long time now. Since 2007, KAS BANK has been
We combine both functions in our new pension
fulfulling the role of Fund Agent for the listed Delta Lloyd
custodian service. In this way KAS BANK contributes
investment funds. We are very pleased with their service
to being ‘in control’ of the PPI and subsequently
provision. KAS BANK also acts as Fund Agent for the new
improves the market position of the PPI.
funds of BeFrank. The orders of the BeFrank funds are provided by BinckBank, which keeps the entire process as simple, uniform and cheap as possible. Of course it is also KAS BANK’s ambition to act as Fund Agent for these funds.”
A PPI has no borders. What are your international ambitions? Pama: “We certainly have the ambition to operate internationally, but we first want to prove what we are capable of in the Netherlands. With the approval of the Dutch supervisory institutions we will also obtain a European passport. If a client approaches us for a foreign
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The impact of Basel III on banks and clearing institutions Increased capital requirements, increased liquidity and
and the equity capital, the so-called leverage effect. In
increased supervision for financial institutions. This is a
addition, banks must also have a capital buffer of 2.5 per
brief summary of the most significant lessons learnt from
cent. At the end of 2018, an additional cyclical buffer of
the credit crisis in 2008. The capital requirements laid down
0–2.5 per cent will be added.
in Basel II appeared to be insufficient to thoroughly identify the risks that banks run. With this, the discussion about
The equity capital of banks must be strengthened.
new capital requirements received a new impulse. On
Furthermore, the quality requirements for Tier-1 capital
12 September 2010, the central banks and supervisory
must be tightened. Not all capital types used in the past
institutions reached an agreement with Basel III. The most
will qualify. This means that many banks will have to start
significant objective: create higher capital buffers to avert
saving to be able to comply with the asset requirements.
the danger of banks collapsing in the future. Furthermore,
The expectations are that European banks in particular will
increased supervision and stricter requirements will be set
have to issue many additional shares to obtain the desired
on risk management and the hedging of risks. What impact
relation between their equity capital and capital on loan.
will Basel III have on the banking sector in general and for
KAS BANK, with a Tier-1 ratio of 21 per cent on average
KAS BANK in particular?
over 2010, already amply complies with the liquidity requirements of Basel III.
Banks will have from 2013 to 2018 to increase the percentage of equity capital consisting of regular shares,
The underlying goal of Basel III is for banking to become
the Tier-1 ratio, from 2 to at least 4.5 per cent. In
less risky under the new regulations, and for the
economically bad times this obligatory buffer will be
consumer, private consumers in particular, to be better
further increased to 7 per cent. Furthermore, restrictions
protected as well as the economy as a whole.
will be introduced for the relation between the total assets
KAS BANK framework: ‘low risk appetite’
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Governance
particularly apply to credit risk and operational risk.
In addition to the increased liquidity requirements, Basel
Market and interest risk are only run to a limited extent
III also focuses on the governance of banks, which
within very strict risk limits.
explicitly focuses on the three lines of defence:
Further to the disciplined management of the corporate
management, presence of a risk management function and
activities and a systematic risk management, the risk
an independent stress test of the measures implemented.
control framework consists of prudent management of
The management is expected to encourage a strong risk
liquidity and capital. Maintaining a broad liquidity, even
management culture. Managing Boards must approve both
under severe circumstances, is essential for custodians.
the risk appetite and the permitted limits and monitor them closely. Senior management must therefore set up a
KAS BANK’s risk governance structure was set up according
clear, effective and robust risk governance structure with
to the three lines of defence. In 2011 additional attention
clearly defined responsibilities.
will be paid to being in control and a thorough control of operational risks. Within the scope of the
KAS BANK’s Risk Framework
recommendations of Basel III and the new supervision
As a pure player KAS BANK has a low risk appetite. When
requirements an ILAAP (Internal Liquidity Adequacy
setting up new activities it is systematically considered
Assessment Process) will be executed for the first time.
whether they fit within this low risk profile. Active risk
Within the scope of ILAAP the broad liquidity position will
management is applied to activities undertaken, whereby
be subjected to an additional assessment and analysis.
the control measures and limits are embedded in
Furthermore, internal stress tests will be executed and
KAS BANK’s low risk appetite. The low risk thresholds
existing control measures will be critically assessed.
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Division of banks?
same (risk) governance regulations. There remains
Another possible consequence of Basel III will be the
plumbing work required in this area. If all goes well the
division of large banks (‘too big to fail’) into a merchant
standardised OTC derivatives must be settled at central
bank and investment bank. Smaller banks will merge to be
counterparties (CCPs), a market larger than the actual
able to comply with the legal requirements of Basel III. In
share market.
the aftermath of the credit crisis services close to home, with local expertise and falling within domestic legal
The central counterparty acts as counterparty to all trades.
environments, have been experiencing a clear reappraisal,
CCPs distribute the counterparty risk among all
validating the existence of specialised banks – provided
participants according to the waterfall model. They deposit
that they are strongly financed – under Basel III. Besides,
both an initial margin and a variation margin plus a
Basel III may see a valuation of the network function of
contribution to the collateral pool of the clearing
banks, the assembling of parties with a financing need,
institution. Together with the equity capital of the CCP
investors, and thorough advice.
this must be sufficient to be able to counterbalance a possible bankruptcy.
Return on equity
By mutually distributing the credit risks the CCPs have
The return on equity of financial institutions may be put
actually become system banks, which are ‘too big to fail’.
under pressure by Basel III: on the one hand the margin
If a clearing institution collapses, it will drag along a large
will decrease as a result of the financing requirements,
number of parties. That is why CCPs, both for shares and
and on the other hand the equity capital must increase.
derivatives, must also draw up minimum capital
This may result in a further restructuring of the balance
requirements, as well as a clear supervision framework,
sheet, shedding of activities or investigating other sources
including risk management and agreements about what
of income. The paradox being that this may induce banks
steps will be taken in the unwelcome event that such a
to take more risks or to start investing in alternative
central counterparty runs into problems.
instruments.
Role of CCPs It is remarkable that ‘shadow banking’ for a large part does not fall under the scope of Basel III. According to top economist and New York Times columnist Paul Krugman, shadow banking was the base of the credit crisis in 2008. At shadow bankers – among others clearing institutions, hedge funds and private equity – enormous amounts of money are involved with a minimum of supervision. According to some estimates shadow banking involves more cash than regular banking. The supervisory institutions do make a distinction between ‘legitimate’ shadow banking, such as practiced at clearing institutions, and institutions that are trying to navigate through the loopholes in the law. Nevertheless, these institutions are not thoroughly supervised, often in conformity with local regulations, and they do not have to comply with the
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D-Day for European EMIR guidelines The European Parliament will vote on 5 July 2011 on the
are settled daily via the variation margin, the CCP will also
final legislation regarding the European Market
charge initial margin, which is a fixed amount that must
Infrastructure Regulation (EMIR). The aim of EMIR is to
be paid as soon as the trade is created. The initial margin
realise increased transparency in the trade in derivatives
is used to hedge the risk arising should one of the two
instruments in Europe and to reduce trading costs and
contract parties default. The party in default will probably
risks. The guidelines provide, inter alia, a framework for
not deposit variation margin. The initial margin is then
central settlement and risk mitigation of OTC (over-the-
used to hedge the risk the CCP runs between the affiliated
counter) derivatives. The most striking item in the
party remaining in default and eliminating the position,
guidelines is the implementation of a margin obligation for
which can be increased as soon as required by the
all trading parties, which will particularly have an impact on
volatility in the market. At the majority of CCPs initial
pension funds, although the exact impact of EMIR on
margin can be hedged by means of non-cash collateral
pension funds is still unclear. Currently, the expectations
such as bonds.
are that pension funds will for the moment be exempt from the margin obligation. However, for certain parts of the
Variation margin
market postponement will be technically difficult to realise.
Variation margin does not differ from the calculation
In this article we wish to share our vision on the impact of
currently used for the Credit Support Annex (CSA) for
EMIR on Dutch pension funds, among others.
derivatives contracts: the present value of the difference between market and contract interest.
The European Committee aims to realise three objectives
Different from the bilateral regulation under the CSA, the
with the implementation of EMIR:
variation margin at the CCP is calculated and settled on a
• Central clearing of qualifying derivatives contracts and
daily basis. Weekly or monthly calculation and so-called
subsequent strengthening of the market infrastructure • A European legislative framework for central
thresholds are no longer possible. Variation margin must always be paid in cash, and
counterparties which will quell instead of strengthen
payment in securities is not possible. The explanation
severe shocks to the financial markets
given by the CCPs is that they only act as intermediaries.
• OTC trades must be reported to electronic trading depositories.
The margin that they receive must be forwarded to the counterparty in the relevant derivative.
One type of derivatives contract qualifying for central margin is settled between the contracting partners as a
What impact will the implementation of margin have on pension funds?
result of which the players in the market (among which
The fact that (variation) margin must now always be paid
pension funds) are confronted with two types of margin:
in cash will have a considerable impact on pension funds.
initial margin and variation margin.
The majority of pension funds deliberately hold as little
clearing is the interest rate swap (IRS). The obligatory
cash as possible in order to invest as much as possible.
Initial margin
That is why the majority of pension funds have sufficient
When interest rate swaps are settled via a CCP, a large
securities available to comply with the collateral
section of the market will be confronted with the
requirements, but those requirements are no longer
phenomenon of initial margin. Although the transactions
accepted by the CCP.
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Pension funds have a number of options to comply with
returns. In general terms, the capital market interest over
the cash requirements:
the total margin will be exchanged for cash market interest. This difference may mount to several percentage
– Hold a part of their portfolio in cash to be able to
points.
comply with the margin requirements. This means that the capital market interest must be traded in for cash
During the selection of counterparties for interest swaps a
market interest. In case of a normal interest structure
pension fund will make selective decisions and will solely
this will result in a considerable loss of interest.
accept counterparties meeting the highest criteria. When
– Generate cash for securities via a repo trade, which
in the current situation under ISDA, CSA margin must be
will involve a compensation of repo interest over the
paid, it will be bilaterally distributed among the selected
received cash part.
parties, which will result in a spread among the best
– Lend securities against cash collateral. Next to an
parties in the market, and the same applies to the spread
additional risk EONIA interest must be paid to the
of risk.
borrower and that amount certainly does not equal the
When the margin is charged by a CCP and must also be
interest payment provided by the CCP.
paid to this party it no longer concerns a spread of risk, but a concentration of risk, namely at the CCP, which
Apart from the fact that it is expensive to create liquidity
actually creates a new system risk.
in this manner, it also requires a complex system to execute these trades. This, combined with the obligation
The following risk is also inherent in the structure of the
to regulate the margin daily, will make many pension
administrative process. The management of the portfolio
funds realise that this method requires specific expertise.
will become more complex as securities may need to be
The new requirements regarding collateral can become too
temporarily converted into cash. For example if securities
complex for the majority of pension funds to execute on
– which have been temporarily converted into cash – are
their own.
sold within the scope of corporate actions. The processes must then be set up in such manner that the securities are
Risks
returned in time to prevent failed settlements and possible
Firstly, pension funds are confronted with risks relating to
buy-ins.
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Global Custody Network News Europe
* Please note relevant Double Tax Treaties (DTT) apply. However, with regard to dividend withholding tax, for
GREECE – New Tax Bill
UK residents the non-treaty rate applies, for Dutch
A new tax bill (on capital gains taxation, dividend
residents the DTT rate is 35 per cent and therefore not
taxation, equities sales tax, etc.) came into effect in
relevant.
Greece as of 1 April 2011. The relevant details are as GREECE – Withholding procedure for tax on sales
follows.
determined The withholding procedure of the Greek tax on sales has now been determined: our Greek sub-custodian will report the ToS withheld to us on a monthly basis. We will pass on these charges to our clients on a monthly basis as ‘Tax on Sales Greece’. The tax on sales is 0.20 per cent, both for on-exchange and off-exchange trades. As from 2 May 2011, for all trades the tax is withheld by our local sub-custodian, instead of the client’s broker/intermediary. For fiscal year 2010: • Dividend withholding tax: increased from 0 per cent to
RUSSIA – Foreign brokers’ orders no longer considered as cross-selling
21* per cent. • Tax on sales: increased from 0.15 per cent to 0.20 per
According to the updated provision on the trading rules of
cent, both for on-exchange and off-exchange trades.
the Russian securities market, foreign brokers will be
As of 2 May 2011, for all trades the tax is withheld by
allowed to register their clients in the trading system so
our local sub-custodian, instead of client’s broker/
that the trading orders of foreign brokers’ clients will no
intermediary. Procedure not yet determined.
longer be considered as cross-selling.
• Corporate Tax: decreased from 40 per cent to 24 per
The provision introduces the possibility for foreign brokers, which trade through licensed Russian brokers on
cent.
the stock exchanges, to assign separate codes for their For fiscal year 2011 onwards:
clients in the trading system. This will mean significant
• Dividend withholding tax: increased from 21* per cent
changes to the previous process, by which foreign brokers could not disclose the clients they traded for. Therefore,
to 25* per cent. • Corporate tax: reduced from 24 per cent to 20 per
the trading order initiated by two clients of a foreign broker will no longer be considered cross-selling and the
cent.
stock exchange trading system will not reject them. As of 1 January 2012
This legislation amendment will improve access to the
Tax on sales is replaced by Capital Gains Tax (CGT). No
Russian market for foreign brokers and will create a legal
further details known yet. CGT is currently not applicable
precedent for recognising foreign professional market
to foreign investors.
participants in the Russian market.
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Outside Europe
UNITED ARAB EMIRATES – DFM and ADX introduce DvP The Dubai Financial Market (DFM) and the Abu Dhabi
AUSTRALIA – Third-party costs for paper-based off-
Securities Exchange (ADX) have announced the ‘go-live date’
market transfers
for the delivery versus payment (DvP) settlement mechanism from trade date 29 May 2011 (settlement date 31 May 2011). All trades on the DFM and ADX will now settle through the DvP mechanism. Investor exposure to local brokers will be reduced considerably as the new operating model will allow greater control over client assets by the local custodians. No changes are required to client settlement instruction formats and our instruction deadlines will remain unchanged.
From 18 April 2011, the Australian Stock Exchange (ASX)
ISRAEL – Reporting requirements
has permitted listed entities and their registries to charge
Effective from 1 July 2011 the Bank of Israel has issued an
a fee for registering paper-based off-market transfers. An
order imposing a reporting obligation on Israeli residents
off-market transfer is the transfer of securities between
and non-residents who perform transactions in foreign
parties without using a stockbroker. The fee is to
exchange swaps and forwards of more than $10 million in
reimburse the registries for undertaking fraud prevention
one day. The required report is to include details of the
security checks on the authenticity of the seller’s details.
transactions and their balance of holdings of such assets.
For example, the largest and most-used registration office
Additionally, non-residents who perform transactions in
Computershare has advised they will be charging a $50
makam and short-term government bonds of more than NIS
transaction fee for off-market transfers. KAS BANK will
10 million in one day will be required to report details of
pass on these charges as third-party costs.
the transactions and their balance of holdings of such
assets. Please contact your account manager should you
INDONESIA – Longer minimum holding requirement for
wish to trade in amounts exceeding these thresholds in one
BI Certificates / SBI
day.
Bank Indonesia (BI) has issued a circular letter to the effect that Bank Indonesia Certificates (SBI) may now only be sold after being held for a minimum of six months (or 182 calendar days) from the acquisition date. Until 12 May 2011, the minimum holding period was 28 days. This includes transactions such as repurchase agreements and collateral. However, the restriction does not apply to SBI transactions conducted against BI. The penalty is 0.01 per cent of the nominal transacted amount, with a minimum of IDR 10,000,000 and a maximum of IDR 100,000,000 per day.
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Reinventing Excellence On Thursday 23 June IPNederland organised a well-
Frijns distinguished a number of risks in the current
attended pension congress entitled ‘Excelling under a new
pension model: under-coverage, capital market risk,
scheme’. Central theme: How can the pension sector re-
inflation risk and political risk. These risks were expressed
invent itself and excel within the possibilities and
in a risk heat map. He then showed what can be done
restrictions of a new scheme? The lecturers were both
about risk restriction. In the case of a defined benefit
pension experts and (future) pension fund participants. On
scheme, for example, in which the pension ambition has a
behalf of KAS BANK, Sikko van Katwijk participated in the
central role, it is all about the quality of the governance,
panel discussion in response to the presentation given by
external supervision, litigation and public pressure. In a
Jean Frijns. In addition, we also had our own stand where
Solvency II model the harsh conditions regarding solvency
the Pension Fund Monitor app for the iPad, amongst other
mean that risks must be reduced as soon as the funding
things, was demonstrated.
ratio decreases. In other models the inflation risk often plays a central role, which can be controlled through
The opening lecturer, Jean Frijns, professor of investments
hedging and a wise duration policy. For market risk the
at the Free University of Amsterdam, wondered how the
mitigation of tail risks is paramount.
pension sector can substantiate ‘soft promises’. According to Frijns the thought of a guaranteed and fixed pension
All in all, hard pension promises are impossible. The
has been unbearable for a long time. In practice, the
alternative is intrusive and persistent micro supervision.
pension promise has already become conditional. The
For a structural solution, maximisation of the risk
pension sector has yet to adapt itself to this reality. But
absorption in all schemes is definitely indispensable.
how must the investment policy be adapted to, on the one
According to Frijns this can be best achieved by means of
hand, ensure the pension rights and on the other hand
a contract model based on risk differentiation. Pension
seek the ambition to realise the soft promises as long-
funds are then divided into a risk-taking fund for young
term investor?
participants and an annuity fund for the older participants and pensioners, enabling a better gearing of risks to the participants’ risk capacity. Pension funds apportion the risks – and their proceeds – to the participant groups in advance. Frijns believes that such a structure is the best way to resist the combined risks of under-coverage and inflation. Frijns concluded his presentation with three arguments: – The ambition of the pension promise is a big illusion in our ageing Dutch CDC scheme. – Rule-based investment policy (for example, the link between risk exposure and solvency position) can be easily maintained, however it leads to false certainty in an unstable political and financial environment. – This requires structural solutions that link to the pension contract (relative to the individual’s risk appetite).
Ilona Monster demonstrates the pension fund monitor iPad app.
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From left to right: Jean Frijns, professor of investments University of Amsterdam (VU), Sikko van Katwijk, Managing Board KAS BANK, Peter Borgdorff, Director Pension Fund Zorg en Welzijn, Johanna de Graaff, Chairman, Pension Fund Zoetwaren.
The next panel discussion dealt with the implications for the asset management of pension funds when they switch
In the end, the discussion and the outcome of the votes
to a new pension contract. According to Frijns this will
resulted in a number of recommendations for the co-
mean a ‘two-track FTK’. The alternative for his risk
ordinating pension institutions. The recommendations
differentiation model: age differentiation to gear the risk
were presented to Mrs. Leny van der Heiden-Aantjes,
level of the investment portfolio to broadly composed
policy manager for the Pension Federation.
participants’ councils, was viewed unfavourably. “The most vocal participant group will then have a large influence on management decisions”, was one of the remarks from the audience. The pension fund management must take responsibility. The afternoon was concluded with a plenary discussion about the propositions submitted. Nearly 70 per cent of the attendants agreed with Frijns’ proposition that pension funds should link investment risks to the risk basis of the participants and not to the solvency position. With this, they rejected the concern of Peter Borgdorff of the Pensioenfonds Zorg en Welzijn, among others, that the solidarity between the generations will then disappear. Student Irene van Wijngaarden also participated in the closing debate. Young people believe that certainty is definitely important but not at any price, according to Van Wijngaarden. Explain what risks are involved, why they are taken and their consequences. According to Van Wijngaarden young people will then probably be more willing to take risks for their future pensions.
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NETHERLANDS
NETHERLANDS
UNITED KINGDOM
KAS BANK AMSTERDAM P.O. Box 24001 1000 DB Amsterdam The Netherlands Spuistraat 172 1012 VT Amsterdam The Netherlands T: +31 20 557 59 11
GERMANY
KAS BANK LONDON 5th Floor 10 Old Broad Street London EC2N 1AA United Kingdom T: +44 20 7153 36 00
KAS BANK WIESBADEN Biebricher Allee 2 65187 Wiesbaden Germany T: +49 611 1865 3800
www.kasbank.com