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Building a Crisis Management Framework for the International Market Jean-Claude Trichet

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Risk and Monetary Policy Jean-Claude Trichet

Interview with Jean-Claude Trichet, President of the ECB MORE ď ˝ď ˝ Money Markets | 1


28 24

2009 International Custody Review


Innovation at Work


32 2 | Money Markets

Alain Closier, Sébastien Danloy, Eric de Nexon and Valerie Siniamin-Finn

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39 4 | Money Markets


The Regional Approach


Innovation at Work


Innovate to Thrive


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Building a Crisis Management Framework

for the Internal Market » Jean-Claude Trichet, ECB

Reform needs to go beyond the “banking sector on which so much

the economy and a massive increase in global levels of unemployment.

attention has been focused. We also have to look very closely at non-bank financial institutions and at the set-up and functioning of financial markets.

Fundamentally, this is a crisis of valuation. But it is also a crisis that has led us, and continues to lead us, to fundamental re-evaluation.

Opening Statement at the Commission Conference

In particular, we must consider fundamental questions about the relative importance and limits of the pure financial “game” in markets, about the potential abuse of market power, and, most importantly, about the function of the financial sector in the broader economy. In my view there is a clear litmus test for this function: whether or not finance serves the real economy.

Reflecting on the crisis from today’s perspective, I would say that what is now called ‘the crisis’ is a deeply evolving phenomenon. It evolved from a crisis of liquidity into a full-scale crisis of banking and finance, and then into a global financial and economic crisis. And as we are all well aware, a great deal of attention is currently focused on fiscal policy and public finances. At the same time, policy-makers around the world have so far fended off a number of threats: a global meltdown of finance, a downward spiralling of

We have had to re-evaluate our understanding of the nature of risk of major market disruptions. We have had to re-evaluate the potential responses in terms of the implementation of monetary policy and the effectiveness of fiscal policy. And as citizens and policy-makers, we have to re-evaluate our understanding of the role of finance in our economies and our societies.

Financial reform therefore must ensure that finance is properly reconnected with the real economy. Reform needs to go beyond the banking sector on which so much attention has been focused. We also have to look very closely Money Markets | 7

at non-bank financial institutions and at the set-up and functioning of financial markets. Financial markets are not always efficient. They are also not always broad, liquid and representing a fair competition of views and positions. Quite often, specific market segments can be oligopolistic, dominated by a few large actors. In such oligopolistic markets, information handling is particularly problematic, as views by dominant actors can evolve into fashions and set off trends that, through herding, move valuations out of line with what is warranted by medium-term fundamentals.

Systemic Risk

A pre-condition for meeting the challenges of crisis prevention and crisis management is a deep understanding of the nature of systemic risk. The financial crisis has been revealing in many respects. It has revealed the scale of the potential fallout from the failure of large financial institutions. It has revealed the fragility of the financial system to features and trends that cut across institutions, markets and infrastructures. And it has illustrated the amplitude of the consequences of the adverse feedback loop between the financial system and the real economy.

As we now all recognise, if left on its own, finance has the potential to spiral out of control, for example through leverage cycles, triggering financial disruption, wealth destruction and economic hardship for our people.

All three elements I have just described are key features of systemic risk: first, contagion; second, the build-up of financial imbalances and unsustainable trends within and across the financial system; and third, the close links with the real economy and the potential for strong feedback effects.

Therefore, one of the greatest challenges for economics and public policy at this time is to restore financial and economic stability, to rebuild confidence in the prospects for our economies and to improve the future functioning of financial systems.

To identify sources of systemic risk and recommend remedial action will be the task of macroprudential supervision in the EU, and the cross-border crisis management framework will help to handle large and complex financial intermediaries whose disorderly failure could pose systemic risks.

The main agenda for today is what progress we can make in building a crisis management framework for our financial system at the European level. I will make some remarks on that key issue in a moment. But first I would like to reflect on what we have learned from the crisis in terms of the fundamental issue of systemic risk.

A Crisis Management Framework

8 | Money Markets

The national legal and institutional arrangements in a number of Member States have sought to improve the framework for prudential supervision and financial stability. We at the European Central Bank have supported such improvements.

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As we now all recognise, if left on its “own, finance has the potential to spiral out of control, for example through leverage cycles, triggering financial disruption, wealth destruction and economic hardship for our people.

One key remaining issue is to accompany the greater interdependencies between national financial systems and thereby bolster the process of EU financial integration that is so desirable from a welfare point of view. This requires appropriate action at EU level to address the possible systemic impact of failing cross-border financial institutions. The ECB therefore fully supports the Commission in its initiatives to develop an EU-wide resolution framework and remove obstacles to effective crisis management pertaining to EU cross-border financial institutions. The Commission has suggested a very useful classification of the main issues under discussion into three areas: early intervention by supervisors; bank resolution; and insolvency proceedings. Let me devote a few words to each of them. First, in the area of early intervention the enhancement of cooperation among supervisory authorities is important, when they address an ailing cross-border financial institution. It can be improved by achieving convergence as regards a minimum set of tools available to the supervisory authorities involved. This may require also a common terminology as regards for instance the types of reorganisation measures to be used for financial institutions . Second, as regards bank resolution, a priority is to pursue an enhanced and more coherent framework for the action of supervisory and resolution authorities. To avoid moral hazard, authorities should be ready to intervene with appropriate actions to contain the possible impact on financial stability and, where appropriate, ensure an orderly winding-up of the affected financial institution. In the Single Market, efforts should be made to facilitate coordination of the actions of national authorities involved in the resolution of a cross-border banking or financial group. Over the medium term, it would be helpful to achieve closer institutional convergence, with an enhanced role for the authorities within the resolution process, by recognising in particular their leading role in the administration of ailing financial institutions, in full respect of the due role of the judicial system. Third, as regards insolvency proceedings, new initiatives are required to promote further harmonization at the EU level. Today, national legal regimes are still diverse in terms of the rules and procedures that apply. It is recognised that harmonization at EU level may be difficult to achieve, but it should be underlined that it is key in any crisis resolution. Therefore, utmost efforts should be devoted to assessing outstanding problems and identifying possible ways forward. The ECB strongly supports the recent establishment by the Commission of a group of experts to pursue this aim. There is one central challenge to all crisis management frameworks and this is speed. The rapidity of unfolding developments is one of the greatest challenges for policy makers. And even though financial crises are by no means new phenomena, the speed of their transmission has accelerated tremendously over the past few decades. The unfolding of the sovereign debt crises in the 1980’s occurred over the course of years, the Asian Financial crisis developed, at its peak, over months. And last intensification of the present crisis, starting in September 2008, has spread around the globe in 10 | Money Markets

the course of half-days. Many factors have contributed to this acceleration, including the process of global financial integration, the increasing leverage in institutions, the technological advancements that allow for an instantaneous transmission of information world-wide and the accumulation over a long period of time of unsustainable global imbalances. Hence, a key message for all crisis management frameworks is that they need to be able to cope with the speed of which financial developments can unfold.

The Role of Infrastructures

Policy action should not concern only banks but also the system as a whole, in particular addressing market functioning, including those of CDS. The current reflections at international level include also initiatives aimed at strengthening the core financial infrastructures and markets. Indeed, it is essential that conditions are in place to ensure that the financial system is able to withstand any possible shock and that financial infrastructures are strengthened to reduce the risk of contagion. Moreover, regulators have to ensure that financial market participants are behaving in full compliance with the rules and that no additional source of risks would derive from improper behaviour. In this context, attention has been attracted at the current juncture by the Credit Default Swaps (CDS) market. I would like to highlight the importance that certain financial instruments, which were introduced in consideration of their positive effects for the hedging of risks, should not be misused in a speculative manner. I share the consensus at global level that regulators should be equipped with appropriate tools to be able to investigate and act in an effective and coordinated manner. We need more transparency in CDS markets, and so do investors. Transparency of markets is a public good. Authorities must be able to gather information, to assess possible risks for financial stability and detect possible improper conduct. In this respect, a key priority in terms of enhancing the resilience of the CDS markets is the establishment of central counterparty facilities. Such CCPs will help, in particular, to diversify and share risk exposures and their margining procedures will reduce the incentive to take excessive risks. Moreover, CCPs will deliver more of the much needed transparency for all parties involved.


The defining characteristic of any financial crisis is a collapse of confidence. The defining characteristic of the current crisis was a loss of confidence that seemed to permeate the whole world and almost instantaneously. At the height of the crisis – when irrational exuberance had turned into excessive pessimism – I repeatedly stated that regaining confidence was of the essence. Since then, confidence in the short term has been restored, not least because of bold and courageous policy actions around the globe. Going forward, we need to strengthen longer-term confidence, and that requires policy frameworks that will be robust against future challenges. That is the agenda on which I know we all plan to make some progress today. Biography: Jean-Claude Trichet is the President of the European Central Bank. Acknowledgement: Courtesy of the European Central Bank.

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Foreword •••

Risk and Monetary Policy » Jean-Claude Trichet, ECB

Lunch Remarks at the SIEPR Economic Summit, Stanford University Financial innovation is part of scientific progress. It is an engine of growth and prosperity. Yet, the key question, which I would like to highlight in my remarks today, is to what extent financial innovation serves the real economy and to what extent it only serves itself. At some point in our recent past, finance lost contact with its raison d’être. It ceased to be a source of services for the real economy and developed a life of its own. Finance became self-referential. I will briefly review the driving forces that led to this situation and the profound crisis that followed. Financial crises have been a recurrent feature of human history. Let me take you back over two millennia in Europe to see how the great historian Tacitus described the financial crisis that hit the Roman Empire in the year 33 AD. In the Annales, he wrote: “The destruction of private wealth precipitated the fall of rank and reputation. At last, the emperor interposed his aid by distributing throughout the banks a hundred million sesterces, and allowing freedom to borrow without interest for three years, provided the borrower gave security to the State in land to double the amount. Credit was thus restored, and gradually private lenders were found.” [1] Replace “emperor” with “governments and central banks”, “sesterces” with “dollars” or “euro”, “security” with “collateral”: this two thousand year old quotation could sound surprisingly familiar. Yet, even though two thousand years have passed, with many financial debacles in between, I think 12 | Money Markets

Life-support in the form of liquidity assistance “cannot act as a surrogate for appropriate management practices inside the banking system.”

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it is fair to say that we entered the current crisis less than ideally prepared.

market power, and, more generally, the role of the financial sector in the economy.

own, private benefit —information that was not generally available.

First, we had to improvise with an economic interpretation of the causes that led to those unprecedented market disruptions. The dramatic fall in confidence revealed a source of risk that macroeconomists had not modelled carefully and that had not even been considered relevant by most theorists of finance. Now, the concept of “systemic risk” is almost common knowledge.

Financial reform needs to go beyond the banking sector on which so much attention has been focused. We also have to look very closely at non-bank financial institutions and at the set-up and functioning of financial markets. Leverage cycles, for example, have been a constant source of instability for centuries. If left to their own devices, their ultimate outcome has regularly been financial disruption, wealth destruction and economic hardship for our people.

Pro-cyclicality acts as a formidable accelerator of financial trends. Demand for finance increases and declines in tandem with the cycle. But the supply of finance does not simply accommodate demand: it often amplifies the cycle.

Second, we had thought that the financial system would act as a shock absorber. Portfolio theory had demonstrated that the dispersion of individual risks would attenuate aggregate risk. But the mispricing of risk multiplied exposures, and the assumption of similar risks by market participants increased the potential for contagion. In the event, we learned that dispersion does not necessarily mean effective diversification.

Let me start by elaborating first on risk before and after the crisis and then turn to monetary policy. I want to share with you the European Central Bank’s approach to dealing with the balancing act, in which we have sought a combination of bold action as regards non-standard measures, while entirely preserving our clear focus on medium and long-term price stability.

Third, as central bankers we had to design intervention strategies that had not been studied in recent times. The extraordinary liquidity measures that central banks took at the height of the crisis on both sides of the Atlantic had

Risk Before and After the Crisis

been expelled from the economics textbooks. Modern monetary economics had suggested that unlimited arbitrage in financial markets would make such measures irrelevant and unnecessary. [2] In the event, amid conditions of extreme uncertainty, private arbitrage was unavailable. As in ancient Rome, public credit became vital because private finance had – at least temporarily – disappeared.

Arrow – is subject to stochastic shocks. Therefore, economic returns are risky, because they are not known with precision ex ante.

Risk is inherent in economic activities because economic pay-offs are uncertain. Even the prototype model of finance – the competitive economy studied by Gérard Debreu and Ken

Where does pro-cyclicality stem from? To my mind, distorted incentives and herd behaviour are key explanatory factors. The role of distortions in economic incentives is probably better known as it had traditionally been widely appreciated even within neo-classical modelling. [3] By comparison, herd behaviour as a driver of pro-cyclical patterns in financial markets still needs a thorough explanation. It is difficult to rationalise herd behaviour. There are two possible explanations. One is that a market player’s own evaluation, pay or external reputation depends on its performance relative to the rest of the market. This is reminiscent of Keynes’ famous beauty contest analogy. To be successful in this contest you don’t need to make your own assessment of the candidates; all you need to do

At some point in our recent past, finance lost contact with its raison d’être. It “ ceased to be a source of services for the real economy and developed a life of its own. Finance became self-referential ”

What are some of the long-term lessons we can draw from the current crisis? Just as we have had to re-evaluate our understanding of the nature of risk of market disruptions and the potential responses in terms of implementation of monetary policy, so we must re-evaluate our understanding of the role of financial markets in our economies and our societies. The lack of a framework for monitoring and addressing systemic risk in the run-up to the crisis is part of the motivation for financial reform and improved market regulation. But we must also consider fundamental questions about the relative importance and limits of the pure financial “game” in markets, the potential abuse of 14 | Money Markets

But the type of risk that we faced in the crisis was of a different nature. It was not triggered by stochastic variation in the real economy – by shocks to “endowments, technologies and tastes” as theory would predict. At source, it was financial risk. The financial structures that we thought were in place to assess, absorb and neutralise risk were either dysfunctional, or worked – perversely – to magnify volatility. This is how financial risk was created, transmitted to the real economy and eventually became systemic. Key factors in creating this risk were opaque financial structures, particularly vulnerability to contagion and domino effects, and pro-cyclicality in financial markets. The lack of transparency in many financial instruments meant that market participants did not know who was exposed to what kind of risk. In this state of incomplete knowledge, some market players could exploit – for their

is figure out who the other participants think is most beautiful. Applied to financial markets this means that individual participants do not form their own opinion, but follow the general mood prevailing among financial market participants. One could call this a dereliction of responsibility. Everybody seeks to ride on the wave created by generalised sentiment, hoping to step out before the general sentiment turns. The second explanation is that global markets are in fact less atomistic than we think. Indeed, despite globalisation, increasing market concentration was already a long-term trend before the crisis. Derivatives activity in the U.S. banking system, for example, is dominated by a small group of large financial institutions. Five large commercial banks represent 97% of total notional amounts and 88% of net exposure. [4] And, of course, the market for credit ratings is famously dominated by three signatures, which act as standard-setters for an enormous volume of financial transactions. Imitative strategies and market concentration make financial trends overly dependent on

34 | Money Markets

16 | Money Markets



idiosyncratic decisions and market sentiment. What is clear is that while the end result – herd behaviour – seems to be individually rational, it is socially wasteful. Herd behaviour favoured the build-up of leverage. Leverage cycles have been a constant of many of the financial crises of the past. But the financial players that contributed to the boom before the crisis were able to use previously unavailable ammunition. In the run-up to the crisis, we saw the emergence and fast development of a new set of complex financial instruments such as ABSs, RMBSs and CDOs as well as hedging instruments like CDS. These were invented as instruments to repackage, disseminate and hedge risks. As they became available, they were viewed as filling a gap in an incomplete market structure. In fact, credit derivatives turned into potent vehicles for pure financial market participants to leverage their views. The distinction between arbitrage and directional positioning is critical here. Arbitrage is an essential market force. By eliminating differences in risk-adjusted returns, arbitrage promotes price discovery and fosters market dynamics. Directional positioning or “pure speculation” does not necessarily eliminate existing discrepancies between risk-adjusted financial prices: it might amplify or even create price gaps. It does so by acting on expectations of future price changes. Unlike in the case of arbitrage, these price gaps are notional – indeed, speculative – and might be large only because they are not suitably discounted for risk. The state of “meta-stability” of financial markets is one in which large-scale positioning has become a leading force of market dynamics. Indeed, system-wide conditions of overexposure and illiquidity placed the markets in a state of meta-stability, i.e. potentially unstable, ultimately triggering systemic risk. An economy in a state of meta-stability is prone to shocks that are seemingly innocuous but can reveal facts that were either unknown or little appreciated before. This new knowledge can trigger the crisis. [5]

Monetary Policy in Times of Crisis

And then the crisis came. Immediate action was needed to fend off systemic risk. Governments and central banks around the world were united in purpose. With their actions, central banks broke new ground which monetary theorists will be studying for years to come. Money Markets | 17

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The modern theory of central banking had a narrow focus on interest rates. Even in a crisis situation – in conditions of collapsing confidence and very low interest rates – monetary theory assumes that a central bank will always be in a position to influence inflation and demand by steering expectations of the future path of its interest-rate instrument in the future. These theoretical prescriptions are based on the assumption of perfect market arbitrage. Intertemporal arbitrage is indeed what makes monetary policy effective in normal times. It ensures that the return on a long-term security is equalised with the return on a strategy of holding a very short-term security – paying the policy rate – and rolling it over until the end of the policy commitment. In this crisis, however, market arbitrage was simply unavailable. The disappearance of market arbitrage was a challenge for monetary policy. But by no means did it imply policy ineffectiveness. It called for central banks to engage in non-standard measures and play an intermediation role that the market was unwilling or unable to perform. The ECB fulfilled its role of market-maker in particular by providing liquidity to banks without limit,

for “as long as was needed”, to restore normal market functioning. Note here a difference between the ECB and the Federal Reserve. Even in normal times the ECB conducts monetary policy through loans, rather than via direct purchases and sales of securities. Unlike Fed discount-window lending, however, our loans are untargeted. They are an instrument for the routine provision of monetary policy liquidity, rather than part of selective assistance to distressed banks. It is a system centred on overnight and term credit to banks. So our system was tailor-made to be used as an instrument to resist a banking crisis. In the event, it was flexible enough to be activated – with only limited adjustments – in emergency conditions. The need to tackle the collapse of private arbitrage motivated two features of our enhanced credit support: first, the full, unlimited accommodation of banks’ demands for central bank credit at our policy interest rate contributed to repair the collapse of interbank lending; second, the extension of central bank credit provision to longer maturities, up to one year, was a substitute for market intertemporal trading.

Our actions would not have been effective if they had not been enshrined in our medium-term monetary policy framework. Our definition of price stability steered expectations in a sufficiently firm manner. So the ECB can dispense with making promises about the future path of the monetary policy stance. The ECB’s approach to steering market expectations is based on comparing inflation outcomes and projections with our quantitative definition of price stability. This can be done without making statements about the policy instrument in the future. Each month we provide the market with a comprehensive assessment of the risks to price stability over the medium term. This allows market participants to form expectations about the future course of monetary policy, conditional on our real-time assessment of the state of the economy. In this sense, the ECB is predictable, and this minimises the volatility of expectations in normal times. Our quantitative definition of price stability and our medium-term orientation significantly reduce the likelihood of either deflation scares or inflation scares. The firm anchoring of inflation expectations – throughout a time of crisis – meant that we could maintain the rate on our refinancing operations at positive levels without Money Markets | 19

having any materialisation of a deflationary risk or inflationary expectations.

The Phasing-out Process

I mentioned that we chose to expand our credit to banks. When executing lending policy, a central bank functions much like a private financial intermediary. Private credit extension is accompanied by restrictions on the borrower to limit its ability to take risks and to protect the value of the loan. If a central bank provides credit support, the analogy suggests that it must follow up with a continuous re-evaluation of the credit conditions to safeguard its funds and make sure its commitment is not abused. It also has to make sure that it does not subsidise certain economic activities nor permanently suppress the private interbank market. 20 | Money Markets

Overall conditions in the markets for capital have improved greatly from the autumn 2008 paralysis. The functioning of money markets is now comparable with the conditions that prevailed in the third quarter of 2007. Money market spreads are close to levels that are reasonable to view as normal after the equilibrium re-pricing of risk that was needed and is likely to have taken place since then. Term lending has resumed on a satisfactory scale. The funding ability of banks is not a restraining factor for lending, as it was the case for some time after October 2008. Since the second half of last year, it appears to support bank profitability. Corporate and bond spreads have also declined steadily across the quality spectrum. Currently, these considerations are what motivate and guide a gradual phasing-out process.

We started to phase out our enhanced creditsupport measures in December 2009, in an environment of improving financial market conditions and emerging signs of recovery. On 4 March we came to the conclusion that the current pace of phasing-out is appropriate. With the resumption of longer-term loans in the private market, we have started to adapt the conditions of our longer-term credit to banks. The first step was to announce a discontinuation of one-year and six-month longer-term refinancing operations. Oneyear refinancing now pays an interest rate indexed to the average rate that will be applied in our weekly main refinancing operations over its 12-month life. The pricing will be the same in our upcoming and last 6-month refinancing operation.



Imitative strategies and market concentration make “financial trends overly dependent on idiosyncratic decisions and market sentiment. What is clear is that while the end result – herd behaviour – seems to be individually rational, it is socially wasteful.

support would distort market behaviour and misallocate credit.

trends – is likely to take time and experience some further oscillations.

We do not wish to breed dependency. Banks might become dependent on today’s very favourable access to central bank refinancing to such an extent that their incentives to repair their balance sheets remain weak. Moreover, permanent extraordinary liquidity measures provide undifferentiated support to all banks, whether in liquidity deficit or in liquidity surplus. This opens the door to opportunistic bidding behaviour and to a sort of arbitrage across assets that is unproductive.

A question that remains is: Where will this process end?

What is our end point? We view the precrisis operational framework as a very natural reference point for the phasing-out process. Of course, we are reviewing carefully the potential lessons of the financial crisis for the design of our operational framework. It seems to me, however, that in this respect the ECB has relatively little reason to change fundamentally what has served our monetary policy well, both in normal and crisis times. This underscores the fact that our long-term refinancing operations are designed to assist banks in their control and management of liquidity risk. They are not an instrument of commitment to a future policy path. We will return to a competitive tender procedure for three-month operations in the second quarter of 2010. At the same time, we have made it clear that we will continue to conduct our weekly main refinancing operations and one-month operations as fixed-rate tenders with full allotment for as long as needed and, in any case, until 12 October 2010. While we monitor the conditions for a gradual phasing-out very attentively, we are convinced that a delayed exit from extraordinary liquidity

The speed and path of the phasing-out of non-standard measures will depend on developments in financial markets and the economy. The current situation of ample liquidity in euro area money markets guarantees a continued positive impact on financing conditions. As regards the monetary policy stance itself, it will be designed as always to deliver price stability, in the medium and long term, in line with our definition.

Crisis Prevention

Governments and central banks have been focused on financial reform since October 2008. The new financial architecture will build on the assumption that a re-pricing of risk around its fundamental value is needed. Price discovery within the market in pursuit of a fundamental equilibrium in risk pricing – one that can be sustained by long-term

As aggregate – undiversifiable – risk diminishes, this will be reflected in lower premia that financial markets pay for risktaking. We know that the commitment by central banks to keep inflation low and stable, communicate clearly about their price stability objectives, and then act on those objectives, has all contributed to a long-term reduction in macroeconomic risk. The fraction of the reduction in risk compensation related to having a stable macroeconomic framework is a steady acquisition of modern societies. Instead, the complement to that fraction – that which is due to excessive financial sophistication, abnormal risk tolerance and shortcomings in risk management – should be gone for ever. That is why my conjecture is that risk premia in a number of markets will continue to be reduced – but they are unlikely to reach the compressed levels that we saw prior to the crisis. Normalcy will probably be reached at a permanently higher level of risk compensation in a number of markets. In order to build an effective system of crisis prevention, we will all need to take on board this simple fact: compensation for risk will need to be appropriate. We shall prevent “pure” speculative activities from becoming the dominant force on the markets. And we shall build financial infrastructures with sufficient buffers to make them bulwarks against instability and resist shocks. Let me mention some striking facts about the power of such buffers. There is a widespread perception that banking crises Money Markets | 21

Overall conditions in the markets for capital have improved greatly from the “autumn 2008 paralysis. The functioning of money markets is now comparable with the conditions that prevailed in the third quarter of 2007. ” in times when money was convertible into gold had apocalyptic consequences for bank depositors. This is not true. The estimated average loss on assets born by depositors in banks that were closed down as a consequence of financial crises was minuscule. Taking a yearly average between 1865 and 1920, it was six cents for every one hundred dollars of deposits. This timeframe covers five of the most severe episodes of financial panic in recorded history, most notably the 1907 crisis. [6] Do you know why the losses were so small? Because banks were well capitalised and bank equity cushioned depositors – and the economy more broadly – against losses in the event of a bank failure. According to a study, the average capital-asset ratio fell from a high of 60% in 1880 to a low of 20% at the turn of the century. Then, after the crash of 1929, it rose to about 30% in the 1930s and 1940s. [7] It is now much lower, as you know. Making sure that banks are well-capitalised is the foremost life jacket of our system. Life-support in the form of liquidity assistance cannot act as a surrogate for appropriate management practices inside the banking system. The European Systemic Risk Board (ESRB), which will be hosted by the ECB, will assume a novel role in crisis prevention at the level of the 27 economies of the European Union as a whole. The ESRB will have the aim of identifying emerging systemic risk, and, if necessary, publishing early warnings as well as making recommendations to the competent authorities. The ECB is also fully involved in G20 reform efforts. International cooperation is absolutely vital given the interconnectivity between financial markets. A return to pre-crisis business practices would be fatal. Financial market participants need to restore trust. But this alone will not be sufficient. We absolutely require intelligent regulation that will prevent self-destruction. It seems to me that we are all – industrial countries as well as emerging economies – very much united in purpose: correct distorted incentives, improve very significantly the resilience of the financial system, and counteract 22 | Money Markets

pro-cyclical mechanisms and behaviours. We are also convinced on both sides of the Atlantic – and here in Stanford, I would say also on both sides of the Pacific Ocean – that the success of the enlarged governance of global finance and the global economy through the G20, the Financial Stability Board and the cooperative activities of the Central Banks, is key for the stability and the prosperity of the present unified global economy.

Concluding Remarks

At the height of the crisis – when irrational exuberance had turned into excessive pessimism – I repeatedly stated that regaining confidence was of the essence. Since then, confidence in the short term has been restored, not least because of bold and courageous policy actions around the globe. Going forward, we need to strengthen longer-term confidence, and this requires policy frameworks that will help to prevent a future crisis. I started with Tacitus’example of bold policy action. I would like to end with Cicero’s fides. There was a famous controversy between Julius Caesar and Cicero 80 years before the crisis described by Tacitus. Rome, at that time, was struggling with a debt overhang. Caesar proposed partly to remit the debt. Cicero strongly opposed such action. He argued that debt forgiveness would shake the foundations of the Roman Republic and destroy one of its most important values: fides. Fides is trust, confidence, good faith. [8] In modern terms, Cicero was hinting at the moral hazard that can – but need not – be created by intervention in a crisis. The ‘lender of last resort’ responsibility of central banks – that Walter Bagehot advocated 1800 years after Cicero and Tacitus – should always be a dual responsibility. It should be crisis management and future crisis prevention at the same time. When these go hand in hand, the result is confidence in the medium and long term (fides) which, ultimately, helps getting out of the short term crisis as well as contributes significantly to long-term growth and prosperity. [1]The Works of Tacitus translated by Alfred John Church and

Eggertson, G. and M. Woodford (2003), “The Zero Bound on Interest Rates and Optimal Monetary Policy”, Brookings Papers on Economic Activity, 1, pp. 212-219.

[3]For example, research carried out at Stanford University

greatly enhanced our understanding of the interactions between

economic motives, incomplete regulation and market outcomes. And Douglass North, of course, had documented how the development and design of institutions – again, good or bad

regulation – has shaped the fortune of countries throughout history.

[4]OCC’s Quarterly Report on Bank Derivatives Activities,

Third Quarter 2009, US Treasury, Comptroller of the Currency. [5]For example, in late 2006 a new synthetic index became available for the first time which could be used to price sub-

prime related tranches of credit derivatives. This new market

price probably aggregated information about the quality of the underlying contracts, which was too dispersed or inaccessible

before. This might have brought awareness of the precarious bases of the financial structures that were being traded.

[6]Data taken from the Annual Report of the Federal Deposit Insurance Corporation (1940).

[7]See Wesley Lindow, “Bank Capital and Risk Assets”, The National Banking Review, Comptroller of the Currency, US Treasury Department, September 1963, pp. 29-46. [8]Cicero, De Officiis II, 73 ff.

William Jackson Brodribb (1864-1877).

[2]Neil Wallace (1981) has an early theorem on the

ineffectiveness of open market operations. Gauti Eggertson and Mike Woodford (2003) prove the irrelevance of liquidity

measures at times of zero interest rates. See Wallace (1981), “A Modigliani-Miller Theorem for Open Market Operations”, The

American Economic Review, Vol. 71 No 3, pp. 267-274, and

Biography: Jean-Claude Trichet is the President of the European Central Bank. Acknowledgement: Courtesy of the European Central Bank.

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2010 International

Custody Review

Selecting the right custodian is critical. Switching providers can be an expensive, time-intensive process, not to mention highly disruptive.

South Africa Provider


FNB Nedbank

Innovation Award

Societe Generale Securities Services Standard Bank West Africa Provider


First Bank of Nigeria

Innovation Award

First City Monument Bank Stanbic IBTC UBA

In order to accurately assess and compare the relative strengths and weaknesses of custodians, the MM (Money Markets) Review Panel employ a proprietary best practice benchmark tailored to the needs and requirements of the investor. The aforementioned evaluation framework utilizes a risk-based approach, focusing on the custodian’s product and service capabilities and the risk controls attached to each function. MM’s benchmark analysis comprises over twenty categories, representing more than eighty specific evaluation criteria. Thus, investors are able to compare the capabilities and controls of providers and market standards, both globally and locally. Such analysis facilitates the identification of product and service gaps within the context of a client’s specific situation.

china Provider

HSBC Standard Chartered

Commendations The following commendations and categories recognize excellence and apply to the tables listed below: Technology // Client service Value-added services // Most improved Best-in-Class commendations are awarded to those providers which have excelled in all of the aforementioned categories.



Hong Kong Provider


Citigroup GTS DBS

Most Improved



Standard Chartered

Client Service

Innovation Awards ICT (information and communications technology) forms the centerpiece of the 2010 Innovation Awards. This year’s Innovation Awards recognize those providers which continue to evolve their value propositions, creating, in the process, truly client-centric solutions and real value. Data pertaining to the activities of certain custodians operating in the geographic territories listed below is considered, in some cases, to be highly sensitive. This may affect the inclusion and or exclusion of providers from this report.

Japan Provider

Selected Zones Only: No more than six custodians have been selected for inclusion in to any one geographic territory.


Bank of Tokyo Mitsubishi Citigroup GTS

Most Improved


Client Service

Mizuho SMBC Standard Chartered

Review Dates & Regions: Next review date, September 2010. The inclusion or exclusion of custodians will be subject to the findings of the review panel.


Singapore Provider


Citigroup GTS DBS

Innovation Award Client Service

HSBC Standard Chartered

24 | Money Markets


Most Improved

Taiwan Provider

Greece Provider


Central Trust of China


Alpha Bank

Innovation Award

Citigroup CTS

BNP Paribas (SS)


EFG Eurobank Ergasias

JP Morgan

HSBC Best-in-Class

Standard Chartered

National Bank of Greece Piraeus Bank

Pan Asia

Client Service




Citigroup CTS DBS



Most Improved

BHF Asset Servicing

Innovation Award


BNP Paribas Securities Services


CACEIS Bank Deutschland

HSBC Standard Chartered


Deutsche Bank TSS

Most Improved Ireland



Bank of Ireland (SS)

Innovation Award Client Service

Citigroup GTS Austria Provider



Netherlands Provider


BNP Paribas Securities Services

Erste Group Bank Raiffeisen Zentralbank

Innovation Award


Citigroup GTS

Most Improved

Kas Bank


Cyprus Provider


Marfin Popular Bank

Innovation Award

Hellenic Bank National Bank of Cyprus



DnB NOR Nordea

Innovation Award


Most Improved

Svenska Handelsbanken

Denmark Provider




Danske Nordea

Most Improved



Svenska Handelsbanken Finland



DnB NOR Nordea

Most Imporved


Innovation Award

Svenska Handelsbanken




Innovation Award



Svenska Handelsbanken France Provider


BNP Paribas Securities Services CACEIS


Citigroup Societe Generale Securities Services

Innovation Award

Money Markets | 25


Custody & Fund Administration



Raiffeisen Zentralbank

Innovation Award

Bank of Ireland Securities Services

Societe Generale Securities Services

Most Improved




Citco Bank

Unicredit Group


Client Service

J.P. Morgan Societe Generale Securities Services


Innovation Award



Bank Julius Baer BNP Paribas SS Citigroup Innovation Award

Credit Suisse SIS SegaInterSettle AG

Most Improved


Central & Eastern Europe Provider


Citigroup Deutsche Bank ING Securities Services

South America Provider


Banco Bradesco

Innovation Award

Raiffeisen Zentralbank

Innovation Award

Societe Generale Securities Services Unicredit

Performance Award

Bank Itau Banco Santander Citigroup GTS

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home markets of Australia and New Zealand. With teams in Melbourne, Sydney and Wellington, ANZ offers a powerful mix of products, capabilities, local market insight and global reach.

Speak to the Australian and New Zealand market experts today. Call Angelo Calvitto on +61 3 9273 1907 Australia and New Zealand Banking Group Limited (ANZ) ABN 11 005 357 522. ANZ’s colour blue is a trade mark of ANZ. Item No. 927346 04.2007 W108047

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Money Markets | 27


At Work »Jonathan Calens talks to Alain Closier, Sébastien Danloy, Eric de Nexon and Valerie Siniamin-Finn

Where a suitable acquisition opportunity presents “itself, we have already demonstrated our ability to

acquire well and integrate successfully, which in turn has facilitated our growth and allowed us to expand our geographical reach and the depth and breadth of our product range.


Whilst many providers have looked for ways in which to limit expenditure, your investment in technology, service provision and human capital remains. Has this been the key to client retention for the Bank? As

we have grown and cemented our position as one of the world’s leading global custodians it has certainly been one of the keys, not only in terms of retaining existing business but also in attracting new clients. Any institution that wishes to remain a major player in this business must continue to invest.

Are you at liberty to discuss your AuC?

In respect of custodial services, our global ranking is sixth and our European ranking is second with €3,073 billion of assets un-

28 | Money Markets

der custody. We provide custody and trustee services for 3,031 funds and the valuation of 4,689 funds, representing assets under administration of around €447 billion.

Despite market conditions, Société Générale Securities Services (SGSS) continues to innovate. What role does this play, in terms of the Bank’s success? There is a

lot to be said on this subject. To begin with, our development model is in itself innovative in the sense that, since its creation, SGSS has pursued the development of unique and integrated pan-European IT platforms for custody, fund administration and fund distribution services. This unique architecture gives our clients more flexibility, in terms of volumes and reporting. Moving forward, this strategy will again prove to be an important differentiating factor in light of future regulatory developments, notably for international investors and asset managers. SGSS has also been a pioneer with respect to the provision of asset services, including the pricing of OTC derivatives and structured products - we are still the only institution in Europe that provides the aforementioned on a stand-alone basis. The exclu-

sive nature of this offering enabled us to win a number of calls for tenders, including the ones launched by the largest pension fund in the UK, BT Pension Scheme Management Limited. The Irish based National Asset Management Association (NAMA) is also notable. We now provide valuation services on different types of derivatives and OTC products (options, interest rate swaps, swaptions, caps and floors) to both of these instutions. Over the past 12 months we’ve also launched an OPCI (French real estate mutual funds) custody and administrative management offering on behalf of a new client category, namely property managers. At the same time we’ve intensified our focus on private equity, thus our clients have positioned us as the market leader in terms of gross assets volumes. Finally, with reference to market coverage, SGSS has developed its securities services capabilities with a broad range of key markets in mind. These include Russia, Eastern Europe, North Africa, Hong Kong and soon India, courtesy of our joint venture with State Bank of India. In each and every case we utilize our Group’s local set up. Our objective is to meet the needs and exceed the expectations of our clients. For example, in Hong Kong, a local hub has been launched in order to support our asset management clients with their distribution strategies and meet their needs, locally. As far as Eastern Europe and Russia are concerned, I strongly believe that very few securities services providers offer such a strong network, both in terms of geographical coverage and financial solidity and risk mitigation due to direct representative offices.

Custody & Fund Administration


Obviously SGSS has ambitious growth targets for both local and international markets. With this in mind, where will you be focusing your efforts this year in order to maintain sustainable growth and respond successfully to the industry challenges that lay ahead? We will continue to

combined collateral and liquidity management offering, which has been very well received. This has been underlined by the success and growing popularity of our OTC derivatives pricing capability, which I mentioned earlier. Finally, SGSS is becoming a prominent player in Germany’s KAG market, which serves to underline our ambitions, geographically speaking.

Another significant area of growth will be product development. We recently launched a

Recovery was slow but steady in 2009 as asset prices drifted upwards to former levels. By the end of last year the mood was a little more upbeat courtesy of high-growth Asia driving much of the recovery. How does the aforementioned upturn, albeit slow, impact the Bank and its clients in

Competition and Expansion

expand our geographical reach by establishing a presence in a number of new markets, either through an existing SocGen group presence or by forging commercial alliances with local providers.

2010? Any recovery in asset values obviously works to our advantage, in terms of assets under custody and our ad valorem-based charging regimes. More important is the growth in confidence in the underlying investment markets. As our clients rebuild confidence, and begin to grow their appetite for risk, they will tend to use our services more. Do you foresee the expansion of the Bank’s custody business being achieved through organic growth rather than acquisition?

Both kinds of growth have been important in establishing SGSS as one of the world’s leading global custodians. Both will remain important. We will grow organically, attracting new business from existing clients and winning Money Markets | 29

mandates from new clients. Where a suitable acquisition opportunity presents itself, we have already demonstrated our ability to acquire well and integrate successfully, which in turn has facilitated our growth and allowed us to expand our geographical reach and the depth and breadth of our product range. TARGET2-Securities

The TARGET2-Securities (T2S) saga rumbles on. If we are led to believe what we read, T2S will go live in 2013. Is this realistic? It is difficult to answer this question given

the time-line to implementation and the size and complexity of the programme. There will probably be some delay as is quite often the case with these types of projects. That is all I can reasonably say. But, in fact, does the question really matter when considering the objectives that have been assigned to T2S? No. What really matters is that T2S is the masterpiece, the jewel in the crown, with respect to the integration initiatives that have been launched over the past decade, and it seems on track to deliver the first pan-European integrated platform for market infrastructures. In 2000, after the introduction of the Euro, the integration of the European financial market seemed rather simple and its achievement a question of some years. Therefore, who would

30 | Money Markets

have predicted that nine years later, after numerous public and private initiatives, the situation would remain so fragmented and complex, perhaps more so than before. However, since the T2S project was launched - three years ago - the ECB, NCBs, CSDs and users have achieved a great deal. Was and is T2S simply a response to the Giovannini reports, given that the platform will harmonise certain practices and remove some of the barriers, both private and public, identified in the reports? I don’t

think that one can say it’s simply a response to the Giovannini reports. As already stated, given the failure of most of the other initiatives, and looking at what has been achieved by the ECB and the industry as a whole in relation to the T2S concept, the programme has to be considered a success in respect of the integration process. The approach used by the ECB, which has already been used successfully for T2 cash, is efficient because it is pragmatic and fosters centralisation, normalisation, harmonisation and consolidation. We know that settlement costs in Europe are considerably higher, when compared to the US, according to the ECB, 10 times higher. Can T2S help us to achieve parity?

First, I want to react to the assertion that trig-

gers your question: we have been told again and again that settlement operations in Europe are ten times more expensive and a lot more complex than in the United States. This is both true and totally normal, because we’re comparing cross-border, pan-European and multi-infrastructure operations with domestic operations that are processed within a single framework and infrastructure. If you look at them individually, the main European markets - Euronext, London and Frankfurt - are as efficient and safe as the American market, because they too are organised around a single infrastructure, each specialised in their particular domain: Central Bank, Clearing House, Central Depository and players work within a single legal framework that is specially supervised. This type of organisation has proven itself on a domestic level; however, it should now be extended across Europe. Coming back to your question, I consider the answer to be twofold: as T2S eliminates the complexity and induced costs related to cross– border settlement, it will help us to dramatically reduce cross-border settlement costs and maintain or slightly decrease domestic settlement costs. However, it will be difficult to achieve parity given the respective transaction volumes that are processed within the two areas. In your opinion what will T2S do for market growth and the economy as a whole?

Custody & Fund Administration


final objective is to create one, single, integrated European financial market “thatThe represents, when achieved, more than the sum of the domestic European markets. T2S is a major step forward in this direction. ” In securing and simplifying cross-border settlement, reducing the related costs, and acting as a catalyst for harmonisation and consolidation, T2S should ease the development of international investment across Europe and as such foster the growth of the market. It should also support the economic development of the region. The final objective is to create one, single, integrated European financial market that represents, when achieved, more than the sum of the domestic European markets. T2S is a major step forward in this direction. Risk Management

More than a year has passed since the fall of Lehman but many of the fears that gripped service providers and, more importantly, their clients remain just as real. The term ‘risk management’ remains firmly etched into the collective consciousness of all with security concerns still paramount. What has SGSS done to improve transparency and bolster the confidence of its clients? Risk management has always been

a priority for SGSS, but no-one should ever rest on their laurels. If anything, we are even more vigilant than before in respect of our fiduciary duties. Furthermore, we have extended our product offering in order to help clients better mitigate risks. Again, I would point to the pricing of our OTC derivatives and structured products. By providing independent valuation services, middle office solutions for OTC products, as well as a risk platform and collateral management services, we provide our clients with the tools necessary to measure risk exposure in an industry segment where the difference between the value of a product and its market price can be huge.

Ultimately, our aim is to continuously improve

our service.

Relationship Management

Feedback suggests that custodians have significantly reduced face-to-face contact with clients. Do you concur with

this? I disagree with this statement. In order to reduce errors, increase quality and speed of delivery, automation has continued to grow. However, by reducing face-to-face contact with clients, you run the risk of undermining your business. To this end, we have significantly developed our Global Relationship Management Team (GRM) and have assigned dedicated contacts (relationship managers) to our top clients. The Next Chapter

As we look ahead, what can we expect from SGSS, in terms of product innova-

tion this year? I’ve already mentioned the

growing awareness of our OTC derivatives pricing product, our combined collateral and liquidity management product, and our growing presence in Germany’s KAG market. In terms of geographical coverage etc., the aforementioned demonstrate our ability to be able to draw upon the strengths of SGSS across many different markets and products. As always, we will continue to work assiduously in order to develop the requisite products and services that meet our clients’ ever growing and ever-changing needs.

Biographies: Alain Closier has been the Global Head of Securities Services since February 2004. In 2007, he carried out the purchase of the Fund Administration activity of Pioneer Investment in Germany, giving SGSS global visibility. He began his career at Société Générale in 1977 as an Economist. Between 1981 and 1987, he worked for the International Division of Société Générale taking responsibility for the Forex and Treasury Advisory Department. In 1988, he was named as Chairman and Chief Executive Officer of FIMAT Group. In 1997, he was appointed Deputy Head of the Banking Services Division of Société Générale and subsequently Head, in 2000. Sébastien Danloy began his career in 1993 with the European Court of Auditors in Luxembourg. He then spent seven years at State Street where he held various roles in fund administration, global custody and sales. In 2001, he joined BNP Paribas Securities Services and worked in Luxembourg, Dublin and London. Over this period he held several functions including Senior Sales Manager, Head of Fund Administration for Ireland and Head of Business Development Middle-East. He joined SGSS in 2005 where he was appointed Global Head of Sales for Investors Services. Eric de Nexon has been Head of Strategy for Market Infrastructures at SGSS since March 2007. He began his career in 1986 as Vice-President of Banque Demachy et Associés. In 1987, he was named Senior Consultant for finance and markets within Ernst and Young before joining the Société Générale group as Head of Back-Offices and Relit Project Manager at Delahaye Ripault, an investment services subsidiary. In 1994, he moved to Parel, where he held several functions before finally becoming Managing Director. In 2003, he was appointed Head of International Clearing and Custody Network of SBAN / STI before becoming Managing Director of the Global Asset Clearing project, launched in the context of the creation of SGSS. Valérie Siniamin-Finn is a member of the Société Générale Securities Services (SGSS) Management Committee where she has served as Head of Communication since February 2004. In this role, she is responsible for developing SGSS’s international brand strategy and communication plan, both externally and internally, including managerial communication actions, as well as implementing change management actions for integrating newly acquired businesses. She is responsible for developing all advertising campaigns and oversees the global communication budgets and media relations worldwide.

Money Markets | 31

Providing a Signpost to Central and Eastern Europe »Jonathan Calens talks to Anita Froech and Bettina Janoschek

New entrants to Eastern Europe’s custody business need to consider the competitive nature of the region and be aware that there are already a number of regional providers out there who are competing for market share.

Introduction Whilst many providers have looked for ways in which to limit expenditure, your investment in technology, service provision and human capital remains. Has this been the key to client retention for the Bank? On

the custody side of our business, there are three factors which we consider to be of paramount importance to our clients; namely stability, security, and engendering the feeling that we are committed to the business. To achieve these aims it’s very important to maintain investment, even though times are difficult; which also underlines our commitment to the custody business. In this connection, we have some important projects on the IT side in which we will invest heavily over the coming two years, again further underlining our commitment. Despite market conditions, Raiffeisen Zentralbank Österreich (RZB) continues to innovate. What role does this play, in terms of the Bank’s success? Of course it’s easy

to claim to be innovative and to offer new products to the client: the claim is not so easily demonstrated. A vital key to RZB’s

32 | Money Markets

success in the custody industry stems from the fact that we are operating not only in the Austrian market, but in some of the more difficult markets in the region. Here we need to offer solutions to our clients that will obviate the inherent difficulties whilst still complying with local regulations. Are you at liberty to discuss your AuC? At the moment we hold approximately €180bn in assets under custody. Within the CEE region it’s approximately €30-35bn.

The Local Market The Austrian market - an EU member since 1994 - offers great stability and maturity. Do you think that this is one of the reasons why local providers have weathered the downturn so well? To a certain extent,

I would say, yes! Remember however that Austrian banks are heavily linked to Eastern Europe, so much so that all of the major Austrian banks have some sort of network in Eastern Europe; hence they have been heavily impacted by the economic crisis, as Eastern Europe was hit quite hard. However,

on the other side of the coin, Austria itself is a very stable country and the Austrian government has handled the crisis quite well in our opinion. So, with the government support programme and the issuance of some participation capital, the Austrian market has managed the crisis quite smoothly. The Austrian market, when compared to that of neighboring Germany, is relatively small. However, the country’s influence beyond its borders is significant. Why is this? This is also linked to our influence in

Eastern Europe. Austria is of course the home market per se, but I like to think that our wider home market is the entire region. So when we talk about our reach, we must look to the entire CEE region as well. This lends itself to significant cross-border influence.

CEE Focus A few years ago, EU accession and widescale privatisation programmes in the CEE region were stimulating interest amongst international investors. Consequently, the demand for domestic custody services grew exponentially. Given the rather challenging market conditions of late, is this still the case? I can confirm that the inter-

est is still there. Notwithstanding, demand for new markets, for more exotic or less developed markets has fallen with concomitant declines in volume. Regrettably many people have ‘burnt their fingers’ over the past 18 months or so, which has led to some dissipation of



So, for a new entrant, it would be very difficult to start up in the Polish “market as it is already over banked on the custody side. ” interest in the region. However, investors are starting to return; it’s a slow but gradual process. Hence we remain quite positive about the future and convinced that going forward interest will increase. However, it would be wrong to say that people are as interested in Eastern Europe as they were two years ago. Despite the fact that you run one of the most extensive sub-custody networks in

the region, competition over the last few years has intensified significantly. That said, the Bank’s local expertise in the CEE markets in which it operates is second to none. Therefore, can some of the new, aspiring entrants to the region really hope to compete for the same clients? On the cus-

tody side, within our group, we cover 15 markets. We offer sub-custody in six others, and here we work with external partner banks.

New entrants to Eastern Europe’s custody business need to consider the competitive nature of the region and be aware that there are already a number of regional providers out there who are competing for market share. It helps that we have participated in this region from the very beginning. From a banking point of view, we opened our first subsidiaries in Eastern Europe before the Money Markets | 33

fall of the Iron Curtain. Since the late 80’s we’ve maintained a lasting presence that has grown considerably since inception. Thus, from a custody point of view, we are not simply focused upon the foreign investor who seeks to invest in the CEE region, but on the domestic market as well. Therefore, in addition to the services that we offer foreign investors in most of the 15 markets in which we are active, we also offer administrative services to local pension funds, retail custody services to our retail network, and custody services to domestic insurance companies and/or banks. For new entrants it would be very difficult to build up the same business model. In the event they tend to focus on the big markets like Poland, Hungary, and maybe Russia, but these markets are already over banked on the custody side. Naturally, those providers operating in CEE want to offer a harmonised level of service. However, given the infrastructure challenges attached to certain markets, is this feasible? Given that the markets are so

different, a truly harmonized level of service is difficult to offer, but not altogether 34 | Money Markets

impossible. In our case we give our clients a harmonized service by organizing operational training throughout the region and maintaining full communication with our colleagues across the region. Additionally, we offer the whole operational aspect based on SWIFT reporting; where manual reports are necessary, we try to employ the same layout everywhere. As for software applications, again we implement enhancements throughout our network ensuring that the same systems are in use everywhere. Obviously, from a capital markets and post-trade infrastructure perspective the goal is to harmonise local rules and market practices in order to mirror the standards set by Western Europe. In real terms, how far away are we from this becoming a reality? We need to recognize that, from

an infrastructure point of view, the region is not harmonized at all. First, it is necessary to identify the two groups of markets in the region; there is the segment which is already part of the EU and the segment which is outside. Naturally, EU legislation is applicable to the former group. Therefore, the degree of harmonization possible is far

greater in this group than it would be in the second group, which includes big markets like the Ukraine and Russia. These markets are far removed from the principles of the EU. Consequently, and for this reason alone, you cannot operate the entire market using a single system. We know that post-trade infrastructure development varies hugely across the region. However, as more and more CEE markets start to invest in the requisite technology etc. in order to handle things like securities lending and omnibus accounts, what impact will this have on liquidity across the region? The more standardized the markets

become, the more the CEE region will be able to comply with Western standards, and this will have an impact on liquidity.

Given that Poland is the largest capital market in the region, has an efficient CSD in KDPW and a strong local funds industry, do you feel, therefore, it offers the greatest potential for direct custody and clearing business?On the custody side, the volumes

in the Polish market are probably the biggest in the region; but it is a very competi-



tive market. In effect, the margins, by virtue of high competition, have fallen dramatically. So, for a new entrant, it would be very difficult to start up in the Polish market as it is already over banked on the custody side. Of course, overall, as a market it has great potential. It’s very developed, very big. Most of the foreign investors who are active in Eastern Europe are of course active in Poland as well. On the custody side however, we are concentrating our efforts more so on markets like Romania, Bulgaria, Croatia and Serbia, which are not yet highly developed, do not have high volumes, but have potential for the future.

Client Relationship Management In your opinion, given the dramatic downturn in the markets, are service levels in decline? I would say no. Of course volumes

have fallen, but on the positive side, this has afforded us the time to look at our procedures with a view to making improvements. So I would say the downturn has not had an impact on our service levels. Everything we do is done with a view to improving our services and retaining the clients that already work with us.

We apply this philosophy throughout the entire region. In spite of market conditions, RZB continues to meet and exceed the expectations of its clients. What is your secret? We make

every effort to know our clients and their requirements. To this end, we try to set up tailor made solutions for them. We also organize workshops with them and this fosters an even greater understanding. Maintaining a good relationship and contact between the relationship management team and the operational team is also crucial. Such teamwork aids in meeting client requirements expeditiously wherever and however they may arise.

year in Austria. From a product standpoint, we are currently working on remote membership solutions that will give foreign brokers direct access to the stock exchange by offering them a clearing facility. Of course we are already offering this product in the Austrian market, therefore, we have turned our attention to Hungary and Slovenia. Finally, we are in a working group comprised of the Vienna Stock exchange, local stock exchanges and the Austrian CCP. Our objective is to design a product which will enable our clients to trade, at least in the final stages, in all of these exchanges using a single clearing agent. This project is certainly the most important product innovation of 2010.

The Year Ahead What can we expect from RZB, in terms of product innovation, in 2010? From a stra-

tegic IT perspective, as mentioned earlier, we are implementing a new custody system here in Austria which will be rolled out throughout the CEE region over the coming years. We have already implemented new fund administration software that will go live this

Biographies: Anita Fröch is the Head of Custody Operations for Raiffeisen Zentralbank Österreich. Bettina Janoschek is the Deputy Head of Sales & Relationship Management for Raiffeisen Zentralbank Österreich.

Money Markets | 35

36 | Money Markets



The Regional

Approach »Lilla Juranyi talks to Money Markets

Unified organizational structure, “harmonized service levels, and a single point of contact for global clients are the main elements.

ING Bank is one of the key providers of securities services in Central and Eastern Europe. We have built up our regional network gradually, country by country and, since the late 90s, have offered our services in all of the major markets. In the beginning we had a multi-market approach, however, this has evolved into a regional offering. Clients investing in more countries enjoy great benefit from all of the improvements and innovations ING

has introduced. The regional approach has become a fundamental requirement. Unified organizational structure, harmonized service levels, and a single point of contact for global clients are the main elements. ING follows the client requirements and often proactively launches new ideas that will assist investors in this challenging region. The single point of contact in each country was offered from the very beginning. A very important step was taken later when ING introduced dedicated Global Relationship Management for our international clients. It is much easier for a client contacting the Global Relationship Manager (GRM) in Amsterdam who is fully aware of all the business requirements of a professional international client. The GRM is of great assistance to the Network Manager. It is their primary responsibility to manage any reMoney Markets | 37

It is important to be aware of the differences between countries within “ the Central and Eastern European region. Every country has its own legal requirements, language, market infrastructure and taxation. As a result, we employ local staff that can keep on top of market developments and proactively follow regulatory changes.

gional question, or general business issue, in providing a unified service. The GRM can act as the escalation point as well if there is an issue at local market level. It’s not just the Global Relationship Manager who provides full responsibility over the region. From a legal point of view as well, a client will have one regional contact that arranges the documentation requirements and a single, regional Master Custody Agreement. The latter agreement has greatly simplified the contractual needs as one agreement is used with specific country annexes. Simplifying the Client Due Diligence procedure - this is a top issue for financial institutions these days. For global clients this procedure is managed centrally, thus not burdening the client with unnecessary documentation, apart from when local regulations require specific documents. ING listens to its clients. In these turbulent times careful risk assessment and asset protection is a key element. ING has developed a special guide for its clients in order to support them through the various risk elements of all specific markets. Protecting our clients’ investments is of the utmost importance to us. In addition to the Risk guide an important element of the enhanced service is the optional account structure offering in Central and Eastern Europe. This is an essential item in connection with securities services as opting for an omnibus structure or a segregated account structure can have a significant impact. It may influence the clients’ assets, including reporting obligations, or its participation in a corporate action. Depending on the type of investor, this type of consideration may be very valuable. By providing our clients with a good overview of the different options available they can make an informed decision. Innovation means that ING is continuously keeping an eye on the requirements its clients need. This is reflected in the bank’s strategic decision to move its securities services business onto a single platform, Converg-e. Our previous custody system was implemented in 1997. However, after 10 years in consultation with our clients it was decided 38 | Money Markets

that we should move to the new state-of-the-art system. Covering the full CEE region with the same software, but adjusted on a country-bycountry basis according to the special market requirements. Our customers now enjoy the advantages of flexible operational solutions that Converg-e offers. Innovation quite often means market development initiations as well. ING is a leading partner in this respect. Based upon our deep securities services knowledge in Central and Eastern Europe, ING is taking the lead in several initiatives. Lobbying, participating in market development proposals and representing the interests of our foreign and local investors are a major part of ING’s services.

Knowledge Transfer It is important to be aware of the differences between countries within the Central and Eastern European region. Every country has its own legal requirements, language, market infrastructure and taxation. As a result, we employ local staff that can keep on top of market developments and proactively follow regulatory changes. We have also developed a cross border knowledge-transfer programme for our employees so that we can offer clients the best possible market advice. This ensures we not only understand local market requirements, but can also understand how our customers would expect a market to function. Our high ranking in the leading business surveys and direct feedback from our clients is clear evidence that they highly appreciate and value these additional services.

Biography: Lilla Juranyi is the Director of Securities Services - Central and Eastern Europe - for ING Securities Services.


Innovation at Work


»Money Markets talks to Willem Holst

There is a clear trend among “ professional investors with respect

to outsourcing all fund business, alternative as well as traditional funds, to one service provider.

Citco’s Unique Value Proposition

Citco’s custody services cover the entire trading, clearing, settlement and custody life-cycle. To what extent does the aforementioned one-stop-shop approach benefit your clients? By having the

entire operational process, from order placement to the final settlement of the transaction, under one roof we are able to significantly increase our clients efficiency and provide much needed transparency. We recognize that increasingly, clients are looking for an independent and experienced service provider that can help them to operate in an industry which is getting more and more complicated.

With respect to custody and fund trading you service tier-one financial institutions and Fund of Funds, do you have any plans to widen the net? Apart from servicing the clients that you mentioned, the

Citco Banks also service institutional investors, like Pension funds, Family offices and Endowments all over the world. There is a clear trend among professional investors with respect to outsourcing all fund business, alternative as well as traditional funds, to one service provider. Are you at liberty to discuss your AuC? A. Before the financial turmoil in the markets started our AuC were around $350 billion. Right now our AuC are around $230-240 billion. Approximately one third of our assets were redeemed and the net asset values of remaining assets came down. What do the aforesaid assets represent in terms of funds? The Citco Banks act as custodian for fund shares only, so on behalf of our banking clients we hold shares in single manager funds and fund of funds in custody. For our Fund of Funds clients we hold their underlying fund holdings. So 100% of our AuC are funds. Despite market conditions Citco continues to innovate. Is this the key to your success? Innovation is very important for Citco; we constantly

strive to offer our clients the best and most efficient services. At times I think that we are in an information technology business, without technology we would not be able to deliver the required levels of service our clients expect.

In order to meet industry demands for increased transparency we are revisiting our operational platforms and investing in state-of-the-art technology in order to improve automation and facilitate complete transparency with respect to the entire operational process. One of your latest innovations, Trailer Fees Administration, automatically manages clients’ billing, collection and payment of trailer fees. How has this been received and has it made the life of your clients easier? Our Trailer Fees Administration services, which

basically can be split into two parts, i.e. Citco collecting trailer fees on behalf of its clients under our own distribution agreements (we call this the traditional service), or Citco collecting trailer fees on behalf of its clients under their distribution agreements (we call this white labeling), has been very well received by the market. Money Markets | 39

you want to be the number one service provider in our industry then meeting “andIfexceeding the expectations of your clients is a must, especially nowadays. ” Nowadays financial institutions want to focus on their core business; consequently, collecting trailer fees doesn’t generally fall into this category. We have signed up several leading financial institutions to this unique service and are negotiating with many others. Hot Button issues

Are we seeing retrenchment in the emerging market fund administration and custody market? We do indeed see a retrenchment

in emerging markets fund administration. The main focus is now on Commodity Trading Advisors (CTA’s), Future/Commodity funds and Long/ Short equity funds. Furthermore, in order to limit the risks, assets are being repatriated from the emerging markets back to the USA. When there was significant institutional money flowing into the fund of hedge funds industry, fund managers and their service providers started to appreciate and recognize the need for, and the benefits of, greater automation and standardized messaging. Given the current economic climate, is this still a priority? Given

the current economic climate, the need for greater automation, standardized messaging and increased transparency has become an even bigger priority for our clients, hence Citco’s investments in state-of-the-art technology. Client Service Levels

In your opinion, given the dramatic downturn in the markets, have service levels in the custody and fund administration arena dropped? On the contrary, the dramatic downturn in the markets has in-

creased the need for better service levels. When you consider all of the funds in liquidation, suspended funds, gated funds etc. the markets have become a lot more complicated. In spite of market conditions, Citco continues to meet and exceed the expectations of its clients. Is this the key to your success? If you want to be the number one service provider in our industry

then meeting and exceeding the expectations of your clients is a must, especially nowadays.

How important is actual client contact when it comes to sustaining relationships with clients? It is all about sustaining relationships

with clients. In spite of the automation, face-to-face contact is very important and cannot be replaced by automation. Our Relationship Managers, based in our Dublin, Zurich, Luxembourg and Milan offices are in daily contact with their clients and meet with them at least once a quarter. Hedge Fund Administration

In line with global market conditions, the pace of consolidation in the hedge funds administration industry has decreased somewhat. However, moving forward, are there signs of further consolidation in the pipeline? Given the ever-increasing complexity of

the industry and the growing demand for transparency, smaller administrators will be handicapped by their inability to invest in new technology and 40 | Money Markets

people. At the same time assets under management have been shrinking, resulting in decreasing revenues for administrators. This has made the business of investment in core resources challenging for smaller administrators, which might force further consolidation in the industry. Prime brokers and large tier-one banks have been aggressively expanding their offerings to include fund administration services. In the main, they have adopted a buy-and-grow strategy as opposed to retooling long-only fund administration systems or building from scratch. Will this continue? Most of the larger financial

institutions have been affected by the financial downturn, which has forced them to focus on core business. In some cases they have been compelled to sell off certain non-core activities, including fund administration. I think it is fair to say that Prime Brokerage revenue streams funded a lot of these non-core activities. Aside from the renewed interest in independent administration it will be interesting to see how Prime Brokers adapt to this new world.

Is investor interest in funds, which are not independently administered and audited, waning? With the industry calling for improved

operational governance standards the role of independent administrators will expand. Consequently, the outsourcing of administration by hedge fund managers who currently perform these functions in-house will increase. Based on what we are hearing from investors, I think that most, if not all, hedge funds will be appointing an independent administrator. Based on recent events in the financial industry, regulatory compliance reporting will naturally be pushed to the forefront. With this in mind, we can safely assume that investors will want more compliance and regulatory information from the fund. However, would it also be fair to say that investors are not looking for position transparency but a view of relative transparency, or the exposure to countries, currencies and industry sectors? Investors

are indeed pushing for more compliance and regulatory information and the administrator is ideally positioned to supply such reporting. As investors become more institutionalized, and because of recent events in the hedge fund industry, the nature of their due diligence is expanding beyond relative transparency. Attribution and asset existing reporting, and monitoring of adherence to investor guidelines are becoming the norm. The Road Ahead

What does the future hold for Citco’s custody business? Our cli-

ents want to be able to concentrate on their core-business, which means outsourcing the administration and custody of their fund business to an independent and professional service provider. Although this applies to mutual funds, it does not apply to hedge funds. Given all of the aforementioned factors, we feel that Citco is ideally positioned to benefit from the current economic climate.

Biography: Willem Holst is the Managing Director of Citco Banks.

Money Markets | 41


»Jonathan Calens talks to Claude Michaux

By selecting best-in“ class IT platforms and

customising them and performing rigorous testing, we ensure that our powerful and flexible systems are both stable and reliable.

Getting to Know CACEIS Q. With respect to the provision of custody and depository/trustee services, you currently focus on France, Luxembourg, Ireland and Germany. Do you have any plans to widen the net?

CACEIS’s goals, in terms of strategic development, are achieved principally through partnerships and acquisitions. We have always actively sought to acquire business or parts of businesses that are a close strategic fit to existing operations. In terms of custody and depositary/trustee services, we plan to increase our presence in Europe by focusing our efforts on finding a suitable partner or acquisition in the UK and Italy. Despite market conditions, CACEIS continues to innovate. Is this the key to your success? Innovation is key to success and is a

core company value, which appears in our “Solid and Innovative” slogan. We have a history of innovating, being the first company to service futures funds in Luxembourg and the creator of the asset cloning technique designed to facilitate the management of multi-jurisdictional fund ranges. We invest heavily in the research and development of new products and their related IT infrastructures as innovation gives us and our clients a competitive edge. Our extensive support to cross-border fund distribution capabilities and our comprehensive middle office services are important examples of recent innovative product

42 | Money Markets


to Thrive


Money Markets | 43

major asset management support functions, such as custody, fund accounting “andThe TA are gradually becoming commodity businesses. High volumes and low margins mean that, although they play a vital part in asset servicing, they generate little in the way of profit.

developments, which is something our clients have come to expect from us. You took over the securities processing and custodial services of HypoVereinsbank (HVB) at the end of 2007. What impact has this had on your custody business? For CACEIS, the acquisition of HVB

securities and their custodial activities was part of our targeted, international, acquisition growth strategy. The operation was an excellent opportunity for us, given that HVB had a reputation as a solid actor in the German securities business with a significant market share. For CACEIS it represented a major step in realizing the international expansion of our custody business and was the first step towards providing a comprehensive asset servicing value proposition in Germany. The acquisition also added €400bn of assets to CACEIS’s assets under custody. Furthermore, it gives us approximately 15% of the German custody market and a footprint in one of Europe’s largest asset services markets. 44 | Money Markets

Technology Over the years, CACEIS has invested heavily in technology. Will this trend continue?

Yes, we will continue to invest heavily in technology as it is a crucial part of our business. Companies unwilling or unable to keep up IT spending will suffer and become less competitive. However, by combining IT investment with a strategy of rolling out systems across our network, we ensure budgets are utilized effectively. Automation not only speeds up operations, but also serves to reduce costs and, more importantly, error rates. By selecting best-in-class IT platforms and customising them and performing rigorous testing, we ensure that our powerful and flexible systems are both stable and reliable. To what extent do you consider technology to be a key differentiator with respect to service provision? Most requests for proposal

contain detailed questions on our IT systems, their capabilities and back-up plans, which is an indicator of reliable IT’s importance to clients.

However, clients require more than just accurate and timely NAV calculations via straight through processing. A host of related services are dependent on IT, from cross-border fund distribution support to detailed report generation, from clearing services to performance and risk measurement, so it is technology which is the key differentiator, enabling CACEIS to provide a full asset-servicing offer.

Hedge Fund Administration You acquired fund administrator Olympia Capital International and its affiliates in 2007. What prompted the aforesaid acquisition? The acquisition of Olympia Capi-

tal International tied in neatly with our goal of strengthening our service offering to the alternative investment funds industry and was a key part of CACEIS’s wider strategy of targeted international growth. Through the acquisition of the well-respected fund administration specialist, we not only gained a large, high-calibre client base but also inherited a significant number of qual-



ity personnel that understand the needs of the aforementioned clients. In addition, it also gave us the opportunity to export our servicing expertise, offering clients more comprehensive services, in terms of both geographic scope and product range. To what extent has the acquisition enhanced your exposure to the alternative investment funds industry and new markets? Through the acquisition, we gained a

number of well-respected alternative clients and significantly increased our alternative assets under administration in one fell swoop. Furthermore, the operation permitted us to broaden the jurisdictional coverage we are able to offer clients, with new operational centres in Canada, the US and Bermuda. By retaining the management and staff, we also inherited

on costs and the constant downward pressure on administrator fees and the demands for more frequent and detailed report production. Automation requires significant IT expenditure on behalf of asset servicing providers, but brings enormous benefits to the industry as a whole in terms of reduced costs, increased transparency, shorter cut-off times and lower error rates. The automation drive will remain a priority at CACEIS and we have been actively participating in SWIFT’s Sharpe initiative to create a new set of autonomous messages, specifically designed to serve the fund of hedge fund industry.

Market Trends & Drivers How important are the major asset management support functions, such as de-

the alternative side. Service providers, which have specialised in alternative assets, will encounter volume difficulties as alternative managers start to look to UCITS to break into the mainstream. And as traditional managers look to more complex instruments, like OTC derivatives in order to boost the performance of their portfolios, providers lacking the experience in pricing sophisticated products will suffer. In your opinion, is asset servicing slowly moving away from being a commodity business? The major asset management support

functions, such as custody, fund accounting and TA are gradually becoming commodity businesses. High volumes and low margins mean that, although they play a vital part in asset servicing, they generate little in the way of profit. However, where asset-servicing companies can really add

The automation drive will remain a priority at CACEIS and we have been “actively participating in SWIFT’s Sharpe initiative to create a new set of autonomous messages, specifically designed to serve the fund of hedge fund industry. ”

the expertise in administering vehicles from the new jurisdictions, putting us in a position to service clients operating out of the world’s major fund centres for alternative investments - Luxembourg, Dublin, Bermuda and the US. In line with global market conditions, the pace of consolidation in the hedge funds administration industry has decreased somewhat. However, moving forward, are there signs of further consolidation in the pipeline? The pace of consolidation may pick

up as mid-sized players start to experience difficulty in keeping up with technology spend due to lower revenues from reduced assets under administration. Polarisation will continue, with boutique administrators occupying a viable niche at one end and larger players able to stomach the IT costs at the other. Mid-sized players will be slowly acquired and absorbed, or may seek to emulate the boutique model and downsize operations. When there was significant institutional money flowing into the fund of hedge funds industry, fund managers and their service providers started to appreciate and recognize the need for, and the benefits of, greater automation and standardized messaging. Given the current economic climate, is this still a priority? Today, man-

agers and investors are keeping a very close eye

positary and custody work, fund administration and transfer agency services, to the long-term success of the investment fund sector? Large service providers are able to

reap the benefits of massive economies of scale on the major asset management support functions, which investment management companies are unable to match in-house. Over the years we have seen the costs associated with these services decrease significantly, which in turn allows investment managers to reduce their total expense ratio, increase the competitiveness of their funds, whilst improving the quality and scope of services they offer their clients. Investment managers are increasingly realising that outsourcing non-core functions to a specialist provider not only reduces costs, but also allows greater focus on the core activity of asset management.

The growing convergence of traditional and alternative asset management styles is creating a new range of challenges and opportunities for the investment and asset servicing industries. What steps have you taken in order to prepare for the challenges ahead?

As a full service provider, CACEIS is well prepared to handle the convergence of traditional and alternative management styles. We are experienced in managing both styles and are able to handle the volumes associated with traditional retail funds and the complexities associated with

value to their customers’ businesses and increase their revenues is in related services, such as risk management, middle office services and fund distribution support. These are the services that are helping to draw asset servicing away from being a commodity business.

The Future Given the current financial climate, this may be a difficult question to answer. However, where do you see CACEIS’s custody business this time next year? CACEIS is a bank

that is fully dedicated to asset servicing. Custody, in particular, is a core part of our business. We are the leading player in France, the domestic market of our shareholders which are committed to the custody and wider asset servicing business. However, we are always open to discussing partnerships with groups who share our servicing philosophy and are constantly looking for acquisitions that are a close strategic fit for our operations. It is clearly difficult to know whether our custody business will change by next year, however, whatever the case, decisions are always taken with the best interests of our clients at heart. Biography: Claude Michaux is the Head of Marketing & Communications for CACEIS Bank Luxembourg.

Money Markets | 45


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List of Contributors C

CACEIS Citco Bank Citigroup


European Central Bank


First National Bank


ING Securities Services


Marfin Popular Bank


Nordea Bank


Raiffeisen Zentralbank


SEB Societe Generale Securities Services




Wells Fargo

48 | Money Markets

Nordea Bank AB (publ)

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Making it possible

Money Markets - Volume 10  

The definitive guide to global and sub-custody.

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