By Ross K. McGill, Specialist in Asset Servicing, Custody, Tax Processing and Regulatory Compliance.

Ross K McGill

Hello from sunny Athens. Well, hello from 20 miles south of Athens actually, the small town of Vouligameni on the coast and the location for the Network Management (Europe) Conference – NeMa. NeMa comes in four flavours – Americas, Africa, Europe and Asia. The European conference is the largest and most well established and this year it welcomed over 460 delegates. The biggest ever. The timing and location couldn’t have been more interesting. A series of cliff-hanger episodes between Greece’s creditors and the home or democracy itself kept us all on our toes and any small period between the major issues of network management debate could easily be filled with speculation on who would do what to whom next.

As is customary at NeMa, each day has its own chairperson and so, following opening remarks from conference producer Andrew Barman, the floor was held by none other than Clive Triance of HSBC – who had just the previous evening announced a two-year cost cutting programme at the level of 50,000+jobs. As Triance observed, others in the industry, such as Citi, had already embarked on similar programmes in recent years, so this was, apart from the numbers involved, not much of a news story and more of an evolutionary tale of whats happening in the industry.

And, whats happening in the industry was at the heart of the conference. The usual suspects topped the agenda for both days – technology, innovation, sub-custody operational issues, regulation, T2S and pricing.

The session I attended on new fee structure models in sub-custody was particularly interesting, however, as the session was conducted under Chatham House Rule, I can use what was said, I can’t associate any commentary with specific individuals or their affiliations. The room seemed to be well split between the buy and sell side of the sub-custody industry. What seemed odd to me was a curious approach from the sub-custody side that prices must always fall, despite increasing costs including then regulatory overload we all hear at every one of these conferences. This also seems to be inextricably linked to the idea of fee bundling. The problem all the players seemed to have is that while everyone on the sell side wants to unbundle fees, no-one wants to be first..and so the status quo remains.

The change I detected this year was that the pain being inflicted on everyone by squeezed margins and higher regulatory costs, is a recognition that these two issues are linked and broken. One speaker baldly stated that the sub-custody fee model is just plain broken - we’ve all known it for some years, but no-one is prepared to do anything about it. Many now seem to be realising that you can’t continue a simple basis point fee model (a) because it discourages any detailed analysis of cost/benefit (which most industries other than financial services do perform as a matter of good business practice) and (b) because it leads inexorably to that ‘fees must always go down’ simplistic (but understandable) attitude on the buy side of sub–custody. What was refreshing was that I did detect that perhaps this conference was different. This time something might actually happen. Maybe it was that Chatham House Rule. My view is simple. Financial Services needs to learn from other industries where this model would have been thrown out long ago.

There are many elements that go to make up a sub-custody service, the issue is that there is a large chunk that is automatable, standardisable and therefore can be commoditised in a cost-benefit price calculation. The commoditising of the sub custody fee however is not the whole story. There are many operational deliverables, most in the post trade asset servicing space, now that T2S is almost upon us (more of that later). Some, such as my own speciality, tax, have high costs, are complex, manual and often are treated as an administrative burden rather than a part of the value chain or indeed even a revenue opportunity. These elements cannot be commoditised in quite the same way and they also can very much be treated as a value contributor to the business. But the precursor to that is acceptance of the principle of un-bundling of fees. One speaker made note of the fact that the biggest problem in pricing sub custody is the lack of education between seller and buyer as to what the product actually is, what it takes to deliver and where the value is. I agree. In fact my observation is that this message was probably not delivered forcefully enough. The 'sine qua non' in traditional marketing is that your customer will understand their fees better if they understand what they are actually buying. That gives you the opportunity to unbundle fees. That in turn leads to more ways to compete as each firm assesses and communicates what they are good at. In other words, unbundling fees is not a problem, its a solution. The commoditisable piece of the fee structure becomes a basic ‘entry level’ that just gets you to the table. The value elements, whatever they are, local knowledge, tax expertise, account flexibility etc are where you can openly demonstrate differentiation of yourself from your competitors. This also resonated with the buy side in the room (although they will always start from the position of wanting lower prices). They now want transparency, partly because they themselves are coming under increasing regulatory and/or governance pressures. Well, be careful what you wish for. This argument also leads to unbundling and service level differentiation both in delivery and in price. The base service is inclusive. The service differentiators, value adds, can be selected based on client need or requirement. The important thing is that the separation allows you price each service element in a way that associates the fee with the delivery effort. You want a high value element, you should be prepared to pay for it (now that you understand what ‘it’ is and entails).

From the perspective of someone who came to this industry from the outside, I’ve always been amazed at the lack of creativity and flair in pricing in the industry. So, I felt more upbeat after this session than I ever have after a pricing discussion at NeMa before. There were those who observed, quite rightly, that ‘we’ the industry have a habit of voicing these issues at conferences, sometimes vehemently, then just going back to our day jobs and nothing ever changes. I got the feeling this week that maybe, just maybe…

I must not forget to mention T2S. There were some great presentations on T2S and this subject seems to rather like Marmite or oysters. You either think it will work or you think it will fail utterly. One audience question hit the nail on the head for me. They asked – why will T2S succeed where other ‘big database’ projects have almost universally failed before. I think it was Alan Cameron of BNP Paribas who commented that it will succeed because the time is right, the technology is available, the regulators are all pushing for it and, most important I think, the need of the industry makes it almost a requirement if the financial system is ever going to evolve intelligently. Wise words (and I have paraphrased and hopefully I’ve correctly attributed).

The discussion of T2S is of course related to the issue of the roles of CSDs and sub custodians. Everyone was of similar opinion that the near future will see a consolidation of CSDs and sub-custodians as margins stay thin and regulatory and technology costs rise.As one delegate put it – the price of entry to this space is high and rising. The price of staying in it is also rising. Some will not be here next year. It was noted of course that a change in the sub-custody fee model might alleviate some of that pressure on some at the edges. As a counter point to the WFC conference in Cancun, there were several delegates present from both conferences (myself being one). Its clear to me that where sub-custodians may be struggling with a broken fee model and a complex and costly product, CSDs are looking at this as opportunity rather than problem. They have, by their own admission, the technology infrastructure and position in the market to offer value added post trade services to their sub-custody clients so they have the option of selling the value while outsourcing the delivery. Both conferences therefore came to a similar conclusions that the ‘utility’ concept could only work when the more creative and nimble firms with specialist asset servicing expertise get together in partnership with the custodians and CSDs who can deliver a platform by means of which those difficult post trade asset servicing tasks can be efficiently tackled.

For my part, I gave my presentation on tax on the second day. Not exactly the largest audience in the world, but there again, tax is never an easy subject to get people energised about. I updated everyone on the current trends in the tax industry which are creating much greater awareness in the investor community and in the regulator community. FATCA is evolving into GATCA with the onset in 2016 of the OECD Common Reporting Standard and AEoI. That in turn has already made the investor community realise that, if they are going to be disclosed to their home market tax authority either under FATCA or GATCA, then they may as well get some of those tax entitlements back from foreign governments. This is showing up in our numbers where our tax claim processing volumes exceeded 5.8 million this year – up over 100% on the previous year. I made the obvious connection between this issue, which will create massive back pressure on already strained sub-custody resources, and the opportunities for partnership between specialist firms like us and the custodians and CSDs who need to deliver these kinds of value add services through their centralised and larger technology platforms.

Collateral played a much smaller discussion role in this conference than in the WFC conference, but was still there on the agenda. The issue (amongst others) is velocity. With regulators requiring much larger capitalisation of almost everyone in the chain, including those who did not think they were subject to such requirements, large chunks of collateral are being sucked out of the market and are essentially being immobilised. This means, by definition that whats left needs to be handled very efficiently and must be able to be moved quickly from one place to another when its needed. John Wilson of DBV-X moderated a great panel debate on this with Andrea Tranquillini of one of the newest CSDs, globeSettle, Cedric Gillerot of Euroclear, Philippe Ruault of BNP Paribas and Rob Scott of Commerzbank.

I’d like to end this rather long epistle with reference to two of the highlights of the conference. The first was Jamie Woodruffethical hacker, who’s scared pretty much everyone silly with both commentary on as well as physical demonstrations of the fact that he can hack any system. I don’t think I’ve seen quite so many bankers, almost lemming like, falling over themselves to get to speak with him afterwards and ask him to visit them. As a follow on to my attendance at WFC2015 two weeks earlier, Jamie’s presentations just made everyone very aware that the more complex we make our systems and the more integrated they are (like T2S), the more easy they are to hack and once hacked, the larger the potential damage can be. That left everyone very sober (at least until the bar opened). The second highlight was Richard Mullender, ex Scotland Yard Lead Trainer of Hostage Negotiators. He did an excellent job of showing us all that we rarely listen efficiently - then helped us do exactly that. I now know the listening position and how to get answers to questions that I don’t have to even ask.

As always, the NeMa closing party was an event to be remembered. All the sponsors in fact did a great job and I noticed that there were significantly more sponsors at all levels this year than last. A sign perhaps that NeMa is taking its rightful place alongside SIBOS as one of the ‘must-attend’ events for industry professionals.

Well, I hope that this was a useful and informative letter from Athens. I’m now airport bound for a trip to New York, so, you never know, you might hear from me there next week. Safe travels to all who came to Nema (Europe). I’m sure I’ll see many of you again at NeMa (Asia) in Shanghai later in the year. For those who haven’t been here, I hope that my Twitter commentary and this blog, help to bring the discussion onto a wider stage.

 

Follow Ross K. McGill on Twitter: @RossKMcGill 

This post originally appeared on LinkedInPulse