The local expertise provided by a global sub-custodian network like ours is a considerable advantage, especially when it comes to clients who are doing business across borders.
The G20 regulatory effort really is a global one that reaches far beyond the developed markets, as a look at the list of G20 members will show: it includes China, India, South Korea, Indonesia, Argentina and Brazil. It is no wonder then, that there is a wide range of local initiatives kickedoff by principles agreed by the G20.
In the case of two examples – increasing capital standards and improving the safety of OTC derivatives – there is wide variation in the detail and timeline, even among the major developed financial centres. For capital standards, the US Dodd-Frank Act specifies no timeframe for the implementation of new capital standards.
Here in Europe, the proposed Capital Requirements Directive CRD IV, which contains a timeline for compliance to Basel III rules, now looks like it may be delayed although we were expecting it in January 2013. And of course other jurisdictions, such as Australia and Canada, are implementing their own interpretations of the Basel rules too.
The bottom-line is that there is significant variation in the timing, detail and content of the regulations from one jurisdiction to the next. As a result, clients are turning to their banks to help them navigate this new landscape and advise them on the likely impact as well as how best to prepare and respond. Global banks with a local presence are in a great position to do so.
What recent regulatory reform best illustrates the benefits of using a global service provider?
This local expertise becomes especially important where initiatives in one country have a knock on effect on investors, funds or service providers in another. The European Alternative Investment Fund Managers Directive (AIFMD) provides one such instance. Even if you’re a custody provider operating in a single custody market outside Europe, you’re still likely to have clients operating on a global basis that you’ll have to negotiate new risk and liability clauses with.
AIFMD also includes tough new depositary requirements and rules surrounding counterparty risk. Alternatives managers must now ensure that their services providers are up to scratch. For service providers, the more links of the chain you are present in, the easier it is for your clients to achieve compliance. Deutsche Bank has a prime brokerage business, operates as a depositary bank, has a sub-custody network and a hedge fund administration business.
Thibaud de Maintenant, global head of direct securities services at Deutsche Bank, discusses the challenge of worldwide regulatory reform “The bottom-line is that there is significant variation in the timing, detail and content of the regulations from one jurisdiction to the next” This means that we can negotiate a model of liability with our hedge fund clients that provides them with complete clarity regarding their asset holdings exposures.
How far do the benefits of global reach extend to doing business in emerging markets?
If anything, the benefits are even more apparent in anticipating and responding to regulatory moves in emerging markets.
These can be sudden and unpredictable and participants may find themselves scrambling to comply.
One timely challenge concerns efforts by governments in emerging countries to protect themselves against the destabilising effects of so-called ‘hot money’. With poor asset returns in developed countries, the governments of emerging economies have become hypervigilant around the dangers of money flooding into their asset markets, which could flood out just as easily.
We’ve seen several specific examples of regulatory moves of this type recently, including in Indonesia, which introduced minimum holding periods on central bank bonds in May; changes in Taiwan around the remittance on off shore inward investments, and the latest imposition of short selling limits in South Korea in August 2011.
Firms with a global sub custody network can bring to bear local expertise to help their clients prepare and respond quickly to measures from regulators and central banks to control the flow of foreign investment. Firms that operate as local market providers are positioned close to regulators, central banks and infrastructures are able to respond more quickly. Their market advocacy efforts also provide a route to help shape these regulatory changes before they are enacted.
How would you summarise the current state of play when it comes to the impact of global industry reform?
There’s no doubt that global regulatory guidelines are being applied differently the word over and that those firms that can respond rapidly to the changes will be at an advantage.