London, Wednesday, 30 November 2022
By Angelos Tsigkopoulos, Publisher, The Decision Maker
Sponsored by Luxury Transfers - recognised Most Reliable Transport Services. London 2022
The Depositary Banking & Custodian Services Survey 2022 was released by the Luxembourg Bankers' Association (ABBL) with assistance from the CSSF, Luxembourg's financial regulator. This is the first iteration of a study that aims to highlight the significance of these two little-known but crucial roles in the financial industry. These are thriving companies with a promising future.
The Depositary Banking Cluster, a division of the Luxembourg Bankers' Association, spearheaded the study's introduction (ABBL). Participation was open to all depositary banks with a banking licence. The Depositary Banking Cluster's vice presidents, Christian Dominique and Éric Guerrier, as well as president David Claus expressed their happiness at the participation percentage of 100%.
“The idea was to measure the impact of this business, which is much less well known than private banking, but which is one of the pillars of banking activity in Luxembourg,” Claus stated.
Being a custodian is a simple job in and of itself. Simply storing clients' financial assets in securities accounts is all that is required. “It is the equivalent of a cash account for financial instruments. Unlike private banks, there are no services associated with this custody, such as advice or management. After the transaction, we will have to settle the transaction--what we call liquidation or settlement--in other words, exchange the cash for the securities purchased, which will be recorded in a securities account”, he added.
Unlike the custody industry, this is a standard banker's position that is not tailored to any one type of client. In terms of processes, it is a fairly developed job with some automation. In most banks, back-office departments are in charge of carrying it out, while teams with specialised knowledge handle the depositary business due to its uniqueness.
Investment funds, which get more services than only custody, fall within the purview of the depositary business line.
“The depositary banker is a kind of watchdog, an additional protection for the investor,” Claus clarified, who is also CEO of European Depositary Banking. This is also a European specificity. American funds are not required to appoint one. “There are already many people protecting the investor: the CSSF, the auditor, the board of directors, the manager, etc. The added value of the depositary is that it has a day-to-day view of what is going on in a fund because all the transactions pass through our books. We are in a much better position to see if there is an error or if there is something suspicious going on. We secure the holding.”
While the custodian's duties are restricted to examining the assets that the fund directly owns, other service providers handle, such as the calculation of net asset value, asset valuation, control of investment processes, dividend payment, etc., the custodian is still responsible for overseeing all of the fund's operational processes. These procedures are all managed by the custodian. The custodian's task is carried out under extremely strict restrictions and with very specific regulatory criteria. “In a few years, we have gone from regulations based on general principles to very prescriptive regulations.”
According to the study, at the end of 2021, the banks operating in the sector had assets in their custody business valued at €6.5 trillion. This was a 22% increase from the previous year “mainly due to the performance of the market.”
Custodians will experience growth as well, with assets under custody reaching €5.5 trillion (+15%). Claus also underlined a crucial point: these sums are distinct, unique to each business line, and do not overlap. “This is a mistake that many people make and which leads to an underestimation of the importance of the business by half. For me, the real value of the study is there.”
The study's scope did not include assets under the custody of non-bank custodians. Non-bank custodians are experts in private markets, whereas bank custodians are authorised by the CSSF and deal with listed assets. Two of the more popular ones are IQ-EQ and Alter Domus.
The top ten players control almost 78% of the assets under custody in one sector and approximately 88% of the assets under custody in the other, indicating that the two markets are highly concentrated.
The numbers for personnel levels are stable year over year, with 1,204 full-time employees working in custody and safekeeping operations and 953 full-time employees performing custodian oversight duties, or around 10% of all banking workers in Luxembourg.