In the period of just over 18 months since State Street acquired the global securities services business of Deutsche Bank it has been snapping up some of the most significant custody and securities services mandates in Germany.
At the same time, the attrition rate of former Deutsche Bank clients has been much lower than the US bank expected, signalling the evolving nature of the German market as pension trustees and investment managers abandon the preference for universal banks they once held so dear.
The year began well for State Street when Aventis Pension Trust, the pension fund for pharmaceuticals group Aventis, appointed the bank to provide depotbank (custody and accounting) services for its e2.3bn fund.
At the time, Petra Zamagna, head of benefits finance and asset management at the company, said State Street’s 30 years in Germany had played a part in the decision to award the mandate. This experience, she said, gave the bank “an in-depth understanding of the market here and of the regulatory environment”.
In May, State Street picked up two more mandates, for Lufthansa and VHV Group. The German airline awarded a multibillion euro depotbank and performance and analytics mandate.
VHV, a composite insurer with capital investments of about €12bn, appointed State Street to provide depotbank services and global custody. The bank’s “superior technology” along with its experience in the German marketplace were cited as deciding factors by Bernd Baur, head of capital investments at VHV Group.
State Street marked the first anniversary of its acquisition of the Deutsche Bank business in February this year. In that period the bank retained the available client revenue, operated the global securities services business at a profit and was on track to finish most of the client conversions on to its platform by the end of 2005.
Stefan Gmuer, senior vice-president of State Street in Munich, says that once the conversion of clients is complete, State Street will be the depotbank for 25% of public mutual funds in Germany. In Germany, these funds must notify and gain approval from the regulators before they change their depotbank.
“You cannot migrate a mutual fund’s book of business within two months,” says Gmuer. “For this reason, we have set a target of transferring all of the business by the end of 2005.” About 1,100 investment funds, institutional funds and public mutual funds and real estate funds are being transferred on to State Street’s platform.
Although there has been little fall-off of Deutsche Bank clients, there has also been little staff attrition. About 95% of the staff involved have stayed with State Street and the business is run by a joint management team. “There has been no ‘us and them’ approach. We want to hang on to our clients but we also want to keep the people who have the relationships with the clients and who do the operations.”
There is plenty of potential in the German market, particularly since the Chancellor, Gerhard Schröder, cut state pension benefits in October last year. The move was an emergency measure to plug an estimated €8bn shortfall in the state pay-as-you-go pension scheme, without raising contributions. The move is likely to spark greater interest in private and company funded schemes, which in turn will help the custody business as assets will have to be custodised.
Other legislation is also having an impact on the German market. The new investment law has opened up choice in terms of investment products, while funds are looking for greater returns with more complex instruments such as derivatives, hedge funds and alternative investment vehicles.
Gmeur detects a change in the once conservative German market. “Germany used to be very house-bank driven,” he says. “A universal bank would be a one-stop shop, providing trade execution, asset management and custody. That is breaking up and there is more transparency coming into the market, distinguishing between these different products. Funds are looking to choose the best provider in each of these categories.”
The complexity of investment products, the globalisation of the market – particularly since the euro became an investment currency – and the cost pressures on funds companies mean that the reliance on house banks is becoming a thing of the past.
On the clearing and settlement side, the German market is highly automated and efficient. In November 2003, cross-border settlement was simplified when Clearstream Banking Frankfurt (the national central securities depository), Deutsche Bundesbank and several other EU central banks introduced a guarantee concept, allowing trading firms to use central bank liquidity in their home central bank to secure securities transactions in the Clearstream night-time processing arrangement.
The facility gives international participants in cross-border transactions access to this processing arrangement using central bank money with efficiency comparable to that provided for domestic participants, increasing efficiency of cross-border settlement and lowering participants’ costs.
Under the guarantee concept, participants make liquidity available for the German market through deposits in cash or securities at their national central bank, which submits a cross-border guarantee to the Bundesbank. The liquidity is thus available in Germany within the framework of the usual Clearstream process with the Bundesbank. Matthias Ganz, chief executive of Clearstream Banking, says the move had brought clearing standards for the German market into line with international rules and regulations. “The whole market will benefit from risk-free securities clearing and settlement,” he says.
Earlier this year, Clearstream introduced an automated settlement route for over-the-counter German government debt transactions with LCH.Clearnet, the European central counterparty. The routing process for settlement instructions generated
by LCH.Clearnet on behalf of its members to be forwarded to Clearstream Banking Frankfurt
for settlement will be automated, achieving 100% straight-through processing rates.
Customers holding their securities assets with Clearstream Banking Frankfurt will no longer need
to instruct Clearstream Banking Frankfurt, therefore reducing operating costs and eliminating matching issues. This enables Clearstream Banking Frankfurt customers to optimise the use of assets held in
custody.
In another reform, Frankfurt Stock Exchange amended its rules to enable exchange transactions to be settled through any registered Wertpapiersammelbank in the country. Wertpapiersammelbanken are specialised banks that administer securities in collective safe custody and carry out securities giro transactions. Previously equities transactions had to be settled through Clearstream.
The importance of clearing and settlement to the overall aim of a singe capital market for Europe was highlighted by EU Competition Commissioner Mario Monti earlier this year in a final ruling on Clearstream’s anti-competitive behaviour in its home market.
Clearstream had, said the European Commission, refused to supply to Euroclear Bank (the Brussels-based international central securities depository) clearing and settlement services for registered shares issued under German law. “While competition law recognises the freedom of companies to freely choose their trading partners, companies in a dominant position have a special responsibility.”
Euroclear Bank eventually obtained the clearing and settlement services from Clearstream Banking in November 2001 – more than two years after it requested those services.
In presenting the ruling in June this year, Monti said: “Today’s decision makes clear that the competition rules are being applied in the financial industry. I am convinced that fair competition on the merits will make European financial markets more efficient. Smooth cross-border trade in securities requires functioning co-operation in clearing and settling of trades. This is in the interest of creating an integrated single capital market that will promote growth.”

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