When the Second Swedish National Pension Fund (AP2) appointed State Street to provide global investment services for its $14bn of assets under management in June this year, the move highlighted a disturbing trend for the Nordic region’s domestic global custodians. Are the region’s larger pension funds players and insurance companies about to abandon local players in favour of the big hitting foreign global custodians?
The answer to the question will inevitably depend on who is asked. The large, mainly US custodians, have argued for most of the past few years that increasing sophistication of investment products and higher levels of cross-border investment require pension funds to choose custodians who can provide the requisite investment services to support such changes in the market. Domestic custodians argue that only they know the market well enough to provide a truly personalised service. These battles between custodians are being played out across Europe and the Nordic region is no exception.
State Street joined Svenska Handelsbanken, which was hired as AP2’s sole custodian in 2001. It will provide custody and fund accounting services, however the details of how the dual arrangement will work have not been finalised. AP2 is one of four buffer funds created as part of the May 2000 reorganisation of Sweden’s national pension system. The fund began operations on 1 January 2001, with the aim of ensuring that pension assets are invested to generate a maximum long-term return at a minimum risk.
Jeff Conway, senior vice-president and head of State Street’s Investor Services business in the UK, northern Europe, South Africa and the Middle East says Sweden is widely viewed as an innovator in addressing the pension needs of its citizens. AP2 is the second Swedish pension fund to select State Street as its investment services provider. The US bank was appointed in October 2001 to provide custody, accounting, performance and analytics, and global foreign exchange services to Siemens’ Sverige Pensionsstiftelse, which has $74m assets under management.
Goran Fors, head of Investor Services Global Clients at Sweden’s SEB, says during the past few years there has been a trend for the top tier investment institutions to choose large foreign global custodians. “There is strong competition in the Nordic market in general and the bigger global custodians are becoming very active as interest grows in these markets. However, the local custodians are still very strong and the medium and smaller investment institutions continue to use the domestic global custodians,” he says.
Colin Beattie, vice-president, Citibank Global Securities Services Network Management, says competition in the Nordic region is intense as Nordea attempts to establish itself as the dominant force. “Sweden is seeing a particularly fierce battle as local providers defend their position. This level of competition in the region is driving down fees as there has been much undercutting.”
In terms of foreign competition, the domestic custodians should be worried, says Beattie. “I think some of the local providers in the Nordic region may have been a little complacent in the past because of the fact that – uniquely in western Europe – the Nordic markets did not have any major foreign custodians competing with them. It is inevitable that there will be a shake-up in the Nordic markets due to increasing cross-border competition.”
David Bilbé, managing director of Brown Brothers Harriman (BBH) London, says there are tensions between the competition among regional custodians and foreign custodians. “Clients, such as pension funds and insurance companies, require global services. The domestic players provide very strong domestic capability and there is strong competition, for example, in Sweden, for clients. But there are questions over the adequacy of the provision of global services. However, the big global custodians in providing global services compete directly with the domestic banks and that is not a satisfactory situation for the domestic players.”
Bilbé’s colleague, Annika Larsson, BBH vice-president and head of the bank’s relationship management team for the Nordic region, says the large global custodians are ‘eating up’ the locals’ domestic franchise. “Domestic players have not yet been able to stop pension funds and insurers moving away from local custody providers which has been the patttern of the past 10 years.”
The reorganisation of Sweden’s pension system in 2000 has led to that market being particularly strong. The reforms included the creation of individual pension savings plans as a supplement to company or government pensions. “The introduction of these plans has created huge interest among Swedish investors,” says SEB’s Fors. “As a result, there has been an increase in the number of mutual funds offered to the public and I’d expect this trend to continue.”
Larsson says of the mutual funds approved by the Swedish government, 75% are offered by foreign distributors. “Unless banks offer a wide range of funds, investors will go to another provider,” she says. Bilbé says BBH, which is the leading provider of US custody services to Nordic banks, is discussing funds distribution with its clients in order to enhance their global offerings.
Indeed, BBH is looking at the idea of a Nordic global custody hub, enabling the domestic providers to subcontract their global needs to the regional hub, rather than having the expense of developing capabilities themselves, but there are no concrete plans. Citibank’s Beattie also identifies a need for a global custody hub for the region. “I would love to have a single point of entry into the Nordic markets, but a pan-Nordic solution to custody has not yet been achieved, even by Nordea. There are many more differences between the individual markets than first appear.”
Nordea was formed from a merger of Sweden’s Nordbanken, Finland’s Merita, Unibank of Denmark and Christiania Bank of Norway. Nordea Custody Services aims to build a pan-Nordic custody service by pooling the resources of all four banks. A product development team at Nordea has been working to implement common Swift messaging standards for all members of the Nordea group, so clients feel they are dealing with one institution across the region while in the background, Nordea is dealing with four different exchanges, currencies and CSDs.
There is something of a contradiction here, as Nordic financial institutions are generally considered to be quite progressive in terms of establishing co-operative ventures in non-competitive areas. Beattie says one of the problems with the Nordic markets is that many of the co-operative initiatives do not come to anything.
Take for instance Norex, the alliance of the Copenhagen, OM Stockholm, Iceland and Oslo exchanges. This combination covers 80% of the Nordic equities market. In addition, 90% of the region’s bond markets are accessible via Norex. The aim of Norex is to create a joint marketplace for financial instruments, including shares, bonds and derivatives, which also will be one of the world’s most efficient securities markets. As Beattie points out, Finland pulled out of this venture, leaving the rest of the participants ‘swinging in the wind’. “When it gets to the point, it seems people don’t want to sign on the dotted line for these ventures,” he says.
Beattie’s observation that the Nordic region is not as homogenous as first appears is backed up by Fors. The lack of any concrete moves to consolidate the region’s central securities depositories into a central provider is because of differences of ownership structure between the countries. “The situation is different in all four markets. For example, the Norwegian CSD will not be privatised until early next year and the Swedish CSD is owned by the stock exchange.” Fors adds that he does not expect to see any movement on CSD consolidation for at least the next couple of years. The same applies for a central counterparty, which although everyone agrees is a good idea, is not expected to be up and running for a couple of years.
Norex and Finland’s depository Hex, are working on a Central Counter Party (CCP) project. The project invited offers for the CCP functionality from Clearnet, London Clearing House/Crest, NOS (the Norwegian clearing house) and Sweden’s OM. A CCP facility was estimated to increase the costs of each leg of a trade by around E0.30, which could to some extent be offset by netting. However, as Anders Reveman, senior vice-president at OM Group points up: “To the Nordic markets, this is less efficient than for other European markets as the Nordic CSDs handle millions of accounts – down to the individual investor level. Therefore, the introduction of CCP clearing will lead to a short-term rise in costs in securities trading.”
SEB’s Fors describes the Nordic region as very healthy, both in terms of global and subcustody. Cross-border volumes remain high and one of SEB’s clients recorded an all time high daily average trading in October. “The strong competition in the market keeps us on our toes; this is a very buoyant market,” he says.
Competition will continue to characterise the Nordic region, particularly as financial institutions move into neighbouring Baltic region as a natural extension of their franchise. Apart from some competition from German banks, the Nordic banks have been left pretty much to their own devices in this region.

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