BNY Mellon's Bodart: Preparing for New European Settlement Landscape
Change management- it's become a major discipline in recent years as financial firms try to help employees -- and even C level executives --adjust to new policies, mergers and acquisitions or even layoffs.
For Brussels-based Paul Bodart, executive vice president and head of EMEA operations and asset servicing for Bank of New York Mellon in Brussels, figuring out how the world's largest global custodian, will handle the most significant change in the post-trade processing arena will be all about minimizing the operational impact to the bank and its customers. Naturally, BNY wants to increase operational efficiency and reduce subcustodian costs by either entirely eliminating or reducing the role of some of its European subcustodians.
"My life's work has been about managing change in the most efficient way possible," says the 59-year old Bodart, a Belgian national who has been with Bank of New York Mellon and its predecessor Bank of New York for the past 16 years. The bank does not break out what percentage of its $25.9 trillion in global assets under custody are in European countries but it is has a network of several dozen subcustodians on the continent.
The market change at hand: European national securities depositories will be outsourcing their settlement functions to a new consolidated platform called Target2Securities operated by the European Central Bank. After several delays, T2S will reportedly go live in June 2015. That deadline isn't exactly set in stone and a worried ECB is offering European securities depositories plenty of financial incentive to sign up early. Still global custodians, such as BNY Mellon don't want to take any changes on being caught flatfooted.
"Linking directly to local securities depositories and eliminating the middleman [local custodian] is a good way to prepare for T2S," says Bodart. "The closer you can be to the local central securities depository the better." The global custodian has more time to send settlement instructions for processing and receives faster status reports.
Bodart and his team of 25 European network managers must decide which of three alternatives BNY Mellon should take: keep the status quo with the subcustodian; do only the settlement work and leave asset servicing functions to the subcustodian, or get rid of the subcustodian and do all the proessing work itself. Asset servicing refers to a panoply of functions, such as processing corporate actions, tax reclaims and proxy votes.
BNY Mellon needs to start preparing this year so it can test its connectivity with T2S in early 2015. "First the network team will evaluate the best option in each market, find the best service provider, negotiate a contract, fees and operating model," explains Bodart. Then the business analysts in the operations units will have to work with their technology colleagues to adapt BNY Mellon's systems."
Of the several dozen European markets, BNY Mellon services three are top of the list for change- France, Italy and Spain. Of the three, France and Italy are the most likely countries for which BNY Mellon may decide to either eliminate or reduce the role of its subcustodians. The operational difficulties in settling Spanish equity trades make it difficult for global custodians to do the processing work on their own, he explains. BNY Mellon is directly linked to international securities depositories Euroclear Bank and Clearstream International as well as the national securities depositories of the U.K., Germany and Holland. Bodart declined to name BNY Mellon's local custodians in France, Italy and Spain but the most popular ones cited by global custodians are: BNP Paribas; Santander, Citi, and Intesa Sanpaolo.
The decision won't come lightly. Subcustodian banks are valued partners for global custodians. They are the ones responsible for ensuring that trades in their home market are correctly settled in local depositories and corporate actions, tax reclamations, securities lending and other functions typically categorized as asset-servicing tasks are correctly processed. Global custodians pick them carefully, not only based on financial soundness but also their operational skills in processing cross-border transactions.
"Linking directly to local securities depositories and eliminating the middleman [local custodian] is a good way to prepare for T2S," says Bodart. "The closer you can be to the local securities depository the better." BNY Mellon would have more time to send settlement instructions for processing and receive faster status reports.
The question then becomes: can BNY Mellon do away with its subcustodians. The answer might be yes when it comes to settling transactions but less clear when it comes to completing more complex asset servicing functions such as corporate actions and tax reclaims. "Local requirements and the lack of harmonized market practices may still require the support of the subcustodian for that role."
Bodart has had plenty of experience managing change. After graduating the University of Louvain with a degree in applied math he had two choices: either serve a mandatory two-year stint in the military or work in an emerging market. Bodart chose the later and ended up overseeing the branch office of La Banque Europenne pour L'Amerique Latine in Brazil. His mission: to install computers in a bank which had none. "It was a great challenge to transform an organization by implementing accounting, current accounts, credit and time deposit programs," he says.
Next up: a stint in neighboring Buenos Aires with the same bank. Once again Bodart had to install computers in each of the bank's 25 branches, PCs for each cashier and connect all of the systems to headquarters. What made the task even more challenging: Argentina lost its battle for control of the Faulkland Islands to Britain. Inflation reached a whopping 50 percent monthly. "Conducting banking activities in such circumstances wasn't easy. You had to learn to react very quickly to the measures authorities were taking to restore stability," says Bodart.
After spending nine years in South America, Bodart was ready to return to the European continent to achieve his next goal: an MBA from Insead. Armed with that degree in 1987 he signed up with the former JP Morgan, which transferred him to its then subsidiary Euroclear to help create its securities lending program. Bodart became part of the operations management team and as Euroclear expanded its reach from processing Eurobonds to government bonds and other securities, Bodart was charged with helping to set up connections to local securities depositories and subcustodians. He also took part in the effort to improve an "electronic bridge" between Euroclear and rival Clearstream, then called Cedel, which allowed users of each depository to process their trades with the other. Bodart later served on the board of directors of Euroclear representing the Bank of New York. Euroclear split off from JP Morgan in 2000 and now operates several European securities depositories.
After a six year tenure at Euroclear, Bodart was relocated by JP Morgan once again. This time to work in the New York office to figure out just how to save costs in its securities services unit. One of the recommendations Bodart implemented: migrating U.S. custody operations from New York to Delaware. When the bank decided to sell its custody operations to the former Bank of New York and BNP Paribas, Bodart was tapped to migrate 200 JP Morgan staffers to BNY Mellon. He joined BNY Mellon at the end of 1995.
Bodart now overseas 3,100 operations executives which include staffers from the former Mellon, and the asset servicing businesses of Royal Bank of Scotland and other BNY acquisitions. He is no longer responsible for only BNY Mellon's custody operations but all of its asset servicing in the region. Being located in Brussels gives Bodart a birdseye view of the changes European regulators want to implement.
What criteria will Bodart and his team of network specialists use to decide what changes BNY Mellon should make? "The size of the bank's business in a given European market will play a key role which is why subcustodian contracts in only a handful of European markets will be affected," says Bodart.
That means it is more than likely BNY Mellon will keep its subcustodians in smaller European markets -- such as Slovenia-- where settlement volumes are low. "It doesn't make sense for me to cut out the middleman when I have only ten trades to settle a month," says Bodart. "It would make a lot more sense if I had say 50,000."
Yet another criteria to consider: cost. How much could BNY Mellon actually save in taking on additional processing work compared to the expense it will incur if it needed to either scale up for the additional settlement or asset servicing work. Settling the trades on its system instead of the local custodian bank's would involve BNY Mellon linking directly to local national securities depositories in Eurozone countries as well as to the T2S platform.
Creating direct links to local European securities depositories is one thing. It might not be that hard to do so technologically and could be an acceptable answer if the subcustodians were only used to settle trades. The choice becomes a lot more complicated for additional asset servicing services. Securities depositories may not be able to offer the same services as subcustodians so BNY Mellon would need to have pretty sophisticated expertise in local regulations particularly when it comes to tax reclamations and corporate actions if it wants to match the functions offered by its subcustodians, which have dozens of those experts on the ground. BNY Mellon would also need to recode its global custody and other applications, such as for corporate actions, securities lending, and tax reclamation to do the extra work while ensuring it makes no mistakes. Subcustodians are financially responsible for any operational errors they make when it comes to servicing the fund manager and other institutional clients of global custodians. That liability would fall entirely on BNY Mellon if it took on all of the processing work.
There is one final wild card Bodart and his team will also have to take into consideration: the potential exodus of a subcustodian bank. "The ECB's T2S platform could ultimately result in a local custodian bank no longer offering custody services or merging its unit with another bank," says Bodart. "We would then be faced with either selecting another custodian bank or doing the work ourselves so we have a plan B up our sleeves."
Bodart believes the majority of subcustodians which operate in only one market will shut down in the next ten years leaving only the largest regional subcustodians to service global players like BNY Mellon. He would not speculate on the survivors but BNP Paribas, Citi, HSBC and Deutche Bank are often cited as the most likely winners.
A report issued by New York-based research firm Celent in November 2011 highlights the difficulty faced by BNY Mellon and other global custodians in deciding how they will process European transactions in the post T2S world. The report cites the indirect model-- continuing to use a local custodian bank -- as requiring no additional technological spend warns that a hybrid model- splitting the processing work with a local custodian-- needing an initial investment of up to E12 million for two markets and a running cost of E1 million annually. Doing all the processing work will mean a bank would need to spend E25 million in initial costs and E5 million in annual running costs. The ultimate costs -- and time it takes to recoup those costs -- would depend on the number of transactions settled, the number of markets involved and the value of the global custodian's assets under custody. Celent's words of advice: don't dream of easing the workload of your custodian bank if you settle fewer than one million European transactions a year and don't think of doing all the processing work on your own if you settle less than four million European transactions a year.
Whatever decision Bodart and his colleagues make, he says he has no regrets about being in the hot seat. "If I hadn't become a securities operations expert, I would likely have become a doctor," he says.
Doctors are faced every day with coming up with answers to potentially life-threatening problems; securities operations executives are faced with developing answers to situations which could very well make or break their bottom line. " It's just as nerve wracking and the outcome depends on how well you analyze the pros and cons of the alternatives," says Bodart.
Written by Chris Kentouris, Editor-in-chief. (Chris can be contacted through Chris.Kentouris@hotmail.com
