The European financial services industry continues to undergo significant change. At a recent client event, senior leaders at BNY Mellon came together to reflect on the latest industry trends, including capital markets developments, data and digitalisation trends and ESG investing, and discuss priorities for our Asset Servicing and Markets businesses in the region.
Ileana Sodani, Head of International Sales for EMEA & APAC Asset Servicing, moderated the discussion with:
Daron Pearce (DP): In the asset servicing space, fees are based on asset values. Given widespread declines across markets, as well as sizeable outflows given market uncertainty, fees have fallen. Nonetheless, we continue to invest in our asset servicing business. We are pursuing our digitalisation strategy of implementing dashboards and making APIs available to facilitate seamless client integration. Data is a key area of focus, which I’ll elaborate on shortly.
Katherine Woodrow (KW): The trajectory of the US economy continues to overshadow global market activity. At the beginning of 2019, it was widely assumed that US growth would continue and rates would gradually rise. Since then, we’ve seen markets trend in the opposite direction. Growth has stalled, the interest rate curve has inverted, rates were cut in July and September and further cuts are expected. The big question is now whether the US can avoid a recession.
“The trajectory of the US economy continues to overshadow global market activity.”Katherine Woodrow, COO, EMEA Markets
In Europe, these challenges are compounded by low FX volatility, the negative interest rate environment and the continuing uncertainty around Brexit.
In the run-up to the original Brexit deadline, the Markets business worked closely with BNY Mellon’s European Bank to prepare, communicate with European clients, explain our European footprint and, where appropriate, move certain functions or legal entities to EU27 countries.
Leonique van Houwelingen (LvH): To add to Katherine’s point, BNY Mellon’s preparations for Brexit saw the European Bank obtain an enhanced licence in Europe. In addition, we sought product approval in line with guidance from the regulators on what activity can and cannot take place outside the EU27. Whilst some of our clients have shifted functions to continental Europe – in particular moving control-type jobs such as compliance, oversight and governance – others have deferred decision-making until Britain formally leaves the EU.
LvH: Having spent a significant amount of time preparing for the day Britain formally leaves the EU, the emphasis has now shifted to what happens after that. There is a broad assumption that trading will have to move to the EU27 but it is unclear whether liquidity will move en masse or become fragmented. Either way, the likely migration of trading desks from London will be an important development.
In terms of transparency, there is a growing focus on sustainability-related issues and investment. A new wave of regulations is expected to help stimulate greater investment in this area. For further context, achieving climate change mitigation and adaptation targets in Europe is anticipated to cost as much as €260 billion, compared to the €180 billion originally estimated1. In addition, there will be a focus on improving data transparency and establishing clearer taxonomies around sustainable investing.
With regard to technology, resiliency is still the centre of attention, as it has been since 2013 when the Single Supervisory Mechanism (SSM) was introduced. The SSM refers to the system of banking supervision in Europe. In recent years, its focus has evolved from capital and liquidity to business models, cyber security and operational resilience. The frequency of inspections has increased and supervisors expect steadily rising investment to bolster resiliency.
KW: The Markets business has continued to invest in technology to remain competitive and comply with regulatory requirements. For example, we began to work with a FinTech to automate the matching of borrowers and lenders for our agency lending business. This last year we acquired the provider. This gives us full autonomy to drive the direction of development of the platform to meet our client and regulatory requirements.
One increasingly important issue in relation to technology is talent management. It is only possible to innovate if creative and resourceful people who also possess technological expertise are in key positions. As our global strategy evolves, there is broader recognition across BNY Mellon that technology needs to be at the front of the house if the bank is to continue to innovate.
DP: Within asset servicing, the focus has been on supporting clients in relation to front office activities, such as order management and decision support.
“BNY Mellon has committed to using an open architecture so that clients can use their chosen technological platforms but gain added value and insights from our data.”Daron Pearce, CEO, EMEA Asset Servicing
To this end, BNY Mellon has launched two new strategic alliances. In April, we announced a partnership with BlackRock, that allows common clients of its Aladdin platform, which combines risk analytics, portfolio management, trading and operations tools, to access BNY Mellon data without leaving the application or re-logging in. This improves convenience, efficiency and visibility. A similar alliance was recently announced with Bloomberg.
BNY Mellon has committed to using an open architecture so that clients can use their chosen technological platforms but gain added value and insights from our data. Our strategy comes in response to the increasingly broad range of stakeholders focused on operational issues. In the past, such decisions were made by the COO. Infrastructure is now so critical given the competitive landscape that CEOs, CIOs and often the entire C-suite take an interest. This diverse group of stakeholders necessarily use different tools to fulfil their functions: consistent, reliable, standardised data that can be accessed by various functions for decision-making is therefore critical.
KW: Regulations will continue to be a key focus in the coming year, especially for clients. For example, BNY Mellon is currently building a solution to help clients comply with the Securities Financing Transaction Regulation, which requires parties in a securities financing transaction, such as lending or margin lending, to report it to a trade repository. Although reporting is a client responsibility, BNY Mellon can match the various fields required, reconcile them and generate a report to help clients satisfy those requirements.
“Regulators have ever-increasing expectations of bank resilience against a wide variety of risks, including geopolitical, climate and technological shocks.”Katherine Woodrow, COO, EMEA Markets
In addition, new rules on initial and variation margins for non-cleared derivative transactions will be phased in throughout 2020. BNY Mellon has the operational capability to deal with issues such as the movement of capital and interaction with third-party custodians in relation to collateral segregation to protect the assets in case one of the trading parties goes into default.
Resiliency will continue to be a focus. Regulators have ever-increasing expectations of bank resilience against a wide variety of risks including geopolitical, climate and technological shocks. Moreover, regulators are requiring an ever-greater level of detail outlining how services can be switched to other geographical locations in the event of such shocks, as well how resiliency testing can occur on an ongoing basis.
LvH: Within Europe, Brexit – and the possibility that regulatory equivalence will not be achieved – could result in the fragmentation of regulations across the region. As financial centres across Europe – such as Paris, Frankfurt, Luxembourg and Dublin – bid to secure business migrating from London, a diversity of rules – covering insolvency or tax, for instance – could increase complexity and reduce trust.
“Within Europe, Brexit – and the possibility that regulatory equivalence will not be achieved – could result in the fragmentation of regulations across the region.”Leonique van Houwelingen, CEO, The Bank of New York Mellon SA/NV
One likely solution could be an acceleration of EU plans to form a capital markets union, which is also likely to be necessary if the region is to achieve its sustainable development financing objectives.
DP: The competitive landscape across Europe is likely to continue to result in consolidation, both of service providers (who are often encouraged by regulators to improve resiliency) and asset managers. Large asset owners are increasingly using a smaller number of service providers, including global custodians. At the same time, asset managers are consolidating and scaling their businesses, due to increasingly tight margins in the industry. From a service provider perspective, this potentially gives clients greater bargaining power and increases the importance of remaining competitive, not just in terms of service offerings, but also cost.
However, many large asset owners have come to recognise the symbiotic relationship between service providers and asset owners and are no longer making decisions based on price alone. In our experience, they seek partners that are able to make the necessary investments in technology and service that enable them [asset owners] to meet their long-term efficiency and transparency objectives.
This article summarises the discussion that took place at the BNY Mellon Sovereign Academy – our global flagship event for sovereign institutions – in September 2019.