Citi's investment in its Middle East and North Africa custody and asset servicing business, which supports investors', intermediaries' and fund managers' operations, is showing results.
The bank prepares to take on new business in its newly launched Kuwait and Bahrain markets and to migrate its first regional investor clients onto a key platform developed specifically for Middle East Investors. Funds Europe talks to Richard Street, Citi’s regional head for securities and fund services.
the ultimate safekeepers of assets for investors, fund managers and brokers, have pushed further into Mena (Middle East and North Africa) markets over the past decade as recognition of their role in defending against financial risks, such as fraud or settlement failures, has increased.
The principle drivers behind that recognition stem from policy makers, such as regulators, who are charged with building reputable financial centres in the region to fuel economic diversity. This regulatory drive is spurred on also by more interest from institutional investors. International institutional investors have long since demanded custody as a best-practice requirement, and increasingly key professional investors from the Middle East now expect the same type of infrastructure employed in foreign markets where custody is more commonplace.
Citi, the large US banking group, is one of the custody providers that has made significant inroads in recent years, and 2010 is something of a watershed moment for its Middle Eastern custody and asset servicing business.
“We have significantly enhanced our service proposition for institutions investing into the Middle East,” says Richard Street, head of Middle East & Pakistan securities and fund services at Citi’s Global Transaction Services. “The delivery of a Middle East global custody platform located in the UAE will provide a full investor service solution on local business days, with local cut-off times, local customer service and a complete treasury and foreign exchange service.”
He adds: “We will transition our first regional client across to our Middle East-based global custody platform later this year.”
Street explains that the client had previously used Citi’s global custody platform in London, and he says there are a number of clients in the pipeline ready to make the same switch, including all of Citi’s key investors clients in the region that have contracted Citi to support their portfolio management activities.
The team has also lined-up a Mena-based hedge fund with a Cayman-domiciled product to migrate to Citi’s global custody platform too, he says, explaining that the custody business, along with its wider asset servicing functions, supports fund managers with Middle East and overseas-domiciled funds.
Citi has an established presence in Bahrain, a large centre for funds domiciled in the Middle East, as a custodian/administrator to Bahraini-domiciled funds. But some fund management clients have selected other fund domiciles, such as Luxembourg and Dublin. Citi provides a locally based service offering to all of these clients in order to deliver the necessary local market expertise.
The Citi offering supports outward, inward and intra-regional investment by investors and fund managers wherever they are based or wherever funds are domiciled.
Boost to capital markets
Street notes that whereas historically the largest Mena-based investors have invested in capital markets outside of the region, flows among these clients, including sovereign wealth funds, now show that these asset allocators have begun to invest in capital markets in the Middle East and North Africa.
Coupled with a greater tendency to invest through third-party managers rather than make large strategic investments themselves (which was commonplace in the past), the impact of these professional investors will also contribute to the development of the regional asset management industry, says Street.
Not only this, they will benefit the custody industry too, by bringing custody costs down.
Street says custody in the Mena region, relative to Europe and North America, is still expensive despite increased competition that is gradually compressing prices. But in Europe, for example, custody is a commodity business, run at low margins, and usually supplemented with value-added asset servicing fees.
Part of the reason for Mena’s higher pricing is its capital markets. They are, of course, smaller compared to elsewhere and trade volumes, certainly over recent months, have been notoriously low. Given that custody fees are directly correlated to asset values and the frequency of transactions, margins are inevitably low.
Consequently, the intra-regional flows from major regional investors should add scale over time, bolstering values of assets under custody and increasing efficiencies for all market participants. As the institutional component of the investor participation grows, custodians should be able to pass on savings to their clients.
Citi’s own internal business lines are a help to the bank as it builds its regional business, notes Street.
Street says: “Our internal business enables us to make the required investment in establishing ourselves as a local custodian and deliver the controls and service standards we apply across all 58 markets in which we operate. This business allows us to quickly establish the operational and local market experience that third-party clients demand, be they global-investors, private banks, or international broker dealers.”
A future event that could positively impact custody and the various value-added services around it would be the inclusion of more Mena markets in emerging market portfolios. Once those Mena markets that are still classed as frontier markets (the majority of them) by index providers, such as MSCI and FTSE, advance in market classification, fund flows to these equity markets will inevitably increase through investors benchmarking to these indices.
Risk is virtually omnipresent in investment operations, of course, but it is more visible in some places than in others.
Settlement risk persists in a number of the regional markets, where brokers – and therefore, effectively, the market – assume responsibility for settlement.
“This makes some investors nervous because it gives brokers access to their shares and cash,” says Street.
Of course, risk goes to the heart of what the safekeepers of assets – the custodians – are there for, and Street notes that Citi, in response to specific client concerns, has delivered bespoke solutions for the settlement model, where required, by acting as a cash clearing bank, ensuring that appropriate controls are applied during the settlement process.
There are different levels of protection and transparency in each market, says Street. He notes the region’s markets are ‘beneficial ownership’ markets. One aspect of such markets is that investors are identified when they buy or sell shares.
For global investors looking to invest in the Middle East, market practices like these are key operational points.
Street says: “There is an inherent degree of protection offered by the markets. Although this has not been considered acceptable for international investors.”
Regulators are mindful of risk management measures, too, as it is partly their task to give their capital markets integrity.
“We have seen some listed entities on the regional markets that have not produced their financials on time, subsequently suspended from the market,” says Street.
“The region is moving from a very private culture to one that is much more transparent. This is happening everywhere, at an official level for example, not just in equity markets.”
As a commercial bank, Citi has been in the Middle East for around 50 years, starting in Beirut. Today the company has banking licences in Morocco, Algeria, Egypt, Lebanon, Jordan, Kuwait, Qatar, the UAE, Bahrain and Pakistan. Banking relationships also extend across the region, from Morocco in the west, to Afghanistan in the east and from Iraq in the north to Oman in the south.
Citi’s Securities and Fund Services division sits within the bank’s Global Transaction Services unit. As with other universal banks with similar businesses, the asset servicing division tends to follow the parent’s mainstream banking activities around the globe.
It provides local custody in Egypt, Morocco, Pakistan, Kuwait, Bahrain and the UAE. The bank is also technically ready to act as a custodian in Qatar, pending the required licences.
©2010 funds global