Taking Custody Into Mongolia ... and U.S.
July 20, 2012
BNP Paribas Securities Services is not well known for handling custody of fund assets in either Mongolia or the United States.
But BNP Paribas is now the fifth largest custodian in the world, with $7 trillion in assets in its electronic vaults. The firm also has $1.2 billion under administration and administers more than 7,000 funds.
The company operates in more than 100 countries, with local operations in 34. Its greatest franchise is in Europe, which calls home. In its effort to compete with State Street, BNY Mellon and Citgroup around the world, the Paris-based firm has been moving into markets in Asia that matter to existing customers. And, this year, is stepping up its presence in the United States.
"Our strategy is to provide global solutions to our clients,'' chief excutive Patrick Colle told Money Management Executive as the firm headed into 2012. "It is clear that we need to be able to provide our European clients, and more and more Asian clients that are becoming global, solutions that comprise not only Asia, where we are covered, Europe, where we are covered, but also the U.S., because they have U.S. funds, right?"
As Paul Cahill, head of product management, institutional solutions, puts it, "the final frontier obviously is going to be here in the Americas.'' The firm has already opened up shops in Brazil and Columbia. And it plans to open up custody capabilities in the United States, by the end of this year.
But, because a key Asian customer asked for it, BNP Paribas moved into Mongolia, first, as part of its efforts to serve customers wherever they operate.
When BNP Paribas sent a two-person research team last year into the homeland of Genghis Khan, the country's stock market was roughly a decade old. About 100 stocks are listed on it, but only about half a dozen trade with any frequency. Average daily volume is about $1 million, according to Lawrence Au, head of Asia-Pacific operations.
But the Hong Kong subsidiary of a firm that likely ranks as the second-largest asset manager in China, Harvest Global Investments, wanted in. So, BNP Paribas went to figure out how to best serve its client.
"When they approached us and asked us whether we want to take the challenge, like everything else, our initial reaction was, that shouldn't be so difficult,'' said Au. "We thought that there must be some custodian already operating in Mongolia, or a network of some custodians. But nobody was actually operating in Mongolia.''
The team spent three months looking at what it would take to operate in this classic "frontier" market.
The biggest challenge: The risk that a broker handling a transaction might disappear or somehow mishandle a purchase of a stock.
There was, quite simply, Au said, no concept of what custodians call "delivery versus payment." That is, a merchanism that handles the simultaneous exchange of stock for cash.
That meant working with the stock market and its regulators to make it possible for Harvest to open its own clearing account at the stock exchange. And to allow BNP Paribas to operate the account, on behalf of Harvest, through which payment against delivery could be safely and consistently handled.
It also meant setting up a messaging network, to handle transactions. So far, the network of the Society for WorldwideInterbank Financial Telecommunication does not operate in this country, whose longest borders are with Russia on the north and China on the south.
The experience gave BNP Paribas a lot of learning that it can apply to other frontier markets, that Harvest or other clients might like to enter.
The Cambodia Securities Exchange, for instance, just opened for business in July 2011, one year ago.
BNP Paribas Securities Services has operated in the United States for more than a decade. One early service was providing funding and access to institutional order flow to brokers who used its clearance products, globally. The firm also has provided hedge fund administration and related services.
But the four largest custodians in the world are based in North America: BNY Mellon Asset Servicing, at $26.6 billion in assets under custody; J.P. Morgan Worldwide Securities Services, at $17.9 billion; State Street, at $16.9 billion, and Citigroup at $12.6 billion.
Into these waters, BNP Paribas-at $7 billion-is now about to dip its toes, to help its customers who operate worldwide.
Until now, BNP Paribas has employed a sub-custodian, based here, to provide help in safekeeping stocks, bonds, and commodities on behalf of its clients and to settle purchases or sales, deal with corporate actions and the like.