WORLD'S BEST SUB-CUSTODIANS, THE

Global Finance, Jul/Aug 2005

Global Finance selects the winners in a specialized area of finance that is critical to global investing.

Investing in overseas markets is becoming routine, thanks to the efforts of sub-custodians, who work closely with local clearinghouses and depositaries around the world to handle transactions and supply securities services. Meanwhile, emerging markets are making foreign portfolio investors feel more welcomed by upgrading trading infrastructures and eliminating regulatory barriers. "Brazil, for example, used to be a complicated market to get into," says Roberto Gonzalez Barrera, head of securities services for Latin America at Citigroup. "But the country has done a great job in facilitating foreign investment," he says.

These changes have had a major impact on the trading of government bonds and derivatives in Brazil, Gonzalez Barrera says. Meanwhile, more and more local market participants are seeking to adopt international standards and to invest outside of their home market, he says. "Pension funds in Latin America are seeking to use custodians to improve transparency," the Citigroup executive says. "They are exporting capital outside of the region," he notes. Global investing has become a two-way street.

In the US market, sub-custodians are discussing ways to immobilize a growing range of sophisticated instruments, such as asset-backed securities, by making them depository-eligible, says Kevin Smith, senior vice president, global custody operations at Bank of New York. Much remains to be done in some areas, such as proxy services, Smith says. The US is the largest single market for class actions, he says, and there is room for more automation in this important sector.

Sub-custodians, who form the bedrock of the global securities business, are often hidden to the end users of custody services. But they deliver the products and services that enable investors to manage the risks and reap the rewards of cross-border investing.

Global Finance editors and reporters, with input from expert sources, selected the winners from the financial institutions that reliably provide the best custody services in local markets and regions to global custodians, broker-dealers and institutional investors. We chose winners in eight regions and in 35 countries. Our criteria included customer relations, quality of service, competitive pricing, smooth handling of exception items, technology platforms, post-settlement operations, business-continuity plans and knowledge of local regulations and practices.

HSBC, which calls itself "the world's local bank," won 15 awards, far more than any other bank, thanks to its strong showing throughout Asia and the Middle East. Citigroup was second, with five awards, including regional honors for Latin America.

While BNP Paribas repeated as the best sub-custodian for Western Europe, it faces growing competition from Citigroup. The US bank in June 2005 opened a new custody and clearing center in Breda, the Netherlands, following its acquisition of ABN AMRO s direct custody, securities clearing and fund-services business in eight markets last October.

Consolidation in the sub-custody business continues, as margins narrow and technology advances. The need for major investments in systems and people to remain competitive makes the provision of sub-custodial services an area that not every bank wants to pursue. Those with economies of scale and the specific expertise needed to provide quality service are still able to make a good living at it, however, and are enjoying fundamental growth in areas such as risk monitoring and correspondent brokerage, according to industry participants.

REGIONAL WINNERS

ASIA

HSBC

HBC is the leading sub-custodian in Asia, where it has an extensive network and detailed knowledge of local markets. HSBC's securities sub-custody and clearing business in the region is operated under the Hongkong and Shanghai Banking brand. HSBC is the leading foreign bank in China, with the largest branch network and the only on-shore B-share custody operations. The B-share markets for foreign currency trading of China-based companies are located in Shanghai and Shenzhen. HSBC's expertise as an Asian sub-custodian is not limited to China and Hong Kong, where it has a solid grip on the top position, but extends throughout the region. Global Finance named the bank the Best Sub-Custodian in India, Indonesia, Malaysia, the Philippines, South Korea, Taiwan and Thailand.

HSBC's Internet platform provides standardized as well as customized reports and services for global custodians, brokers, dealers and institutional investors. HSBC offers sub-custody services for both equities and fixed-income instruments. The bank's core securities-related services include receipt and delivery of securities, safekeeping, securities lending, dividend and income collection, proxy services and portfolio reporting. The bank tailors its fees to each customer, based on asset sizes and volumes in particular markets. It offers automated-settlement coverage programs in some markets, whereby it borrows securities to cover positions to avert failed settlements and avoid damage to its clients' reputations.