HNB recently announced the launch of its Custody and Trustee services business, another first amongst the local private commercial banks in the country. The setting up of the Custody and Trustee business further strengthens HNB's unparalleled product depth and service offering and is a testament of HNB's commitment to continue providing world class banking solutions to its customers. This unit will be headed by Tyrone Hannan, who brings with him a wealth of experience and track record of structuring solutions to expand the custody and trustee business in Sri- Lanka.
Ruwan Manatunga, DGM Corporate Banking, commenting on set up of the Bank's Custody and Trustee business said that HNB has always been in the forefront in developing new relationships with an eye for the future. He was of the view that Sri Lanka is poised to develop further in the offering of financial services and that HNB is now well positioned to be a serious player in the capital market as well.
Mr Tyrone Hannan, articulated that with the launch of the Custody and Trustee services business HNB can facilitate its client base, which is one of the largest, to have easy access to the capital market to participate in IPOs and the corporate bonds market. Further, HNB is well positioned to also provide expertise in advisory and other services to the market players.
With the expected growth in the capital market, HNB being a well-established bank with a long history is geared to support both local and international players who will demand exceptional services for their investments. Being one of the first to enter local private commercial banks to enter the Custody and Trustee space gives the bank the platform to be in a position to cater to specially cross border clients entering the Sri Lanka capital market.
Q. What are the main reasons for HNB to add Custody, Trustee and Escrow services to its existing business?
The anticipated development in the Country's capital market is likely to increase the demand for custodian and trustee services. HNB aims to provide a "one stop shop" for its customers to enjoy traditional banking services coupled with ease of entry into the capital markets.
More importantly, over the recent years, there is an added focus on compliance and reporting requirements by regulators, which need is addressed by appointing custodian banks, who will provide the required independent services.
Also, efforts are being made towards developing the corporate debt market. The new US$ board would be introduced shortly to facilitate the listings of foreign entities and the CSE is working towards the introduction of derivative trading. The introduction of the Central Counter Party (CCP) settlement system is also in the offing.
Further, the increase in per-capita income of the Country and the increase of the middle income bracket will enhance market demand for investment products such as unit trusts which will create greater demand for custodian and trustee services.
Q. Competitive advantage of HNB entering into the Custodian Banking business?
HNB with is its 275 plus billion Corporate Banking portfolio, which is the largest amongst the local and foreign private commercial banks, offers its corporate and retail customer base the full suite of product and services covering working capital financing, international trade financing, project financing, payments and cash management services.
The introduction of the Custodian and Trustee business further strengthens the Bank's offering to its diversified customer base by providing value and convenience leveraging on the expertise of Mr Tyrone Hannan to structure solutions with the commitment of offering a world class customer experience at competitive pricing. To this end, HNB is investing heavily in state of the art technology to keep pace with international Custodian and Trustee industry standards trends. HNB is positioning itself as the local player in the custody and trustee services space alongside the foreign banks operating in Sri Lanka.
Q. Give an Overview of Custodian Banking Custodian Banking is a specialized service that can be offered by a licensed commercial bank in Sri Lanka in addition to the traditional commercial or retail banking services.
In simple terms, custodian banking involves safeguarding financial assets of a firm or an individual or any capital market participant.
The custodian banking business came into existence when the US government passed the "ERISA" act in 1974, mandating the separation of investment management activities from the custody of underlying assets. It has since evolved into a highly specialized and complex global service today, offering a wide array of services.
The ability to gather assets, effectively employ technology, and efficiently process large volumes of transactions is essential in the custody business today. With the growth of the investment industry and financial markets during the past two decades, particularly developments in the mutual fund and hedge fund businesses, the level of assets under custody has increased significantly.
At present context, custodian banks provide custody services to a variety of customers, including mutual funds and investment managers, retirement plans, bank fiduciary and agency accounts, bank marketable securities accounts, insurance companies, corporations, endowments and foundations, and private banking clients.
Q. What are the products and services offered by Custodian Banks?
The key functionalities of a custodian bank are as follows:
Involuntary - scrip dividends, share splits/bonus issues etc.
Voluntary - rights issues, mergers, tender offers, bond calls etc.
e.g.:- Dates of Annual General Meetings and attend for AGMs as proxies
Other information where relevant
Q. What is global Custody Services?
A global custodian provides custody services for cross-border securities transactions. In addition to providing core custody services in a number of foreign markets, a global custodian typically provides services such as executing foreign exchange transactions and processing tax reclaims.
In providing global custodian services, a custodian bank typically has a sub-custodian (using their own local counterparts), or an agent bank, in each local market to help provide custody services in the foreign country.
As of today, the five largest Custodian Banks in the world are:
The top four of these custody banking giants are based in the USA and together account for nearly 60% of the global custody industry. As end of Dec 2015, the total Assets under Custody of the 4 industry giants reported to be over USD 100 trillion (Source: http://globalcustody.net). Based on the above it is estimated that the total Assets under entire custodian industry to be approx. USD 170 trillion as year-end 2015.
Over the recent years, there has been a marked increase in the demand for custodian services worldwide due to the added complexity in compliance and reporting requirements. The stricter regulatory rules have compelled financial institutions to approach custody banks to take care of accounting, back-office and middle-office activities. The resulting increase in the size of assets under custody for the world's largest custodians has driven top line growth by boosting fee based revenues.
Q. What about Custodian Banking in Sri Lanka?
Custodian banking business is a relatively new product to the Sri Lankan commercial banking market even though country's capital market is over five decades old.
The heightened interest over the Sri Lankan capital markets stimulated the increased participation of Custodians. The growth of capital markets during the past few years with the establishment of many Mutual Funds in addition to Pension Funds, developments to the Debt Market along with widened foreign investments to Colombo Stock Exchange were key catalysts to awake the custodian operations.
Multinational banks based in Sri Lanka enjoy almost the entire custodian market in Sri Lanka and the presence of local commercial banks in this business is negligible despite registered and having license to operate.
The composition of the client base in the Sri Lankan custodian banking industry is approx.;
As at 31 Dec 2015, there were 79 approved mutual funds in Sri Lanka with a Net Asset value of LKR 130 Bn (Source: SEC Annual Report 2015). For the same period, there were 30 insurance companies and 57 insurance brokers registered with the Insurance Board of Sri Lanka and operating in both long term (life) and general insurance (non-life) business. Total assets in respect of both long-term insurance business and general insurance business amounted to LKR 465 Billion as at end 2015. (Source: Insurance Board Annual Report 2015).
Q. What is the regulatory framework?
The immediate governing body of custodian banks in Sri Lanka is the CDS where it is regulated by way of Rules set out by CDS. All Participants of the CDS must comply with these Rules. Any breach of the Rules shall be construed as a breach of contract between a Participant and the CDS. The CDS Rules create obligations, which are additional and complementary to statutory obligations.
The ultimate governing body of Capital Market operations of Sri Lanka is the Securities and Exchange Commission (SEC).
The primary risks associated with custody services are:
This risk is inherently high in custody services because of the high volume of transactions processed daily. Past experience in the custody business has shown that; errors in corporate action, settlement, foreign exchange, and suspense account processing are common causes of losses attributable to custody activities.
These losses, individually and in the aggregate, may be material. Hence, efficient use of technology is essential in managing this risk to minimize human involvement thereby overcome human errors. Further, effective policies and procedures and strong control environment is necessary to manage the risk at an adequate level.
Custody services are contractual in nature, and a bank must ensure compliance with the provisions of all applicable agreements. Once a customer transfer the financial assets under a custodian, the custodian bank is responsible to manage its entirety on behalf of the owner. Hence, the custodian has to adhere to all the governing rules of CDS within its purview and non-compliance could pose threats to the bank which can lead to have financial losses.
Custodians may be exposed to credit risk in case of settlement of a trade without availability of cash in the customer's account. Sri Lankan capital market at present does not work on a platform of Delivery Vs Payments (DVP), and hence there is a risk of the custodian delivering securities without receiving payment or pays without receiving securities. As per the CDS settlement rules, payments should be made within 3 market days of executing a transaction (T+3). Once a custodian instructs to execute a purchase transaction, the custodian is liable and has to honor the settlement even if the absence of money in the customer's account.
Strategic Business Risk
A bank's decision to participate in the custody business, and its ability to be competitive if it does so, is a source of strategic risk to the bank.
The custodian industry has seen increased competition in recent years, which has resulted in reduced margins and forced industry consolidation. In order to compete in the custodian business, banks must have a portfolio size that creates economies of scale, and continually invest in systems and technology.
To conclude, both Ruwan Manatunga and Tyrone Hannan stressed that HNB will now play an important role in developing the Country's capital market and will ensure that the Sri Lanka's profile in the international market space to attract foreign funds to the local market is maximized. Furthermore, they also commented that the Bank's unwavering commitment to its valued corporate and retail customers to provide a world class product depth and service offering and that this track record is reflected through the series of investments HNB has made in the recent years in human capital and state of the art technology.