Internationally, assets in custody exceed USD65 trillion, with USD23 trillion of this belonging to the world’s biggest global custody player, BNY Mellon Asset Servicing. It is a big market, and in Spain, one that is dominated by four main firms: BNP Paribas, Citibank, and two major Spanish banks, Banco Santander and BBVA.

 However, the Spanish custody market itself is one very closely protected by stringent legislation - particularly when it comes to the entry of a foreign custodian. For example, only commercial and savings banks, stockbroker entities and credit co-operatives can act as custodian entities in Spain.

 What is more, their corporate domicile and central administration must always be local, and prior authorisation from the Spanish Securities Regulator, the omission Nacional del Mercado de Valores (CNMV), is required. Marta de Alba, Executive Director Securities Services from BBVA, Spain believes that the tightly controlled market is what makes Spain distinctive. “Whilst it has probably acted as a barrier to the development of business in the years of growth, we now see it as an advantage in the face of the current crisis,” he says. A senior member of Banco Santander’s Securities and Listed Derivatives Services team explained that “Spanish legislation covering the equities world is complex and makes the custody and settlement process something for experts only. Not knowing the market and its peculiarities can prove costly and many a client has had their fingers burnt.

 However, the Spanish market has been probably the most attractive market in Europe over the past 10 years due to the high returns offered by the companies included in the IBEX-35 index and this has made the “risk” of trading in Spain worthwhile for all.

 The most notorious aspect of the custody and settlement process and legislation is the technical references (or RR’s as they are commonly know) as well as the need for the registration of securities as part of the settlement process. These are the two key points that make the Spanish market different from most other European venues as well as the main source of trouble for non-resident investors. However, this has also become an opportunity for domestic players to enhance their service and product offering to non-resident investors to facilitate operating in the Spanish market and allowing domestic players to take part of the pre-settlement functions out of the non-resident client’s flow and into our own back-office flows and procedures. This has greatly helped our clients to reduce headcount and risk exposure and has allowed us to add significant value to our clients and expand our product offering reaching beyond run of the mill custody and settlement services”. The Spanish fund market itself is characterised by extreme fragmentation. With more than 6,000 investment funds and SICAVs (open-ended collective investment schemes), it represents 10% of worldwide investment funds by number, but only 2% of Assets Under Management (AUM). The balance sheets of most of the Spanish asset managers are very weak, with one in four currently in severe deficit. José María Alonso-Gamo, managing director of RBC Dexia, Spain, suggests that a restructuring of the industry is a must. “Asset managers with less than 500 million in AUM may need to explore mergers to survive,” he explains. “Due to the increase in costs and income reductions, mergers between funds and asset managers are how we foresee the industry in the short term.” And this industry has no plans to open up to more foreign custodians any time soon.

 Alvaro Camunas, Head of BNP Paribas Securities Services in Spain, commented that “during the last twelve months, the local regulators have been strengthening their requirements, and we feel that the current domestic environment is now even less accessible to foreign service providers, in particular, areas of the Depositary Bank and Fund Administration services”.

 When mentioning the recent strengthening of local regulatory requirements, Mr Camunas is specifically referring to those published in 2008 and 2009 by the CNMV. Examples of these circulars which impact the depository entities acting as custodians of Spanish funds include C 3/2008 on the accounting rules of funds, C 4 /2008 on the public information to be prepared by funds, and C 3/2009 on the reports to be provided by Depository Bank entities.

 Mr Camunas goes on to explain: “We believe that this legal framework reinforces local regulatory requirements making the access to foreign custodians more difficult than ever. The fact that UCITS IV does not contemplate the European passport for depository entities is, of course, a further drawback for these entities.”

 In regards to the confidence Spanish investors have on funds, Mr Camunas believes that the latest financial events have reinforced their already conservative profile.

 “This, linked with the slow recovery of the main financial indexes and the reinforcement of regulatory requirements, does create a very challenging environment for all the domestic fund industry,” he says. However, this is not all bad news. “We believe this presents a good opportunity to reinforce the level of professionalism in the market, as only the custodians showing the adequate level of recourses, expertise and commitment will be able to subsist.”

 The Spanish market itself has also undergone significant change over the last twelve months. For example, many asset managers owned by banks have now been vertically integrated, making them accountable for not only the asset management, but the associated administration, risk control and compliance issues. According to Mr Alonso-Gamo, this process was “possible with buoyant markets, when analytical accountancy was not a priority”. He added: “Since the last quarter of 2008 the main aims are no longer growth at any cost, but a more logical focus on company profit and loss. The market trends change so rapidly, meaning that new regulatory rules have to be implemented at short notice, and as a result, the P&L has turned red.” For custodians specifically, change has occurred in the asset mix of client funds. “Last year, we saw a significant shift from equities to fixed income assets,” explains Mr Camunas.

 For RBC Dexia, Mr Alonso-Gamo describes a different experience. “The rising stars within the underlying assets of local investment funds are public debt and bank deposits. On the other side, fund managers are still very reluctant to trade in high yield fixed income, equities, collateralised debt obligations and other structured vehicles. Volumes traded on the stock exchange are still at relatively low levels, even though some innovative products such as exchange-traded funds and reverse exchange-traded funds are gaining market share.”

 So how do these changes impact the custodian? “Most of these assets, mainly public debt and bank deposits, are less profitable for custodian banks,” Mr Alonso-Gamo states. “The fees charged for custody of public debt are not significant, and interest rates worldwide are at their lowest level, so margins are being squeezed.”

 For BNP Paribas, Mr Camunas mentioned the impact that the redemptions carried-out on both traditional funds and, more significantly, on alternative funds. “This has had, of course, a relevant operational and organisational impact on our teams, as well as tightening our margins.” Another change of note is the surging of interest in the process of outsourcing. “This is driven by three key points,” explains de Alba.

 “Firstly, it is due the increasing complexity of the assets held in clients’ portfolios, making them more difficult to administrate and settle. Secondly, communication has vastly improved at a global level, and finally, due to the necessary reductions and concentration of efforts in core business areas, outsourcing is now more pertinent.” Mr Camunas believes this incremental increase in outsourcing presents room for potential. “Entities that were not even considering outsourcing some of their non-core activities some months ago are now knocking on our door to ask what solutions we could provide. This includes depository, private and retail banking back-office services, and is probably the area of fastest growth in our business currently.”

 The close scrutiny of the CNMV and the typically conservative nature of Spanish investors, plans to open up to more foreign custodians are not set to materialise any time soon.