Markets for depositary and custodian banking services in Luxembourg are “heavily concentrated”, with the top ten banks holding more than three quarters of all assets, the first ever survey on depositary and custodian services in the grand duchy shows.
At the end of last year, the top ten institutions held 78 percent of all assets under depositary and 88 percent of all assets under custody at the end of last year, the survey shows. All 53 banks offering such services participated in the survey that banking association ABBL has conducted in cooperation with financial supervisor CSSF.
During 2021, the industry represented some 6.5 trillion euro in assets under deposit, up 22 percent from a year earlier due to market performance. Assets under custody in Luxembourg increased 15 percent to 5.5 trillion euro. The total number of staff in depositary supervision roles, as measured by FTEs, increased by 5 percent to 953 people.
Custody is the traditional activity of depositing and holding securities on behalf of third parties. This activity has evolved over time depending on the clients for whom it was provided, particularly in the case of investment funds, where its scope significantly increased due to the adoption of dedicated sectoral standards, such as the AIFM and Ucits directives.
Different clients
In these cases, the activity is referred to as depositary, which covers the act of custody and safekeeping securities. It is also accompanied by other obligations such as supervision and control and is subject to a specific liability regime in this area.
“Often seen as a single business, sometimes carried out by the same players, depository and custodian banking nevertheless deal with different clients and are subject to different obligations”, said David Claus (photo), chair of ABBL’s Depositary Banking Cluster and CEO of European Depositary Banking S.A., which belongs to the Apex Group.
“In a nutshell, depositary banking addresses the fund industry, whereas custodian banking services concern every other clients,” said Christian Dominique, vice-chair of ABBL’s Depositary Banking Cluster and Head of Client Delivery and Chief Operating Officer at BGL BNP Paribas Securities Services.
Vehicles subject to depositary services for examples are UCIs and investment vehicles with depositary requirements, such as Ucits, Part II funds, SIFs, Sicars, Raifs, unregulated companies qualifying as AIF and having appointed a depositary, and non-Luxembourg domiciled investment vehicles with depositary requirement as per EU passporting rules under the AIFM directive.
Pension funds
ABBL noted that its survey made it possible to obtain a more granular view of various types of clients. A breakdown of the assets under custody shows that about 31 percent of these are held on behalf of clients at pension funds. Another 31 percent is held for global custodians, while 22 percent is held for banks. Corporate clients account for 7 percent and insurance funds for 6 percent.
Depositary banks also play a key role in the supervision of funds and investments, as they are well placed to monitor the fund’s activity on an ongoing basis and to intervene in case of discrepancies or irregularities.
“Having a depositary bank acting in the investors interest as further gatekeeper, alongside the national supervisory authorities, the fund’s management bodies and the auditors, is a European specificity,” said Eric Guerrier Vice-chair of the ABBL’s Depositary Banking Cluster and head of depositary oversight and custody diligence at Pictet & Cie (Europe) S.A.
Looking ahead, ABBL noted that financial regulation in Europe is expected to place additional requirements on banks that provide custodian and depositary services. “Legislative challenges are also ahead, with the UCITS and AIFMD directives due to be recast and the shoulders of professionals in these sectors potentially having to bear the burden of even more obligations,” ABBL said when releasing the survey.
Talent challenge
Meanwhile, banks in this part of Luxembourg’s financial ecosystem are not immune to the overall challenge of attracting and retaining talent. “Finally attracting and keeping skilled talents are challenges, like for many Luxembourg based companies, but even more so as our trades are getting more and more specialised as we continuously deal with new categories of assets” said Guerrier.
Claus said he remained optimistic. “Looking further ahead, we remain positive about the future of our businesses. Even in the face of the opportunities and challenges posed by the advent of sustainable finance and the emergence of crypto-currencies, we remain convinced that the Luxembourg fund industry, and therefore the Luxembourg depositary banking industry, are very well positioned to face international competition. Strong and competent monitoring will always be sought, whatever the underlying assets are. And that is what our industry stands for.”
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