SEB buys global custody technology and services from BBH
The Nordic custodian SEB has reached an arrangement by which the outbound global custody needs of its domestic institutional investment and fund management clients will be met by a combination of existing SEB infrastructure and the technology and operational services supplied by Brown Brothers Harriman (BBH), the global custodian and mutual fund administrator.
Both parties emphasise that the deal is neither a sale of the global custody business of SEB, nor an outsourcing of its service needs. It is, they say, an insourcing of BBH capabilities which will be white labelled and integrated into the range of services SEB provides to its global custody clients.
“It is a commercial arrangement, in which SEB is insourcing its technology and operational needs in global custody for its domestic, outbound custody business,” explains Göran Fors, head of custody and cash sales at SEB. “It is a commercial relationship, not a joint venture or a partnership. It is the opposite of out-sourcing. We are strengthening our product, and remaining the provider of the services.”
Unlike most of its Nordic competitors, SEB has always emphasised its commitment to retaining its domestic global custody clients. It competes against the major global custodians most active in the region – BNY Mellon, Citi, J.P. Morgan, Northern Trust and State Street in particular – for the business of domestic fund managers, pension funds and insurers, and the new arrangements are not intended to disturb that.
“There is a strong belief and commitment from the Board that SEB wants to remain a strong provider of custody services in its `home’ Nordic markets,” adds Göran Fors. “The goal is to grow our global custody business, not to withdraw from the global custody business. The only alternative to this arrangement which we considered seriously was to build a new global custody platform ourselves, and we concluded that made no sense. It would be extremely expensive, and with no guarantee of success.”
The economic logic of skipping the cost and risk of investing in a new global custody platform of its own is hard to dispute. Sharing technology infrastructure will give rise to operational efficiencies, and Göran Fors hopes that this will allow SEB to focus more of its staff on client-facing roles.
“For BBH, this is an evolution of a long held strategy of providing financial services, particularly sub-custody, to Nordic financial institutions, and part of a wider strategy to increase our provision of technology and infrastructure services to clients through our technology services group,” says Richard Fodder, head of the London office of BBH.
There is of course a risk that domestic clients become attached to BBH, but there is a number of reasons why that is unlikely to happen. First, the level of trust between the two banks is high. They know each other well, with BBH acting as American and African custodian to SEB, and SEB as Nordic custodian to BBH. Secondly, BBH will be close to invisible to SEB clients. The services will be white-labelled by SEB, and the Nordic bank will remain the legal counterparty to all users of them.
Thirdly, BBH has neither the resources nor the ambition to become a global custodian on the scale of Northern Trust, let alone BNY Mellon, Citi, J.P. Morgan or State Street, which means SEB clients are unlikely to see BBH as an alternative. In any event, the services supplied by BBH to SEB will be limited in scope.
The arrangement is restricted to outbound institutional business in the four principal markets – Denmark, Finland, Norway and Sweden – of the Nordic region, plus Luxembourg. Most institutional clients need more than global custody, and will not sacrifice a relationship with SEB for that alone. In addition, the sub-custody services of SEB in the Nordic region are unaffected, as are both cash payments and retail custody in the Nordic markets.
SEB is only now sharing details of the arrangement with its clients, but Göran Fors says the handful consulted so far have welcomed it. They retain the same client service officer, and may even get more people working on their account if operational staff released by the services provided by BBH are re-deployed as intended. The client risk remains on SEB and, if the deal works as both parties hope, they will enjoy the benefits of better technology and settlement and asset servicing in non-Nordic markets.
Interestingly, SEB continues to have discretion over the appointment of its sub-custodians. Inevitably, SEB will appoint BBH as sub-custodian for more of the markets which it does not service directly itself. BBH pioneered the practice of selecting more than one custodian in each market in its network, and consolidation in the sub-custody industry means that the overlap between the SEB and BBH networks is already high. But SEB can select a third party sub-custodian if it wishes.
Göran Fors reckons around €350 billion of outbound custody assets are affected – much of it managed by members of Swedish and Finnish hedge funds, whose business SEB utterly dominates, though the bank also services around 500 UCITS funds, and a number of the mid-sized Nordic pension funds. €350 billion equates to half of the €700 billion that SEB has in custody overall, including sub-custody.
The deal with BBH means SEB is taking a different path from the one chosen by its regional rivals – especially Nordea. After a three-year marketing alliance with BNY Mellon, Nordea sold its book of outbound custody business to J.P. Morgan in 2008. Similarly, Handelsbanken has a relationship with Northern Trust by which the Chicago-based bank provides global custody services in its own name to domestic clients of the Nordic bank. Only Swedbank continues to offer global custody services in partnership with J.P. Morgan Chase to its domestic clients, and then only in its home country of Sweden, and within its Baltic franchise.
Global custody clients will start migrating to the BBH platform early next year, and the aim is to complete the transition by mid-2016. Though the deal is not unlike the arrangement that BBH has with Mitsubishi UFJ Global Custody, in which the American bank supplies global custody services and technology to domestic clients of the trust bank, Richard Fodder says the details are peculiar to SEB. “It is a continuation of the strategy demonstrated by the Mitsubishi UFJ relationship in the sense that a third party is using the technology and operational infrastructure of BBH,” he says. “But the details are very different.”