BNP Paribas Securities Services has big ambitions to continue growing its global franchise servicing hedge funds (as well as other alternative investment managers, asset owners, banks and brokers) and is doing so through strategic transactions such as the acquisition of Credit Suisse’s fund administration arm, Credit Suisse Prime Fund Services, in 2014; integration of Deutsche Bank’s prime brokerage and electronic execution business in 2019, as well as stakes in leading wealthtech and funds distribution platform, Allfunds, and private capital fintech, AssetMetrix in the same year. BNP Paribas is also supplementing these deals through partnerships with providers such as Broadridge Financial Solutions for front to back portfolio administration, and organically, through investments in digitisation, data science, systems and technology, including its first electronic investor transaction into an alternative fund this year.
To have a partner with the ability to support a manager no matter what direction they want to move their business is highly valuable.
Diarmuid Ryan, Global Head of Hedge Fund Services, BNP Paribas Securities Services
Consolidation in fund servicing has been a perennial trend for the past decade, but BNP Paribas is distinguished by a broad suite that matches its culture of universal banking. “Whereas some competitors are chasing every asset on the street, our firm is not seeking indiscriminate growth. We want the right partnerships that are a good fit for the business model. This will often involve clients using many products spanning different service lines, but not necessarily everything,” says Diarmuid Ryan, Global Head of Hedge Fund Services at BNP Paribas Securities Services, who sits in Dublin and oversees a global operation including Europe, the Americas, and Asia Pacific.
“We can offer an aligned value proposition including prime brokerage, clearing, execution, administration and custody,” says Ryan. This can be a starting point discussion with clients, but multiple extras can be bolted on. Some managers are changing their operating models by partly or fully outsourcing one or more of selected front, middle and back office operations, while others mix and match internal and external combinations for different functions. For instance, currency management and hedging; cash management; collateral management, margin calculation, OTC valuations or the trading desk can all be outsourced to varying degrees.
Cost savings are one motivation for streamlining service provider relationships. “Exact savings depend on client circumstances, their existing model and technology landscape. But it is not difficult to achieve 10-20% cost savings, which could be even higher where customers are spending millions on technology that could be outsourced,” says Ryan. Some line items of savings can reduce expense ratios for investors while others could cut asset managers’ internal overheads. “Clients might be able to retire some technology, stop investing in proprietary technology or rethink their middle office strategy,” explains Ryan. Outsourcing can also reduce the number of hats sitting on a single head: BNP Paribas Securities Services’ report on the Future COO found that some COOs are carrying out as many as nine functions.
Multi-tasking is harder to avoid in smaller managers, who may also be falling short of some providers’ minimum revenue thresholds, and can be threatened with offboarding. “For such managers, concentrating spending with one provider might be the only way to access services such as prime solutions or cash financing. BNP Paribas can afford to take a holistic view on revenues across an entire relationship, including prime brokerage financing, administration, custody, clearing, execution and so on. This enables us to take on and support a wide variety of managers across all regions,” says Ryan.
To characterise service provider choices as best of breed monoline providers versus an all singing, all dancing “one stop shop” is a false dichotomy that oversimplifies the situation. “We can trim it down to a single digit number of vendors, reducing the number of relationships by a significant amount,” says Ryan. “While we are not a monoline provider, our best relationships span several service lines. But the menu is still a la carte. Every client has different demands, markets and solutions. Clients can pick two out of ten or ten out of ten services,” he adds.
Ryan estimates that 70% of new relationships use bundles of products and this proportion has gone up over the past decade. “There used to be a perception that administration, custody and prime had to be segregated. But in the past few years, more of these relationships have come in tandem as industry norms accept bundling. Information barriers and technology solutions help to ensure independence between service lines,” argues Ryan.
BNP Paribas Securities Services currently has over USD 11.3 trillion in assets under custody.
Though some asset managers do use a non-affiliated depositary, Ryan estimates that 90% of the bank’s client base that require the depositary function use BNP Paribas. “Our depositary is very much independent, with segregation of teams, management lines and services provided to the fund, in line with all guidance and regulations. They provide monthly and quarterly reports which detail the controls and level of oversight performed, demonstrating their independence,” he points out. BNP Paribas Securities Services’ depositary reports can flag up issues such as potential liquidity mismatches, investment and borrowing restrictions, or may raise concerns about valuation methodologies. Since March 2020, regulators including the UK’s FCA have asked depositaries for additional reports around performance, margin calls or trade fails.
Financing forms an integral part of BNP Paribas Securities Services’ differentiated offering. Depending on the needs of the client, it can provide custody-based financing and securities lending, in addition to the prime services of its Global Markets business. Securities lending solutions can be conducted on an agency basis, with BNP Paribas Securities Services acting as the intermediary between client and borrower, as well as through a principal structure, where the client contracts directly with BNP Paribas Securities Services as the only counterparty. Securities lending can be an attractive way to increase yields, by allowing the mobilisation of assets to generate a return while maintaining discretionary control of portfolios allocations.
Working with BNP Paribas Securities Services does not necessarily imply ending relationships with other providers – they could continue via the bank’s own partnerships. BNP Paribas Securities Services has invested substantially in proprietary technology, but also has service solutions with technology providers such as BlackRock Solutions’ Aladdin, Broadridge, Charles River, and Eze Castle. “We look at what works, and find best of breed solutions,” says Ryan.
For instance, BNP Paribas Securities Services has in 2019 partnered with Broadridge to offer a front-to-back solution, though this is not exclusive to either side nor essential. “Some clients may opt for this FTB solution, which can be transformational in terms of costs, operations and access. Broadridge Portfolio master can share the front end with clients and then involve BNP Paribas’ mid office teams, connecting to the mid and back office. It covers the full lifecycle of trades and positions,” says Ryan. “BNP Paribas’s relationship with today’s Broadridge dates back over a decade to firms such as Paladyne Systems and others that Broadridge acquired. We wanted to make sure we were connected to the highest quality front end systems, providing tier one products for everything from the simplest to the most complicated hedge fund structures, across all regions,” he adds.
BNP Paribas Securities Services has also bolstered its digital offering through an upgraded hedge fund services portal, through which fund managers, investors, distributors and authorised account contacts access key information and insights across all of their hedge fund holdings. A recent enhancement involves streamlined trading functionality that allows investors to electronically complete and submit trades on their existing fund investments directly through the portal, as opposed to a traditional manual paper driven process. “This is an important milestone and aligns with our wider digital objective to optimise the user experience for our clients and their investors through the portal,” says Ryan. The upgraded application can be accessed by fund managers, investors, distributors and authorised account contacts to let them access the information they need. “Hedge fund clients and their investors now have real-time access to data across the full trade life cycle, including supporting documentation for tax, financial and reporting purposes,” adds Ryan.
It is not difficult to achieve 10-20% cost savings, which could be even higher where customers are spending millions on technology that could be outsourced.
Diarmuid Ryan, BNP Paribas Securities Services
BNP Paribas Securities Services also places emphasis on keeping architecture open enough to interact with other providers to leverage its global market connectivity. “We have a massive network of outbound and inbound connections. We have 60 plus connections on the front end, absorbing masses of data from counterparties, pricing sources, and data vendors,” Ryan points out.
This open architecture is facilitated by technology. “Downstream connectivity becomes more customised into clients’ CRM systems, internal risk warehousing solutions, and requests for tailored reports. We have made a huge investment in data strategy to be more adaptable and flexible on data, reporting and customisation is a key part of the onboarding discussion,” says Ryan.
Migration is not just about transplanting existing routines, but also seeks to improve the operating model through enhanced data solutions, investor reporting, and additional services. Data scientists at BNP Paribas Securities Services are turning unstructured data into useful outputs. “We are constantly innovating and reviewing our data strategy every 6 months. This includes portals and dashboards that slice and dice P&L, exposures, cash and financing, in a live real-time portal that is more user friendly than an Excel spreadsheet; though clients can also download Excel CSV files. Investors can also obtain transparency,” says Ryan.
Another key area of BNP Paribas Securities Services’ overall digital roadmap is Application Programming Interfaces (APIs). These stitch together different applications and systems, which allows for real time and intraday reporting, as well as customised reporting of performance estimates, final NAVs, settlements, corporate actions and so on. Outputs are only as good as inputs, so this all depends on an ongoing drive for data quality and security. Much can be automated through AI and machine learning, but some manual intervention remains.
“Our API solution is becoming more sophisticated and morphing into data as a service. Data can sit in multiple places, such as prime brokers, administrators and custodians and it needs to cater for different end uses. In five years’ time this will have become the norm,” says Ryan. New services based on ways of aggregating and digitising data are being rolled out.
There are hopes that a harmonisation and standardisation of API standards (to ISO 20022) will permit more interoperability of systems and sharing of data throughout the industry, and BNP Paribas Securities Services belongs to a SWIFT initiative that is working towards this goal. Distributed Ledger Technology (DLT) can also be another way of harmonising data.
At a time when consolidation continues to gain momentum among fund managers and administrators alike, BNP Paribas’ universal bank model places it among a select group of providers globally offering a ‘one-stop shop’ solution where all of the above services are available under one roof. When asked why this is important, Ryan responded: “We do see a growing place for the optionality this model can bring to our clients and how this impacts their own strategic roadmaps. To have a partner with the ability to support a manager no matter what direction they want to move their business is highly valuable. A manager with a one-stop-shop partner can seamlessly diversify into different asset classes, expand into new markets, distribute globally, outsource more within the same single relationship or more quickly access liquidity in times of volatility as seen recently. We can help future proof a fund’s operations while helping to minimise costs along with operational risk, and more time and resources are left over for navigating market conditions.”
Underpinning all of the above is BNP Paribas Securities Services’ size, global presence and balance sheet stability. It currently has over USD 11.3 trillion in assets under custody, enjoys top ratings from credit agencies, and is one of the most capitalised banks in the world – in addition to being one of a select group of 30 G-SIFI banks.
“Our ambition is to be a long-term partner of choice to leading hedge funds and alternative asset managers, and our ongoing investments across the bank into our offering in this space make this very achievable,” says Ryan.
Nathalie Texier-Guillot, Head of Institutional Sales for Equity Derivatives, Global Markets Americas, and Kirsty Gurr, Head of Client Solutions, Prime Solutions & Financing, EMEA were featured in The Hedge Fund Journal’s 2019 ‘50 Leading Women in Hedge Funds’ report.