Today the role of the custodian in Africa has evolved. This is especially evident in the way custodians are focusing on meeting both business and client needs, to initiate and enable development of the continent’s capital markets.
As African capital markets deepen, the increasing volume and activity, along with the changing business and client requirements are evolving the custodian role from recipient, to enabler and – at times – initiator of capital market development by bringing new product capability and global best practice norms to domestic African markets.
Fifteen years ago, custodians focused on the basics of safekeeping, processing of corporate actions and settlements and reporting. The growth of both the continent’s local investor base, along with increased foreign investor activity over the past decade, has shifted the custodians focus from the basics of custody to the value adds – such as advocating change for best practice and expanding the business of custodian banks with new product capability.
At the same time the regulatory complexity of local and international markets has also increased and has influenced the role of the custodian in the local markets.
Within this rapidly changing and demanding environment custodian banks are finding themselves at the centre of enabling and initiating change to move African capital markets forward.
Custodian banks as an enabler of capital market development
Custodian banks are seen as key representatives of local and domestic investors and intermediaries and with this are active enablers of change in capital markets. The role of custodian banks may be regarded as an enabler of change in the capital markets that is growing in importance.
The South African market recently changed the settlement cycle for equities from five business days after the trade date – aka T+5 – to T+3. This was a long-anticipated change and the great collaboration between market participants and regulators resulted in a seamless and ultimately an anticlimactic change.
Custodian banks played an active role in enabling this change in the market.
From the bank’s perspective, a key feature of enabling this change was the engagement with clients, the depository and the Exchange on managing client commitments and margin exposure to brokers. This was a material concern in the market for go live and required an understanding of the client process and requirements, understanding the change required in client behaviour and ultimately the engagement with all parties to bring about the change.
Similarly, in Kenya, the bank is a key player in enabling the development of the local derivatives market by bringing its local and regional expertise to develop a clearing capability in the Kenyan market.
Custodian banks as an initiator of capital market development
Custodian banks also proactively engage regulators and other market participants, to initiate change in the local capital market. The bank does this by tabling the opportunity or problem statement with regulators and market participants and by demonstrating the need and value of the change through joint visits to markets where the proposed capabilities already exist.
This is further enhanced by bringing experts from other markets into the local market to engage and inform regulators and participants on the application of the new capability in country. This process generally demands considerable time and investment and therefore requires belief in and commitment to the development of capital markets in Africa.
A good example of such a change is securities lending in Nigeria. A few years back the bank’s custody team in-country engaged the local regulators and market participants to launch a securities lending product in the market as a mechanism to improve liquidity. Following on-going and extended engagements, regulations and guidelines were published to establish the capability in Nigeria and the resulting product is close to full implementation.
Custodian banks have also been actively involved in lobbying for and driving pension reform across the region and particularly around influencing changes in governance relating to independent custody functions. There has been a fundamental shift in recent years in local markets in Africa towards independent custody, which has in turn instilled confidence in the pension industry and created fertile ground for growth.
Custodian banks, from reactive and proactive to anticipatory
Custodians are not only expected to react to specific market and client needs in order to initiate or enable change, Today, custodians are also expected to anticipate client and market need and to drive and initiate change.
Clients are increasingly expecting custodian banks to anticipate their needs, to represent their requirements and drive change in the market without the client requesting the action. This means constantly asking both the process, regulatory and broader philosophical questions around how we push this market to evolve further – both for the bank and its clients.
Doing business in a rapidly evolving multi-jurisdictional and multi-currency landscape, often still developing much of the institutional effectiveness and norm-compliance that characterises custody in the developed world, means that custodians are expected to play – an anticipatory and partner role in Africa. This is achieved by strong connectivity with local institutions, sourcing and managing information with clients and putting them in a position as if they were on the ground themselves.
Custodian banks of today in the African markets have evolved from being passive, reactive players in the market to proactive and driving forces in market changes. Their role and importance in capital market development is growing as the size and complexity of the markets change.
This evolution points to the very active role that the bank plays in its capacity as a custodian; evolving the African capital markets by bringing new product capability and best practice to local markets.
As the role of custodians is evolving to both understand and operate in a changing African landscape, Standard Bank is uniquely positioned to blend global best practice with local knowledge, to bring about change that will move African capital markets forward.
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