Is Austria and CEE a logical region or is it a geographic grouping merely reflective of the business reach of the UniCredit Group? This was the interesting and challenging question that I was recently asked.
The rationale for the UniCredit business profile and treating CEE as an appropriate network region are linked. Austria is the traditional gateway into CEE and our Group’s expansion eastwards was a logical by product of the dominance of Austrian banks in the region as well as their local market knowledge. And there was opportunity as the region sought to privatise formerly state owned enterprises. Banking follows trade and so we also saw other banks implant themselves in the region.
But there was a difference. Bank Austria (and UniCredit SpA as its parent and also the direct owner of the important Polish business) sought to ensure they had deep roots in each of the geographies. They did not build a limited purpose branch based presence in each of the countries, but established and grew a meaningful full service banking network in each location. This meant they had a proposition that covered a range of client groupings. Most importantly, from a GSS perspective, it included the potential to distribute financial products to a sizeable retail client base and to offer full banking, brokerage, capital markets, and custody services to the newly emerging financial institutions in the area. Such financial institutions ranged from new ventures through to subsidiaries of major global groupings in the financial and investment management sectors.
But such a rationale does not necessarily answer fully the true purpose of the question. T2S is encouraging clients to revisit their network strategies across Europe. Where does one position CEE in this scenario? For some, CEE includes Russia, for others it does not. But, generally speaking it encompasses the whole region.
Perhaps it does no harm noting a few issues that are fairly selfevident, but relevant to the question. The number of micro to midrange markets, by comparison to global scale, across CEE makes client participation in those markets relatively high cost, both in terms of coverage staff needed as well as in the cost of managing the unique characteristics of those markets.
In addition, only a small subset of the markets are planning to be T2S eligible; these are the mid-sized Austrian market and the micro markets of Slovenia and Slovakia. Although Hungary and Romania plan a link with T2S, it is unlikely that this will be of any relevance to the global investor as it is based on the euro rather than domestic currency settlement of transactions.
In addition, the region is likely to be in change mode for the coming decade. It is difficult to forecast events, but in the long term the current nation based structures are not sustainable. We have already seen moves towards consolidation around Vienna’s CEESEG, the cross listing strategy of Warsaw and Moscow’s ambitions to reach out to the former CIS countries. Thus we would expect changes in several areas over and beyond any actions among the commercial service providers.
The CSD scenario is likely to change, whether this is due to the launch of regional groupings, with Warsaw and Vienna still in discussion, or alliances to enable shared infrastructure either through some of the regional powerhouses (Vienna, Warsaw, and Moscow) or an international CSD. The CCP scenario will evolve with either increased interoperability across CCPs, allowing internationals to bypass the local CCP or full mergers of the different structures as a cost saving strategy. Market practise is likely to converge as EU regulation takes grip although several markets in the region are outside the direct scope of such a trend. Moreover, some that are in scope have shown, in the past, a tendency to adopt some unique interpretations of specific regulations. And T2S will drive change beyond the initial three core markets, assuming that there is eventual expansion eastwards of the concept of the single currency.
So what are the core reasons that make the region a logical grouping from a network selection perspective? Firstly, it contains a large number of smaller markets each with distinct languages, different legal systems, mainly local currencies and separate infrastructures. Secondly, it is likely to see material change both in terms of regulation and structure over the coming decade. Thirdly, it is a growth region albeit from a small base. It would not be illogical to expect cross border asset allocation and additional supply to lead to a material growth in assets held by overseas investors in the region. On the brokerage side, remote brokerage will grow in the larger markets and thereby increase the footfall from that sector. And finally, there are unique risks inherent in the markets, not so much specific risk but the fact that the profiles differ from market to market. As we are also in a period of material change, the environment militates for proximity to the market to ensure strong cross border client influence for local market advocacy and short and direct lines of communication between clients, their agents, and local companies or infrastructures.
T2S has been the driver for the adoption of a strategy for consolidation of networks in European markets, but this strategy has some adverse consequences if applied automatically to the CEE region. The first is that any region or market grouping needs to have critical mass. That is in the interest of all parties. As UniCredit we create critical mass through the three legs of our client strategy, namely coverage of local institutional, cross border agents and corporates in each market. But a critical component of that critical mass is also the volume contribution we have from the major markets; namely Austria, Czech Republic, Hungary, Poland and Russia. The second is that T2S allows clients two core advantages; namely the potential for a single point of direct control over trade flow and greater ease in managing euro denominated securities cash accounts. However, we are conscious of the need to neutralise these benefits for clients and believe we overcome the first advantage through our asset servicing and operator models and the second by our preferred and mainly unsecured liquidity package.
We are conscious that ease of access across all markets is also an issue and are working on several solutions to ensure we can offer this, facilitated by our strong commitment to SWIFT 20022. There is a danger that the noise from T2S has drowned out the reality of many relationships. Quite simply, T2S is a settlement engine; it does not cover asset servicing, non CSD eligible instruments, cash full service “nostro” account management or local market support and knowledge. And those functions are definitely the key risk areas and business requirements of the global custodian community. They are also critical in risk mitigation terms to brokerage houses although liquidity management and credit appetite are even more critical and vital for those firms.
In short the answer to the question of whether Austria and CEE is a logical region is indeed yes. Its diversity, its development path, its unique structures and its risk profile all militate for keeping it separate from the bulk of the EU. The region has critical mass and the Austrian or Moscow boundaries are sensible if we believe that the past phase of consolidation of regional markets is a precursor of the bigger ones to come.
John Gubert
Chairman
Global Securities Services
Executive Committee