The Australian securities services community experienced a year of immense change over 2023. Consolidation of the major players meant a reshaping of the landscape and we expect 2024 will see further evolution.
With parallels similar to the ‘big four’ in the Australian banking industry, the structure of the local securities services market is gradually reaching what we believe is a sustainable position for the $3.5 trillion Australian custody market – five or six global custodians. BNP Paribas’ Securities Services business and other major market providers fulfil a critical role supporting the broader financial services community, servicing the market well and efficiently.
In the meantime, staying abreast of external trends such as the shifting economic and market environment, ongoing regulation, and ESG investment priorities, is more important than ever as we lean into the complex world of artificial intelligence, digitalisation and data management.
Moderate growth recovery ahead
From an economic and market perspective, the team at Markets 360, BNP Paribas Global Markets’ strategy and economics division, believes disinflation is likely to be sufficiently advanced to allow the central banks of most developing markets’, to start cutting policy rates soon, lowering the risk of a hard landing and allowing for a moderate growth recovery in the second half of 2024.[1]
The global economy is expected to slow substantially from the heady pace recorded in the third quarter of 2023. However, policy easing will likely help it avoid a more conventional and deeper downturn. As for the eurozone, the Markets 360 team continues to expect it to avoid a full-blown recession, with activity likely to stagnate over the next few months before a possible recovery from Q2 2024.
On the Australian front, the Reserve Bank of Australia held rates steady in February 2024. In terms of inflation, both hard and soft data suggest there’s still some resilience in the economy, which would continue to keep additional tightening on the table. Markets, however, don’t appear to be pricing in any further rate increases.
ESG ramping up
With the market generally facing ESG credibility and green-washing issues over the past year, client ESG initiatives and priorities have strengthened in importance and are expected to increase over 2024.
A BNP Paribas survey of 420 asset owners and managers, hedge funds and private capital firms representing around $51 trillion in assets, shows that institutional investors are mobilising capital towards investments that will deliver measurable positive impacts alongside financial returns. Despite data constraints posing the biggest barrier to ESG integration, especially in tackling financial risks posed by climate change, institutional investors are nevertheless incorporating ESG, notably in their portfolio management and investment decisions. [2]
This latest survey demonstrates that, since 2017, institutional investors have been transitioning from asking ‘why’ integrate ESG, to focusing on the ‘how’ of implementation. They are now increasingly tackling the challenges of using ESG data, achieving their net zero objectives, and integrating ESG expertise into their operations. The next two years will be critical for them to practically implement their ESG strategies.
Impact investing is also increasing in importance, with 54% of respondents expecting to use it in the next two years (versus 45% who are using it now). Investors are keen to see a clear and tangible contribution to social and environmental issues without the spectre of greenwashing. As such, impact investing is set to become the most popular ESG approach globally.
Leveraging from BNP Paribas’ significant presence in Europe, Jules Bottlaender, Head of Sustainable Finance for APAC also provides key perspectives on how the outcomes from COP28 impact market participants.
While a significant delegation pushed to agree on the ‘phase down’ of fossil fuels, last minute the wording has been replaced by ‘transition away’, yet the outcome is still praised by many as ‘the beginning of the end’ of the fossil fuel era,
said Mr Bottlaendaer
Broad targets were given to manage this transition away which included the scale up of nuclear energy, tripling of renewable energies and a doubling of energy efficiency. It has also generally been understood that public money is needed to de-risk capital and unleash private financing. After years of delays, a fund has finally been launched to compensate for the loss and damages of climate change. More than $700 million was pledged from developed countries, which represents less than 0.2% of what is needed by developing countries.
“In terms of Australian regulations, sustainability and climate mandatory disclosure for companies and registered investment schemes will start progressively in July 2024, up to 2028 for small entities,” he said.
The year of CPS 230
Operational risk is a theme unfolding globally with regulations now in Europe, UK and Asia Pacific. APRA’s Prudential Standard CPS 230 Operational Risk Management (CPS 230) is designed to strengthen operational risk management in entities such as banking, other approved deposit institutions, insurance, and superannuation industries.
The regulator is looking to simplify its regulatory architecture by the proposed integration of existing standards for outsourcing and business continuity into a single, principle-based standard which will strengthen operational resilience across the industry.
BNP Paribas’ Josephine Maiorana, Head of Regulatory Watch & Market Advocacy, APAC believes it will be a significant change in how asset owners manage third, and even fourth party providers, and engage with partners.
By 1 July 2025, the new standards will come into force which means much preparation needs to take place in 2024, in line with regulatory deadlines. Asset owners impacted by CPS 230 will need to develop their implementation plans and test them with their third-party suppliers,
said Ms Maiorana
The APRA consultation paper sets out requirements for regulated entities to maintain effective internal controls for operational risk, commensurate with the size, business mix and complexity of the activities they undertake.
“It’s important to be prepared and be ready to ensure continued delivery of critical operations during periods of disruption; and effectively manage the risks associated with the use of service providers, whether it relates to CPS 230 or broader regulation,” she said.
The rise of artificial intelligence and the client centric journey
Artificial technology (AI) is here to stay and thanks to AI technologies, BNP Paribas is implementing a range of client initiatives that aim to optimise efficiency, lower operational risk, while allowing faster processing and time-to-market.
We’re seeing custody clients demanding real-time services that promote accuracy and improve operational KPIs. The application of AI helps to incorporate rules-based encrypted solutions to exploit data and to provide clients with much needed tools and applications that increase efficiency in daily tasks such as electronic signatures, virtual assistance and data preparation.
We bring best in class partners and fintechs seamlessly into our service offer, via our open service models, so that clients can benefit from these innovative services. For example, our next generation online assistant NOA, created with Amelia, one of the global leaders in cognitive tech systems, combines artificial intelligence, machine learning and natural language technologies.
At the same time, we also believe it is critical to ensure that smart technology is effectively combined with human interaction and accessibility of people on the ground. BNP Paribas is a human, client-centric organisation that recognises bespoke client services are just as critical as standard services and that ultimately it’s important to have a balance of both.
Data management, digital assets, cyber security, blockchain and robotics driving forward
Data is the glue that holds everything together. The industry continues to face data management challenges in relation to data consumption, quality and distribution, coupled with challenges in user experience and the ability to access data in the most secure manner.
With growing complex reporting requirements for both clients and regulatory authorities we see a need for data standardisation and aggregation, across asset classes, irrespective of the service providers. Also needed is the ability to process external data to align with a client’s ecosystem’s data standards while continually ensuring the security and protection of data. There is an increasing requirement for near real-time position keeping, high impact decision making and data distribution to stakeholders, plus the ability to provide increased transparency to end-investors and other key stakeholders.
Given custodians typically hold a high percentage of clients’ operational data, we have a significant role to play by working collaboratively to provide complete solutions for our clients.
We provide an open service model architecture, to connect with the best of breed financial service partners, data providers and fintechs and employ extensive digital and data capabilities, leveraging a wide range of technology partnerships. In conjunction with these services BNP Paribas provides a comprehensive cyber security programme to secure client assets, as well as state of the art data encryption and data leakage protection technology. In addition to robust business as usual processes to protect clients, BNP Paribas constantly challenges itself to expand into new frontiers of protection. We have implemented a cyber security program which applies the US National Institute of Standard and Technology framework to identify new projects that would further enhance our protection capabilities.
The industry is also keeping a close eye on digital assets trends including tokenisation and distributed ledger technologies. While not broadly available in the Australian market, tokenisation is still a growing theme here. Distributed ledger technology could offer benefits to financial institutions such as increasing efficiency, reducing counterparty risk for market participants, decreasing issuance and settlement times, while creating and trading new digital assets
At BNP Paribas, we are testing use cases for distributed ledger technologies in financial services, evaluating their business value and associated risks. We are experimenting in many domains such as digital assets and cash, custody, depository services, fund administration and transfer agent activities. This is to lay the foundations required for us to potentially support clients in the future.
Trade and post trade technology pick up the pace
Trade and post-trade technologies are rapidly evolving as we move forward in 2024. The efficiencies of moving to a T+1 settlement cycle have been well discussed over the last 12 months on the global stage, in terms of settlement risk, lower margin requirements and greater available liquidity.
However, there are operability concerns from offshore investors into such markets. These relate to geographical time constraints for foreign investors and their intermediaries to manage settlement instructions and funding across the relevant counterparties.
This leads to an increasing importance for custodians to provide clients with vital information to support client activity. From our perspective, and as part of the shift to T+1, a service that provides round-the-clock support, standardisation, connectivity and partnerships becomes critical. That is where global organisations and custodians who have a ‘follow the sun’ model become even more vital.
Over the course of 2024, BNP Paribas will continue to analyse the situation and provide support where needed in terms improving operational efficiency, changing investment behaviours and drive further autonomy.
Our client centric approach continues to be the focus
The client experience is evolving and becoming more tailored and sophisticated as technology drives greater interconnectivity between providers and trusted partners to ensure focus remains on supporting clients’ requirements now and for the future.
BNP Paribas continues to hold steadfast to our philosophy that clients are the heart of everything we do. Our need to act in their best interests inspires and motivates us to be a collaborative and true partner. We aim to be an extension of our clients no matter what changes and challenges they face over the coming year.
The information contained within this document (‘information’) is believed to be reliable but neither BNP Paribas nor any of its branches or affiliates (hereinafter collectively, “BNP Paribas”) warrants its completeness or accuracy. Opinions and estimates contained herein constitute BNP Paribas’ judgment and are subject to change without notice. BNP Paribas and its directors, officers and/or employees shall not be liable for any errors, omissions or opinions contained within this document, nor for any direct or consequential losses arising from any action taken in connection with or reliance on the information. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or service, and is not intended for retail investors. The information does not constitute legal, financial, tax or professional advice, is general in nature and does not take into account your individual objectives, financial situation or needs. You should obtain your own independent professional advice before making any decision in relation to this information. For the avoidance of doubt, any information contained within this document will not form an agreement between parties. Additional information is available on request.
The contents hereof may not be reproduced (in whole or in part) without the prior written consent of BNP Paribas. The use of any trademarks and logos displayed herein is strictly prohibited unless written permission for such use is obtained from BNP Paribas and/or, where relevant, such third party, which may own the trademarks and logos.
BNP Paribas is a credit institution that is authorised to perform banking activities and investment services under the law applicable in France and is subject to prudential supervision on a consolidated basis by the European Central Bank, in cooperation with the Autorité de contrôle prudentiel et de résolution. As a public listed company and as an investment service provider, BNP Paribas is also in France under the supervision of the Autorité des marchés financiers. Its registered office address is 16 boulevard des Italiens, 75009 Paris, France, and its website is www.bnpparibas.com.
Services described in this document, if offered in Australia, are offered through BNP Paribas acting through its Australia Branch ABN 23 000 000 117 (“BNP Paribas”) and/or BNP Paribas Fund Services Australasia Pty Ltd ABN 71 002 655 674 (“BPFSA”). BNP Paribas is licensed in Australia as a foreign authorised deposit-taking institution by the Australian Prudential Regulation Authority and delivers financial services to clients under its Australian Securities & Investments Commission Australian Financial Services License (AFSL), No. 238043. BPFSA is an Australian-incorporated company which is a wholly owned subsidiary of BNP Paribas and delivers financial services to clients under its AFSL No. 241080. The Information is directed at wholesale clients only and is not intended for retail clients (as both terms are defined by the Corporations Act 2001, sections 761G and 761GA).
Services described in this document, if offered in Hong Kong, are offered through BNP Paribas acting through its Hong Kong Branch, which is registered as a Licensed Bank under the Banking Ordinance and regulated by the Hong Kong Monetary Authority. It is also a Registered Institution regulated by the Securities and Futures Commission for the conduct of Regulated Activity Types 1, 4, 6 and 9 under the Securities and Futures Ordinance. Furthermore, where the content relates to regulated products/ activities, the Information is directed at “professional investors” as defined in the Securities and Futures Ordinance.
Services described in this document, if offered in Singapore, are offered through BNP Paribas acting through its Singapore Branch, which is licensed by the Monetary Authority of Singapore under the Banking Act 1970 as a qualifying full bank. It is also a clearing member and depository agent of The Central Depository (Pte) Limited (CDP), a trading member of Singapore Exchange Derivatives Trading Limited (SGX-DT), and a clearing member of Singapore Exchange Derivatives Clearing Limited (SGX-DC). Singapore dollar deposits of non-bank depositors placed with the Singapore branch are insured up to $75k by the Singapore Deposit Insurance Corporation. Foreign currency deposits, dual currency investments, structured deposits and other investment products are not insured.
Services described in this document, if offered in New Zealand, are offered through BNP Paribas Fund Services Australasia Pty Ltd (“BPFSA”) acting through its New Zealand Branch, NZCO registration number 1010736. BPFSA is an Australian-incorporated company which is a wholly owned subsidiary of BNPP. BPFSA is registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008. BPFSA is not licensed by a New Zealand regulator to provide financial services and BPFSA’s registration on the New Zealand register of financial service providers does not mean that BPFSA is subject to active regulation or oversight by a New Zealand regulator. NO BNP PARIBAS ENTITY IS A REGISTERED BANK IN NEW ZEALAND. The Information is intended for wholesale clients only, as such term is defined in the Financial Markets Conduct Act 2013.
Services described in this document, if offered in the People’s Republic of China (“PRC”, which for these purpose excludes the Hong Kong or Macau Special Administrative Regions or Taiwan), are offered through BNP Paribas China Limited (“BNPP China”), a subsidiary of BNP Paribas. BNPP China is a commercial bank regulated by the China Banking and Insurance Regulatory Commission. This document does not constitute an offer to sell or the solicitation of an offer to buy any financial products in the PRC to any person to whom it is unlawful to make the offer or solicitation in the PRC.BNPP China does not represent that this document may be lawfully distributed, or that any financial products mentioned herein may be lawfully offered, in compliance with any applicable registration or other requirements in the PRC, or pursuant to an exemption available thereunder, or assume any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by BNPP China which would permit a public offering of any financial product or distribution of this document in the PRC. Accordingly, no financial product mentioned herein may be offered or sold, directly or indirectly, and neither this document nor any advertisement or other offering material may be distributed or published in the PRC, except under circumstances that will result in compliance with any applicable laws and regulations.
Services described in this document, if offered in India, are offered through BNP Paribas acting through its branches in India, which is registered as a Scheduled Commercial Bank and is regulated by Reserve Bank of India. It is also a registered custodian under the SEBI (Custodian of Securities) Regulations, 1996 and is regulated by the Securities and Exchange Board of India.
[1] Global Outlook 2024: Still searching for a landing – Global Markets (cib.bnpparibas)
[2] Institutional investors accelerate their low-carbon transition strategies, BNP Paribas ESG Global Survey finds – Securities Services (cib.bnpparibas)