As pension funds across Latin America expand their reach to include more cross-border and alternative allocations, custodians can help ensure that demands for improved transparency and streamlined trade processing are met.
Throughout Latin America, the continued uptick in retirement savings is expected to help boost domestic AUM by more than 10% annually through 2025, according to recent data from PwC. [1] With investment guidelines becoming less restrictive, pension managers in countries like Mexico, Peru and Chile have steadily increased their cross-border allocations (which, all told, rose some 19% in 2019, notes Cerulli Associates). [2]
Meanwhile, alternative strategies such as infrastructure, real estate and private equity are likely to assume greater prominence in regional pension programs going forward, with IMF, Lipper and other observers forecasting a two-fold increase in alternative AUM over the next four years. In the two years since Mexico’s AFORES Pension System authorized investments in global alternatives, such allocations have nearly doubled, closing 2020 at nearly $10bn in capital commitments, according to data from BMV Group.[3]
With participation on the rise comes the need for greater transparency into investment fund flows, putting added pressure on managers to keep pace with current solutions and protocols. Bolstering core competencies in areas like trade execution, portfolio analytics and other compulsory services can be a costly proposition, however, particularly for smaller funds only now getting up to speed in terms of front-to-back office efficiency.
Accordingly, a growing number of asset managers are seeking all-in-one, third-party platforms capable of handling an increasingly sophisticated array of fund activities. Bolstering data analytics capabilities, for example, offers managers greater insight into the investment decision-making process, allowing them to explore more lucrative alpha-generating opportunities on behalf of their investors. The Latam pension expansion will have a measurable impact on regional custody players as well; in Colombia, for instance, going forward custodians will need to accept matched trades with respect to the CCP, and also be able to manage and monitor daily matching codes.
Custody to the rescue
Despite being among the globe’s hardest-hit regions due to COVID-19, data from the Economic Commission for Latin America and the Caribbean (ECLAC) pegs current-year growth at around 3.7%, as local economies gradually begin to reopen.[4] Maintaining that trajectory will require that governments continue to expand fiscal and monetary policies, while also promoting greater investment in sustainable programs and practices, notes ECLAC.
A decade after establishing its first Latam-facing custody, clearing and administration platform in Brazil, BNP Paribas continues to seek growth opportunities in the region. In late 2019, BNP Paribas Securities Services was named global custodian by Protección S.A., one of Colombia’s leading pension funds, and going forward BNP Paribas Securities Services believes the provision of custody services will be key to the successful transformation of additional pension programs. When managed effectively, custody drives portfolio efficiency, offers security to investors through better risk controls, while also providing an operational and technological infrastructure in support of funds’ growth strategies. At BNP Paribas, for example, all custody and settlement services are supported by Neolink, a web tool that ensures accurate processing of order instructions to the custodian, as well as the interactive data navigation analysis tool DNA, capable of delivering highly granular risk and performance analysis even when dealing with massive volumes of data.
It is a time of great change within Latin America, marked by the emergence of newer asset classes such as ETFs, as well as ongoing innovation and digital transformation. For providers with the right skills, solutions and regional presence, there will likely be opportunities aplenty to help Latam pension managers achieve the kind of streamlined trade processing and investment transparency that their clients require.
Colombia: Pensions innovation
Through its recent Capital Market Mission directive, Decree 1207 of 2020, Colombia’s Ministry of Finance has sought to liberalize voluntary pension-fund guidelines, including lifting limits on alternative allocations such as real estate and private equity, giving plan managers greater discretion in the process. The new rules are part of the country’s overarching effort to bolster the local economy as Colombia, like neighboring countries, reduces its historical reliance on commodity exports in favor of newer opportunities for global investing. If anything, the economic impact of COVID-19 could further this trend.
The Colombia story is part of a wider swath of financial innovation taking place throughout Latam. Accordingly, providers with a strong local presence and solid record of commitment that can offer a broad range of capital-markets solutions, from custody and clearing to strategic advisory services and more, will be best positioned to reap the benefits as the region continues to evolve.
In an effort to continue making Colombia a market that is more aligned with international standards, the newly enacted Decree 1207 seeks to improve custody and clearing protocols around voluntary pension funds, and also expands the number of portfolios requiring an external custodian for post-settlement activities. According to Claudia Calderón, Head of Hispanic Latam, BNP Paribas Securities Services, the regulation underscores Colombia’s desire to comply with internationally recognized standards, while at the same time reducing operational risk associated with all affiliated counterparties. “This, among other things, will improve the attractiveness of Colombia for investors, and will contribute to its growth in the region,” notes Calderón.
While the majority of regional trade data has been disseminated on a T+0/T+2 basis, as recently as late last year Colombia was one of the few key players still missing T+2 settlement capability and, concurrently, a domestic equities CCP. This was not for lack of trying—plans to establish a clearing house for the equities market predated the push towards T+2, itself originally slated to roll out beginning in 2019. The country is finally T+2 ready and Colombian leaders believe that their recently debuted CCP – Cámara de Riesgo Central de Contraparte – for equities will be more effective at streamlining portfolio investment flows and reducing overall risk for this market segment. [5]
[1] PWC report, “Asset & Wealth Management Revolution,” Jan. 2021
[2] “The Cerulli Report—Latin American Distribution Dynamics 2020: Emerging Opportunities in Uncertain Times,” Dec. 2020
[3] Source: BMV, BIVA, Sept. 2020
[4] ECLAC report, “Preliminary Overview of the Economies of Latin America and the Caribbean,” Feb. 2021
[5] BVC news release, June 2020
