Global Custodian Winter 2018 | Page 33

[ I N - D E P T H Stock Exchanges. More mature SMIs also leverage their expertise and create joint ventures or partner- ships to further develop newer securities markets (e.g. Korea Exchange and Cambodia exchange).” In some cases, the distinction between emerging, frontier and nascent markets does not provide a clear guide to where market opportunities lie. Indeed, Mobius confirms that investment opportunities and a market’s operational framework often do not align. “You can have a market which operationally is not in good shape, but where there are a few “hidden gems” that are worth buying,” he notes. Standard Bank covers over 14 markets in Africa and continues to expand even where foreign access is yet to be confirmed. Not all of these markets will individually generate sufficient activity to justify stand-alone investment in capability but should be seen as part of a bigger picture. In some markets, given their size, the economics may not at first glance appear to stack up, but if you really want to be a reliable regional bank for your client base, you have to recognise that they want a regional capability. Secondly if a bank that is estab- lished were to pull out of a market, it would send the wrong message and open up opportunities to com- petitors. “We need to look at these markets in the longer term and help enable them to grow. Exiting would make that more difficult,” says Bruyns. There are some markets that may currently be subscale, but where efforts are evident to support the growth of a savings industry, a necessary underpin- ning for longer term success. The domestic savings industry should dominate at least 60% of the market, with perhaps 40% foreign investors coming in. But if that 60% local participation is missing in the market, the huge dominance of foreign investors brings the possibilities of sustainable growth into question, not to mention the risk of added volatility driven by foreign investor sentiment. There are four key questions in this regard, says Bruyns. What is the local savings industry doing? What savings products are coming onstream? What are the pension fund regulations? And what moves are there to stimulate more liquidity into the market? “Those are the things that keep us interested in en- gaging,” he says. “Of course, custody will be the basic product and then we’ll start moving up the value chain with more product capability, but we’d need to see a sustained potential for the capital markets growth to invest in a significant capability.” From an operational efficiency perspective, there are grounds for optimism in some of the emerging and frontier markets, whether long-established or with little or nothing in the way of legacy. Har- wood-Jones suggests that new technologies, with lower entry costs, can help these markets to leapfrog some of their more developed peers. She points to West African markets such as Ghana and Nigeria that are very actively looking at distributed ledger | E M E R G I N G M A R K E T S ] technology proof-of- concepts in the securities space. “In ASEAN, too, markets like Thailand, Singapore, Indonesia and Malaysia have or are in the midst of shortening their settlement cycle to T+2 as they up- grade their platforms, often with SWIFT Standards,” she says. She adds that the emergence of regional and global players can bring further consistency of service across developed, emerging, frontier, and next fron- tier markets thanks to the implementation of single common custody and asset servicing platforms. First emergence The term ‘emerging markets’ was coined in 1981 by Antoine van Agtma- el, now a senior advisor at FP Analytics, but at the time working for the International Finance Corporation (IFC), a division of the World Bank. His focus was a set of promising stockmarkets that required further invest- ment to come into their own. According to the IFC, during a meeting at Salomon Brothers investment bank in New York, van Agtmael proposed a new global investment fund for stock markets in developing countries: “Many of those present were interested. But a banker from JP Morgan identified a hurdle: IFC would never get buy-in using the original proposed name, “Third World Equity Fund.” Van Agtmael spent the next weekend considering a name and came up with a new term for both the idea and investment he wanted to promote: “emerging markets.” “As these markets are moving through the stages of maturity, we also expect an increase in efficiency and product availability such as securities lending and short selling, e-voting solutions for proxy voting, along with reduction in settlement cycle and overall more real-time data flow,” says Harwood-Jones. “Other considerations such as openness to foreign ownership, ease of capital inflows and outflows, for- “A large contribution [to GDP] from financial markets suggests a mature market.” CHARL BRUYNS, HEAD OF INVESTOR SERVICES, STANDARD BANK GROUP eign exchange (FX) liquidity, efficiency of operation- al framework, competitive landscape and stability of the institutional framework, along with solid corporate governance and investors transparency principles, can be more challenging.” To be or not to be Do such challenges mean that on occasion, a securities services provider will reluctantly have to forego the opportunity to open a new market? Harwood-Jones makes the point that, while major indices providers already have broad coverage of Winter 2018 globalcustodian.com 33