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Risk Management - January 21, 2010

It is necessary to create a level playing field for depositary banks in Europe - an interview with François Marion

In this month's interview, François Marion, CEO of CACEIS, discusses the role of the depositary bank within the value chain of the fund industry, the European Commission's plans to harmonise the depositary function and to strengthen protection mechanisms, and the CACEIS/EDHEC-Risk research chair on "Risk and Regulation in the European Fund Management Industry." François Marion was appointed Chief Executive Officer of CACEIS in June 2009, when the group changed from being a company with a supervisory board to a company with a board of directors. He is also a member of the management committee of CAAM Group and a director of Euroclear SA/NV.


François Marion

Why did you choose to endow the research chair on "Risk and Regulation in the European Fund Management Industry”? What importance does this subject have for CACEIS in particular and for asset management professionals in general?

François Marion: The financial crisis in general and more specifically the Lehman collapse and the Madoff affair caused many questions to be asked on the subject of where the responsibility for risk lies. These events also served to reveal the lack of a level playing field across the European asset management industry, which is clearly exposed to higher risks than previously thought.

Both risk and regulation are areas where CACEIS, as Europe's premier depositary bank, aims to be at the leading edge of developments to better service asset manager clients across its custody, depositary and fund administration business lines, therefore contributing to improved protection for the end-investor.

EDHEC-Risk released a position paper a few months ago on the European Commission's plans to harmonise the depositary function and to strengthen protection mechanisms. EDHEC-Risk believes that there should be an in-depth study of the practices of the parties in the value chain and the regulations to which they are subject beforehand and that, beyond a minimum protective threshold, complementary protection should be optional, which supposes clear disclosures of the degree of protection and of its cost. What is CACEIS's position on this subject?

François Marion: We are unsure as to whether optional protection, which essentially leaves the investor's choice of cover up to market forces (above a minimum) would have the desired effect. Without specific regulation linking an asset's risk level to a corresponding level of protection, competition pressures could drive the level of protection advised to the bare minimum.

An asset servicing provider advising a higher level of protection, would be easily undercut by a rival offering the same product with lower (and therefore cheaper) cover, creating undesirable competition on coverage. That is why CACEIS advocates that products be clearly labelled, illustrating the risk split by asset component (securities, cash, OTC derivatives, etc.) in order that an appropriate level of risk coverage be specified.

The nature of the investor, whether retail or institutional, should also be taken into account when it comes to protection mechanisms.

If complementary protection leads to increasing cost of insurance against risks, what might the consequences be for your business?

François Marion: There has been much talk of the depositary acting as the insurer, but depositaries are neither remunerated like an insurer, nor have they the capital reserves necessary to cover the risks across the entire fund industry. CACEIS believes the focus should shift away from just the depositary and instead take into account the industry's entire value chain, bringing together the depositary, the investor, the promoter, the distributor and the asset manager.

We believe it would be unwise to rely on a single entity as an industry safety net as there would be little to foster responsible sales of high risk products. The depositary should of course assume full responsibility for the operational risks in its business, however, risk generated by the asset management process or by methods of distribution should be borne by those participants in charge of taking the investment decisions or selecting the business partners.

As far as the costs of insurance are concerned, the depositary would have little choice but to pass them on to the asset manager and/or the fund.

Do you think that it is possible to have a level playing field for depositary banks in Europe and would it be possible to do this without additional legislation?

François Marion: We believe it is not only possible but also entirely necessary to create a level playing field for depositary banks in Europe. Today, despite there being comprehensive European legislation in the form of the UCITS Directives, the existence of a truly level playing field is hampered by differences of interpretation when transposing European legislation into national law.

Incidentally, this was confirmed by CESR in its recent mapping exercise on the duties and responsibilities of UCITS depositaries. The only practical solution to this problem is therefore to pass precise legislation that is not open to differences of interpretation among Member States.

CACEIS has supported EDHEC-Risk's research for a number of years now. Why have you decided to give such extensive support to EDHEC-Risk's academic research?

François Marion: EDHEC-Risk has a well-deserved reputation for providing key insight into risk-related aspects of the fund industry. For CACEIS, as Europe's leading depositary bank, measuring, monitoring and controlling risks for our clients clearly forms an integral part in our business.

We have given extensive support to EDHEC-Risk's research projects as we find the combination of high quality academic research and our extensive operational knowledge and wide-ranging industry expertise, provides practicable solutions to industry issues. We are then able to use to the results to refine the services we provide, ensuring our clients remain at the cutting edge in terms of controlling risk.



About François Marion

François Marion, 51, is Chief Executive Officer of CACEIS. A graduate of the Ecole des Hautes Etudes Commerciales (HEC), Paris, he started his career at the internal audit Division of Banque Indosuez. From 1985 to 1991, he was in charge of operations for Banque Indosuez New York as well as middle-office and accounting functions for all branches of the bank in the US. In 1991, he joined the Capital Markets department in Paris and was responsible for the market risk monitoring in international branches. In 1992 in Hong Kong, he was nominated Chief Operating Officer of Banque Indosuez in charge of support functions for the Group in the Asia-Pacific region. In 1997 he was responsible for financial controlling, budgets and strategic planning for the Crédit Agricole Indosuez Group in Paris. In 1999, he became a member of the Executive Committee for Crédit Agricole Indosuez and Head of Systems and Operations.

In June 2004, François Marion was named Managing Director of Crédit Agricole Investor Services (CA-IS), head of institutional financial services of the Crédit Agricole group, then CEO of CA-IS Bank and Chairman of CA-IS Bank Luxembourg. In August 2005, François Marion was nominated Chairman of the Management Board of CACEIS. In June 2009, he was appointed Chief Executive Officer of CACEIS when the group changed from being a company with a supervisory board to a company with a board of directors. François Marion is also a member of the management committee of CAAM Group and a director of Euroclear SA/NV.