Malta still suffers from a lack of international, big name custodians. Of these only HSBC has a presence in the jurisdiction. That is set to change in 2011 as more banks eye Malta’s potential.

HSBC is upping its game in Malta. According to Chris Bond, head of global banking and markets for HSBC Bank Malta, the jurisdiction has become an important part of the global services network for the bank’s securities services as well as an integral part of the European structure.

Charles Azzopardi, managing director, HSBC Securities Services (Malta), agrees. He believes the bank has a real role to play not only in fund administration but also as an international custodian.

They confirm the Malta operation has been putting in a “huge effort” to react swiftly to the needs of local customers. Both time and resources have been invested with significant support from the international network, including technology.

This is important, as Malta’s one black spot remains the lack of custodians. However, that is set to change in 2011 when Deustche Bank is widely expected to open, albeit probably with a relatively small initial presence. There are also rumours BNY Mellon and one or two other large US custodians may be joining HSBC as well as local custody provider Bank of Valletta and the Austrian Sparkasse Bank Malta.

Malta’s keenness to increase the number of custodians is driven mainly by its desire to gain a bigger share of the Ucits market. In 2010 there was a surge in the number of alternative or hedge fund Ucits setting up. Almost all of these new funds chose Luxembourg or Ireland as a domicile. Because the Ucits rules specify that a local custodian must be appointed, Malta has been unable to take advantage of the rush into Ucits products by many fund managers. Additionally because the rules also call for weekly or fortnightly liquidity, fund administrators need to be able to cope with what is close to daily reconciliation. On this front Malta’s fund administration community appears more ready, although any of the really big names have yet to set up in Malta.

Meanwhile, HSBC believes it is up to the challenge not only of increasing the level of its services and response time in Malta but also of beating off the existing and expected competition. Bond says the bank welcomes the increase in competition as it will add to the overall credentials of Malta as a financial services centre. He believes HSBC’s worldwide network will continue to keep it a firm favourite.

Bond says assets under custody in Malta in the first eight months of 2010 rose by over $5 billion, a 20% increase over 2009. Although most of this growth came from the retail, Azzopardi says 30% of the increase was due to hedge fund growth in Malta.  Both expect AUA to continue to increase in 2011.

Bond “would not be surprised” to see a five-fold increase in the number of funds domiciled in Malta over the next four to five years. He is aiming for HSBC to maintain a 40%-50% of the custody market in the jurisdiction as the country continues to expand.

Meanwhile, Bank of Valletta (BoV) continues to search for an international custody partner that will be able to provide it with a deeper and wider capability. Specifically the bank is looking for a partner from the top tier of the custody banks so it can piggyback on technology. At present the bank does not have the resources to keep pace with technological advancements or update its own platform.

Although Lino Calleja, head of custody operations at BoV, is hopeful of closing a deal, he is also realistic. He does expect to see a real increase in business until there are more international custodians present and he hopes one of them is a partner for BoV. “We have limited compliance and monitoring capability for complex funds. A lot of Ucits funds use derivates and have a huge volume of daily trading. If one fund does 200-300 trades a day, there would be an obvious impact. We couldn’t handle that. We would look for the capacity for that from our joint venture partner,” says Calleja. “We know what we have to do.”

At Sparkasse the mood is more upbeat. According to Paul Mifsud, managing director, the bank has seen strong demand for its services including execution, settlement and custody in 2010 and expects this trend to continue into 2011. Since the bank performs some of the functions of a prime broker, Mifsud believes it is also well placed to start picking up more custody work, particularly when more Ucits funds begin to domicile in Malta.

Mifsud says Sparkasse caters for the boutique asset manager and also family offices looking to hold assets through a fund structure rather than in a trust. “I see more of this and not the plain vanilla. That’s what we’ve seen over the last 12 months,” he says. Most of the custody arrangements are below the $50 million threshold. “We have a void to fill. A bank of our size can cater for boutique funds. That’s our area. The larger banks don’t want these accounts. They are too large to take the risks. If the big guns do not want this, then we will attract the business,” notes Mifsud.

According to Mifsud the bank is now fielding around four to five serious enquiries a month and many of these look likely to result in business. “We’ve been very focused on what we do. We think clients have appreciated that we only pitch for banking and custody,” he notes.

While he admits Sparkasse lacks brand recognition, he is still optimistic. “From what we’ve seen, we’ve been quite impressed with the flow. Over the last five to six months there have been more enquiries. We’ve done more business in those months than in all of 2009. We’ve had a 60%-70% conversion rate of enquiries into business.”

Mifsud says most of the business is coming via word of mouth and referrals from fund administrators. “The funds industry is very small.”

He thinks work is just starting to gain momentum. “We’re still pushing the wheel up hill,” he says. He expects the introduction of Ucits IV to also encourage more business to Malta. “I think we will have more people looking at Malta. Already competitors are out there,” he concludes.