MARKET REVIEW | GLOBAL CUSTODY More to do, fewer to do it Is global custody still the business that gave our magazine its name? o one would accuse the global custody industry of see convergence with some other areas of service such as moving too fast. Prudence, after all, is not meant to hedge fund administration and private equity administration,” Nbe exciting. Taking a long view, however, change is notes Nick Schmid, vice president, global marketing & inevitable, even if its slow pace gives a deceptive impression. communications, investor services, Brown Brothers Harriman. Expectations have certainly grown over time. “What was the “As we see global asset managers expand the range and last innovation in custody?” asks Gunjan Kedia, executive vice types of portfolios they manage, adding multiple alternative president (EVP) and head of U.S. investment services, State asset classes, the business is starting to bleed into some of Street in Boston. “We all got really excited about real-time the other surveys that Global Custodian has been running for reporting and that was a meaningful differentiator. Now it is many years. “ ridiculous to think you wouldn’t provide that kind of data.” With a quarter of a century of annual global custody surveys At the same time, some of the services that providers are behind it, therefore, Global Custodian decided this year to being called on to deliver no longer fit comfortably within assess the business landscape rather than ask clients to rate the traditional definition of the business. “We are starting to their providers at our traditionally granular level. In doing 36 globalcustodian.com Global Custodian | Spring 2015 MARKET REVIEW | GLOBAL CUSTODY “We all got really prime custody as a service. They are trading on information intraday in real time so what they need is a little different.” excited about real-time Variation within client segments may also be masked by reporting and that was a broader segmentation. “Generally speaking, pension clients have similar problems, but the scale of the challenge might be meaningful differentiator. quite different,” notes Schmid. “If you look at a large pension Now it is ridiculous fund they may have hundreds of managers. Someone with a $2 billion pension plan may have five to ten managers.” The level to think you wouldn’t of complexity from an administrative perspective will therefore provide that kind of data.” differ considerably (see page 38). Post-crisis, regulators rather than clients have been Gunjan Kedia, State Street the principal drivers of the global custodian’s increase in responsibilities. “Regulations do not just impose requirements on us as a service provider, but also directly on some of the so, we wanted to see how much of the business we actually clients,” says Van Verre. “Reporting, for example, was in the recognise from the early days of our endeavours. past mainly around transactions we were executing for clients; The term ‘global custody’ was originally coined in 1974 by now it involves more and more information that clients are Douglas Bonnar, a managing director at Chase Manhattan Bank using to meet their own internal and external obligations to to describe a service that Ford Foundation had contracted from trustee oversight and management committees, so there is a the bank to cover its international assets. Twenty-five years shift in terms of how the information is being used.” later, the number of banks calling themselves global custodians This has implications for the way service providers organise had mushroomed. Fast-forward another 25 years and the their own processing and delivery capabilities. J.P. Morgan is number of service providers has been whittled down again, not only associated with the origins of the business through while the range of clients has expanded. But are they still its merger with Chase Manhattan Bank, but also with its being asked to do the same things? How do global custodians subsequent industrialisation through the launch of large see themselves and the challenges they now face? processing hubs. Historically, the bank maintained major “The term ‘global custody’ still means something, but we centres in Dallas and Bournemouth, as well as a number tend to talk in much broader terms with most of our clients,” of smaller offshore processing operations that handled less says Penny Biggs, EVP, Northern Trust and an industry veteran. complex – though high intensity – high intensity processes. “We survey our own clients on a two- to three-year basis and That is now shifting. “We see the industry moving to a 24x6.5 it’s a lot more complicated than it used to be. We used to send operating model,” explains Chris Rowland, head of global out one survey and now we need five or six versions.” custody at J.P. Morgan. This inevitably involves a pass-the-book type activity from Who needs it? one centre to another following the clock. “We have now The traditional client segmentation between asset owners implemented that with operational centres that can support and asset managers still holds for most providers though the end-to-end process. Consequently, we have been putting distinctions have grown within and between those two technology in place that supports a globally deployed umbrella groups. operating model,” says Rowland. “We split our clients into a number of segments that have Prudence remains a byword for the business, however. more or less the same drivers for selecting and buying their Ronald Akkermans, executive director, and head of custody services,” says John Van Verre, head of global custody, HSBC. FI sales and business development at UBS is another industry He sees insurance companies as fairly closely aligned to the veteran, who has seen predictions of paradigm shifts come asset management segment as many of the larger insurers run and go. “Sometimes I’m astonished at how much has actually their own internal investment function. Pension funds and remained the same,” he says. “Nevertheless, when we look public sector asset owners such as sovereign wealth funds at the value-added services, such as reporting, we are in an (SWFs) also tend to show similar buying behaviour. entirely different world.” The same applies to the liability that “There are some things that are universal,” says Samir custodians are expected to take for their product. “I think that Pandiri, EVP and CEO, asset servicing, BNY Mellon. “We is one of the drivers of consolidation,” says Akkermans. “The provide core custody to everybody, but we also have prime product today doesn’t necessarily get the credit it should have custody, where people need different cut-off and turn-around for the responsibilities involved.” n times. A lot of our alternative managers, for example, use – Richard Schwartz Global Custodian | Spring 2015 globalcustodian.com 37 MARKET REVIEW | GLOBAL CUSTODY The big data chase Beyond the core services of settlement and safekeeping, what are the largest asset owners and managers looking for from their global custodians? n addition to speaking to service providers about how they identified additional services that are being provided to these Isaw the challenges the market was throwing at them, Global clients, they are listed in the provider profiles following). Custodian invited a selection of the largest and most complex asset owners and managers to comment on whether and how Satisfaction well their expanding service needs were being met. Since most Before exploring the service and product gaps that respondents these comments were provided on a non-attributable basis, we brought to light in the interview and survey process, global have decided to keep all quotes in this section of the market custodians can take comfort from the fact that, as indicated in review anonymous. They are, however, all from ‘household’ Figure 3, a vast majority – 89% – are either very satisfied or names in the investment industry that all global custodians would at least satisfied with the service they are receiving from their count among their most sophisticated and demanding clients. principal provider. None were totally dissatisfied, which is The first question we wanted to understand was whether good, because the pain involved in transferring to a new global clients still saw global custody as a discrete service provider remains non-trivial, advances in technology and requirement. Nineteen percent of respondents handled the automation notwithstanding. bulk of the administrative burden for non-domestic assets Long-term relationships remain a feature of the industry. in-house. Interestingly, though, a majority (52%) contracted “We tend to keep our global custodians for several years in with the same third-party master custodian/master trustee that the absence of some significant event, but we are reviewing handles their domestic activity, while 19% used a separate the relationship constantly,” says one major U.S. client. Change global custodian. does, of course occur. “We use a couple of global custodians Beyond the core services associated with administering and they tend to be long-term relationships, but we have made international assets, Figure 1 opposite indicates the additional changes in the past,” says another. services that respondents typically bought from their global Faced with the hypothetical question of which products custody provider. The first observation is that the distinction and services institutions would prioritise in selecting a new between custody and fund administration from an asset provider, the core requirements of settlement and asset manager perspective is eroding, at least as far as mainstream servicing top the list despite expansion in the breadth of mutual funds are concerned. Figure 2 lists those services requirements (see Figure 6). “We actually see our needs as that most global custodians surveyed are currently providing pretty consistent,” says one asset manager. “We have high live to at least one client, rather than simply being capable expectations across the board.” of providing.