Talking Heads: this year’s model
How is the global custody and asset servicing model changing? Will consolidation occur? What do clients want? Daily News at Sibos finds out …
Göran Fors: global head of custody, SEB
Global custody is set to go through tremendous changes in the near future, posing challenges for all involved.
For many years we focused on developing efficient procedures for corporate actions, talking about new markets, increasing efficiency and mitigating risk. This was all done under the safe umbrella of continuous growth in the industry, with increasing volumes and reasonable profits. Of course, we spoke about the need for change. Following the crisis of 2008 we had to replace the umbrella with a new one as the old one blew away and we actually got a bit wet.
Equipped with our new umbrella we continued with big smiles and our industry developed well. Despite a few casualties along the way the confidence level remained high.
But what did we change and what did we learn?
Looking back at the past five years I believe that we did learn a few things, but that we did not really do what was needed to facilitate change. Indeed it seems to be difficult to really transform your model when you live under continuous growth.
The regulators definitely learned that it was possible to regulate our industry and that has certainly been done in a big way.
We now live under heavy regulation, strong cost pressure and declining volumes. In combination with a lack of growth and declining margins, this is a bit like being between a rock and a hard place. That is rather an uncomfortable position and means that we need to take some action in order to change our model for the future.
The custody industry is a very important part of the global capital markets and will continue to play a significant role going forward. However, we have to show that we are agile and can adjust to the new normal.
Joanna Meager: co-head, investor services, RBC Investor & Treasury Services
The custody industry continues to be defined by two themes: a major shift in the needs of custody clients and ongoing regulatory changes.
Clients remain sharply focused on cost control, minimising risk and asset safety. The choice of custodian has become largely guided by their financial strength as a counterparty and the reassurance this offers. Clients are looking for transparency around fees, clarity on ownership, segregation and accessibility of assets, and a provider with a comprehensive system of internal controls and policies. Moreover, they are seeking service providers with the ability to go beyond traditional custody functions and support them in the execution of their growth strategies through value added services such as distribution support and investment analytics.
Similarly, educating and supporting clients in compliance with evolving regulation is key. This continues to place cost, organisational and operational demands on clients and final requirements often remain under discussion as the regulatory framework continues to take shape. Custodians need to not only ensure compliance with the regulation, but assist clients in identifying the opportunities that any change could potentially create.
As the industry continues to face a low margin environment, taking this broader role is as essential for custodians as it is for their clients. It is paramount that service providers work to meet clients’ business needs as a full and integrated partner. By doing so, they will in turn meet their own objectives and those of their stakeholders, while best serving their clients.
Samir Pandiri: chief executive, asset servicing, BNY Mellon
The global custody offering is continuously evolving via incremental steps, but over the past 12 months it is fair to say our industry has experienced revolutionary change. We are at an inflection point in our history, a transformative moment. As an asset servicer, we cannot stand still. The model has changed and we need to explore new avenues and activities in order to continue to thrive. That requires significant commitment in respect of management time, resources and reinvestment in technology and intellectual capital. That bar is being set ever higher, and we are already seeing consolidation as smaller, more narrowly focused providers choose to exit this space.
Risk, regulation and cost control continue to be the key drivers that we see driving demand among our clients for solutions that are at once flexible and scaleable. This is a challenging and ever more complex environment for everyone, and clients continue to look to us to help them transform their business models, notably around risk mitigation, collateral, transparency, compliance and distribution.
The boundaries between traditional businesses and areas of expertise are dissolving. Today clients want broader, more multi-faceted solutions that are delivered in a more seamless fashion. They are asking us to do more for them. Accordingly we have reengineered our offering to ensure we are touching all points across the investment lifecycle: from the creation of assets through the trading, clearing, settlement, servicing, management, distribution and restructuring of those assets. To support that, we have enhanced our client management model to better align our resources with emerging needs. And we are continuing to expand that model to ensure better support for complex global clients, as well as creating full-service teams focused on specific clients, market segments and regions and simplifying our operating and service delivery platforms.
Antonio Thomas: chairman, RBS Fund Services
New regulations and the cost of implementation are the main drivers forcing the funds industry to reassess traditional service models and crystallise change. The Alternative Investment Fund Managers Directive and the imminent Ucits V Directive will both encourage further clarification and harmonisation as a result of increased liability for depositories to protect the underlying investor and boost investor confidence.
Asset managers will be affected by these changes, which bring increased controls, potentially less flexibility in the service model and more cost, as the depositories for their investment funds review their risk appetite on subcustodian liability profitable markets, modifying their subcustodian network model and carve out some markets where the risk premium does not cover the marginal revenues.
Different approaches to these challenges are emerging. Some global custodians have opted to expand their inhouse subcustody network; whereas other niche players, servicing specific markets or products, are also starting to emerge, as well as new players entering the market place altogether.
Given the requirements for increased segregation of duties and an even greater focus on managing conflict of interests, 2013 has seen an increase in product rationalisation. Asset managers are seeking fewer funds with larger fund sizes that can cope with the increasing costs more efficiently. There has been little appetite to consolidate asset managers and global custodians and indeed some custodians have divested themselves of certain capabilities, such as UK authorised corporate directors services, to concentrate on their traditional custodian services.
Asset managers have already started to identify that there will be less choice in the market and that redefining the service offerings, depth, scope and cost will require them to review operating models in place and possibly the number of providers they use.
Morgan Downey: global head of global custody and agency services, Bank of America Merrill Lynch
We are at cross-roads as the worlds of treasury, custody and global markets become increasingly linked due to evolving industry dynamics and new market drivers. We are continually seeing heightened demands on custodians from a broader range of clients to provide greater coverage of core custody services. Additionally, there is a definite shift towards demand for more value added services especially real-time reporting and information tools to help clients better proactively manage their risk.
The pace and complexity of regulatory change, coupled with the added issue of a lack of global harmonisation continues to pose significant challenges for clients and custodians as they grapple to respond to new demands in a timely and cost effective manner. Clients are looking to custodians to take these problems off their hands and successfully handle them. However, the days of fixing a problem with a single product are gone. Clients are now demanding a suite of solutions that address all their needs, whether regulatory, risk or associated with operational efficiency. The bar has been raised and the expectation from clients today is that custodians must offer integrated, holistic solutions that can be implemented across the breadth of their franchises and provide real value to clients.
As the industry evolves, expect to see ‘stratification’ rather than consolidation wherein larger custody banks that have invested heavily in their platforms will increasingly set their sights on working with larger global clients, while pure play custodians will increasingly serve a broader range of clients.
Philippe Ricard: global head of asset and fund servicing, BNP Paribas Securities Services
The global custody and asset servicing model has been evolving since the financial crisis. Regulation has been the main driver behind this shift, which has accelerated significantly over the past 12 months, but asset diversification and client reporting are also factors for change.
Against a backdrop of a difficult economic and financial environment, which remains uncertain, asset managers have had their investment confidence knocked down. The hunt for yield and risk diversification approach was a key focus in the first half of 2013, where we saw asset managers and asset owners look to invest in emerging markets such as Asia or Latin America and also diversify their portfolios with an increasing allocation to alternatives like private equity and real estate funds. Custodians therefore had to evolve their model to better service their clients through these trends and assist them in their strategy to target new markets and new assets. They also had to work on implementing a global approach with a follow the sun model as well as enriching their service offering from the enhancement of ancillary services, including tax, proxy, class actions to development of new services like fund structuring.
Another area where custodians have had to up their game regards client communication and reporting. Client expectations have become more demanding due to market pressures so there is an urge for more monitoring of activities, transparent and interactive data management, and instant methods of efficient and tailored client reporting, which also provide direct access to markets and a consolidated view.
Consolidation is also on the cards, not only for size but also to enrich the offer and roll out a true global/local model.
Andy Duffin: head of sales, emerging markets, Société Générale Securities Services
The Alternative Investment Fund Manager Directive (AIFMD) is one of the biggest changes faced by the securities services industry in recent years. Whilst AIF refers to any collective investment vehicle, excluding Ucits funds, all are covered by AIFMD. However, it is not only this segment which is affected, custodian banks are also affected. The due diligence at the subcustodian must be reinforced, specifically requiring the depository to inform the fund manager of any risks which might impact assets held abroad.
At Société Générale Securities Services (SGSS) we are already seeing a change in the way our subcustody clients manage agent bank networks. We have recently seen numerous requests to renegotiate legal agreements to comply with AIFMD. We have also noted clients performing more rigorous due diligence processes with a greater emphasis on asset protection. Clients have also mooted the possibility of annual on-site visits to all markets in their network. In some cases we are already receiving requests to tender for business where a prospective client has become uncomfortable with the level of risk at its existing provider.
These are a few examples of an increasing list of initiatives. As a result SGSS as a subcustodian has been required to direct increased resources to accompany clients in their changing needs and to find ways to enhance client protection.
Therefore, while AIFMD represents challenges and costs to the subcustodian and depository banks it has also led to a resurgence of the network manager. SGSS has noticed our clients bolstering the network management function and a greater interest in this function from senior management. While every custodian bank will argue it has always focused upon risk, there is a definite shift towards the level of risk incurred being the primary factor when selecting an agent bank.
Robert Almanas: managing director, international services, SIX Securities Services
The operating models of financial intermediaries in the post-trade business are being challenged by regulation and industry initiatives. Central clearing of OTC derivatives is requiring custodians to develop collateral management solutions for their buy side customers. Some are developing their own, some are partnering with infrastructures and some are doing both. T2S has caused firms to seriously consider the unbundling of services, but few have that experience and are now being confronted with the cost of adaptation.
T2S represents a significant challenge. While SIX Securities Services has always operated from a common multi-currency, multi-asset platform for both domestic and international businesses, domestic CSDs in the eurozone must now move from national market to cross-border servicing. Moreover, asset servicing will become a key element of their service offering.
T2S and collateral management go hand in hand. Market participants will be operating with a real time gross settlement system and thus will be required to pay more attention to managing their collateral and financing needs.
Over the near to mid-term, new CSDs will arise, with the anticipation that the costs of initial development and on-going expense for purely domestic CSDs will eventually force consolidation.
The irony of T2S is that the market has yet to substantively address the source of real costs and risk: lack of harmonisation of tax processing and of corporate actions processing, including quality of information. Market players will still have to continue development of solutions to these issues and at a continuing cost.
All of these initiatives and regulations have created many unknowns, a blurring of roles in the value chain and a fair degree of ambiguity. Customers want clarity, solutions and freedom of choice from their infrastructures – with the option of diversifying. They want pricing models that are flexible, yet simple. The day of ‘one size fits all’ in terms of service offerings from infrastructures is already or soon to be obsolete.