Asset servicing specialists discuss the importance of cognitive technology, data visualisation and the search for talent in driving forward standards.
Jeremy Albrecht (managing director, global client coverage, RBC Investor & Treasury Services)
Pierre Cimino (head of international development and member of the executive committee, Caceis)
Steve David (head of Luxembourg, Northern Trust)
Mathieu Maurier (country head Luxembourg, Societe Generale Securities Services)
Jervis Smith (head of Investor Services Luxembourg, Citi)
Funds Europe – What are your development priorities for your Luxembourg asset servicing business in 2019? In which direction are your clients leading you?
Pierre Cimino, Caceis – At Caceis, we continue to develop our service offering for private equity and real estate. There is a lot of client interest in this product and we expect a strong flow of request for proposals (RFPs) during 2019 and beyond.
To support technology development, we have created what we call the “3D initiative”, representing data, digital and dissemination. These three priorities are closely interlinked, driving our strategy to apply robotics and process automation across our asset servicing business.
For our clients, data is the golden input to their investment and distribution strategies. As an asset servicing specialist, we have a large amount of data available in our systems and we are mining and structuring this data to maximise its value to the client.
More broadly, we are working to strengthen our position in Europe. We set ourselves the standard of being one of the top-three asset servicing companies in the European marketplace. Looking globally, we identify Asia as a growth opportunity and have a strategy in place to extend our service coverage and client base in the Asia-Pacific region.
Jervis Smith, Citi – At Citi, our plans for 2019 are a continuation of the development objectives that we have been working on for several years. The central pillars of this strategy are technology, product and talent.
From a technology perspective, we are reviewing every element of the transaction processing life-cycle and evaluating where we can automate. We are exploring application of blockchain technology to transfer agency functions, delivery of 60-minute net asset values (NAVs) and a series of other technology-based initiatives.
On the product side, we draw heavily on the expertise, technology and scale that Citi offers as a global organisation. There is little, from a product standpoint, that is “made in Luxembourg” – this is really a gateway that links to our global operating model. However, Citi does maintain centres of expertise around the world and Luxembourg is a specialist centre for supporting bank loans and private equity, real estate and infrastructure products. We will continue to build on the strengths in Luxembourg that we offer in these product segments.
Talent is an essential input to our service expertise and, as an industry, we do not emphasise this sufficiently. Brexit has highlighted the danger of skills bottlenecks as companies review their service models in preparation for a potential UK exit from the EU. This discussion is not just relevant at senior levels. There is the question of how we continue to recruit junior talent locally when a lot of junior-level jobs have been relocated offshore. To maintain this flow of talent, Citi has established online learning tools (known as “Degreed”) to foster technical and managerial expertise for the future.
Jeremy Albrecht, RBC Investor & Treasury Services – Data visualisation is at the forefront of every conversation that we have from a commercial perspective. The subject has been discussed within the industry for a number of years, but there has, so far, been limited delivery in practice. We are now providing solutions that can help our clients to make better and faster decisions.
There is no one-size-fits-all approach and these solutions are tailored to the specific requirements of each customer, bridging front office, middle office and back office.
In doing so, we work closely with chief executive officers, chief technology officers and now, often, with a chief data officer, which is a relatively new position that some asset management companies have created to oversee their data management and data analytics. Our data services expertise is attracting strong interest and represents an area where we can deliver real value to the client.
From a product standpoint, we continue to see demand for our private equity, real estate and infrastructure solutions, a sector we call private capital services.
It is vital as an organisation, and as an industry in Luxembourg, that we continue to invest in talent. Our business must recruit staff that have the right skills and are highly trained. In private capital services, for example, we cannot just take staff with experience in liquid asset classes and reposition them straight into a private equity or real estate services role. These are specialised skills – and skills that are now becoming expensive, given the demand for quality candidates in these areas.
Mathieu Maurier, Societe Generale Securities Services – SGSS offers a fully integrated asset management services solution that embraces a front to middle to back-office solution. This combines order routing and transaction execution along with middle-office services, MiFID II compliance and a full post-trade solution that includes fund depositary services, fund accounting and transfer agency. This provides the backbone of our fund services offer in Luxembourg and other European investment fund markets.
In providing fund depositary services, it is important to be selective about which funds we will support with a depositary solution. Under AIFMD and Ucits V, we have a responsibility to ensure safekeeping of fund assets and to provide restitution for any ‘avoidable loss’ of an asset held in our books on behalf of a fund. Some management companies can be managing specific alternative vehicles and it is important that we can quantify these risks and take a reasoned decision about whether to provide this service. We question the rationale for becoming a depositary bank for some specific vehicles.
We are investing in technology development and data science applications to find new efficiencies in how we process these products. Highly protective Data Lake computing solutions enable us to be more agile in managing and delivering data in a secured environment. As global credit institutions, we are regulated and have a responsibility to protect not only clients’ assets, but also their data.
Steve David, Northern Trust – We have much in common with colleagues around the table in terms of industry developments and opportunities we are working on. Northern Trust acquired the fund services business of UBS Asset Management in Luxembourg and Switzerland in October 2017 and this has strengthened our fund servicing capability, positioning us as a top-ten administrator by asset size, making us more visible to asset managers when seeking to review their service provision.
This development has increased the pipeline of RFPs coming in our direction for Ucits business, but also in Luxembourg’s vibrant private equity and real estate marketplace. The number of funds over €500 million in assets continues to rise and this provides a sizeable market, even though there is competition between many asset servicing specialists interested to win this pipeline of business.
Technology is fundamental to our ability to develop creative solutions to our clients’ requirements. Northern Trust made the first commercial deployment of blockchain technology in the private equity sector in 2017, and also collaborated with major audit firms to develop direct access to fund data, enabling real-time auditing of private equity life-cycle events. More generally, we have continued to invest in our fund accounting, transfer agency and custody platforms as part of a broader programme of technology investment.
Investment in talent is also essential to our competitiveness. A member of the fund services team, for example, may need to engage with fund managers, distributors and investors via a range of delivery mechanisms, including web services, API or mobile apps. We all need to be IT-savvy – and we are in close dialogue with universities and the Luxembourg government to ensure we have access to the skill set that we need.
Funds Europe – With implementation of AIFMD in Europe, Luxembourg has worked hard to make itself attractive to private equity and real estate managers. How has this affected your business?
Albrecht – Policy-makers have done an intelligent job in providing appropriate tools for asset managers that wish to launch this type of alternative investment product. While liquid products have delivered variable performance in recent market conditions, illiquid strategies may be delivering double-digit returns and this has provided incentive for more investment managers to offer private equity or real estate strategies.
Importantly, AIFMD has created a safer environment for investing in alternative funds. This has enabled fund managers to reach out with AIF products, within a tightly regulated environment, to investors that might not have considered buying this type of product in the past.
Smith – Investor clients have been searching for improved returns in a low interest rate environment for much of the past ten years. In doing so, they are increasing their allocations to products such as private equity, real estate or infrastructure that may deliver higher levels of return, even if this requires giving up some liquidity in the product.
A number of offshore centres are bringing choice to investors in this area, but the Dublin and Luxembourg brands have particularly shone. Ireland has focused heavily on hedge funds and ETFs. Luxembourg has targeted real assets, not just private equity and real estate but also infrastructure, bank loans and private debt. They have really leapt ahead of other offshore centres.
David – Investors are looking for alternative investment products registered and domiciled in well-regulated domiciles. This has resulted in a shift in investment flow towards Ireland, Guernsey and Luxembourg and we only see that increasing in times ahead. This has resulted in sizeable AIF launches from US managers that we did not see previously. This market remains small in relative terms when compared with Ucits markets, but we are seeing strong growth.
From an operational standpoint, we are constantly reviewing our servicing strategy for alternative products – and looking for ways to leverage the services we have in place for liquid asset classes. But often these demand very different product sets, requiring specialist product knowledge and specific platform requirements. This is also the case for fund depositary services – the requirements for supporting a liquid equities fund in a Ucits wrapper, for example, differ substantially from providing depositary services for a private capital fund.
Smith – A fundamental requirement in bridging these asset classes is to be able to report the performance and investment risk in a consistent way. While we may be processing asset classes on different platforms, using inputs from different specialist teams, it is important to demonstrate a consistent approach when delivering reporting to the investor and when managing their data.
Funds Europe – Asset servicing firms have faced a decade of declining fees and rising cost of regulation. How have you managed these economic pressures?
Cimino – We are also starting to experience pricing pressure in servicing alternative investment products that we have seen previously for Ucits. As prices are pushed downwards, we need to work with clients to find the right balance between the investments we make in our business, the levels of service we deliver and the revenue that we generate. We have spoken about the need to invest in technology, to add new talent and to deliver product innovation, but this carries an associated cost – and both client and service provider recognise that the service relationship must be attractive to both parties.
Maurier – This client segment requires a lot of banking capability to support it – whether that be account opening, account management or credit provision to support some investment strategies. As an asset servicer, we recognise the importance of providing investment fund services from a well-capitalised banking organisation that has the scale, expertise and balance sheet strength to support these fundamental requirements that fund companies require, whether in AIF or more liquid strategies.
Albrecht – Investors value the independence of the fund custodian and the fact that we are exercising controls over the management company. Institutional investors are looking closely at the checks and balances in place, at the oversight role played by the fund custodian, when they appoint an asset manager. This independent validation is something that clients are willing to pay for.
Maurier – However, there are currently 67 regulated depositary banks registered in Luxembourg – and that is a large number, given the size of the market. Passporting of depositary functions is not permitted in the EU, so the provider must have a presence in Luxembourg to offer depositary services to a Luxembourg-domiciled fund. This demands scalable investments. Given the fee pressures that we have spoken about, this raises questions around the likelihood of consolidation within the sector.
David – Consolidation will also be driven by the huge cost of investing in technology. A major global bank such as Northern Trust is making large investments in technology and it is hard for smaller players to keep pace with this scale of investment.
Smith – Typically we are supporting global clients in Luxembourg that have an investment services and banking relationship with our organisation in multiple locations. Consequently, we have had little problem with clients failing to understand the cost of delivering the function.
We have managed the cost associated with the depositary function principally by automating our processing operations as fully as possible. As a global organisation, we have been able to draw on best-of-breed solutions developed across our global locations, providing a set of tools and systems that deliver service innovation at high levels of operational efficiency. On top of this, we lay service innovations that have been developed for our Luxembourg model, enabling us to combine global technology with the bespoke requirements of the local market.
David – Our clients recognise the value of the asset protection offered under AIFMD and Ucits V and this has been reflected to some extent in fee discussions. This has brought even more transparency around the asset protection responsibilities that we hold and the restitution obligation that we bear.
Albrecht – With implementation of AIFMD and Ucits V, we have basically moved from delivering a custody function to a depositary function. Under their breath, some clients were beginning to question. “Why am I paying for custody? I am no longer convinced of the value provided by that service.” With the depositary function, these benefits are now more obvious. We bring value by providing oversight and control of the asset manager’s activities, over what the ManCo or the prime broker is doing. We provide safekeeping for the investor’s assets, recognising that there is an obligation to provide restitution for any loss that is not beyond our reasonable control to prevent. With this clarity, clients understand why they are paying for this service.
More generally, asset managers are now evaluating whether they can outsource a wider set of functions. This includes middle-office functions, share class hedging, management of standing instructions, all largely services that were off the table previously.
Cimino – Initially some clients appeared to be playing the competition between different depositary banks. But now most recognise that our obligations under AIFMD and Ucits V have done much to secure the investor and, by association, the investment manager. We are again in partnership mode.
This said, we still need to improve a lot of things. For example, the due diligence questionnaires circulated by asset managers to the fund depositary are very detailed, but often they do not follow a standardised format.
Funds Europe – There has been much discussion around how artificial intelligence (AI), distributed ledger technology (DLT) and process automation will transform asset servicing. Have you developed practical solutions that apply this technology?
Albrecht – We aim to automate low-value tasks to allow specialist staff to focus on the high-value tasks. This is where our technology investments fit best. We have established a tech lab in Luxembourg dedicated to research in robotic process automation (RPA). Its results have already been employed to automate some tasks in custody and transfer agency which have repetitive controls and can be automated.
However, artificial intelligence applications are still in an embryonic phase in the asset servicing environment. Over time, we expect to apply AI to bring greater automation to value-added functions.
There is general optimism that distributed ledger technology may have valuable applications to transaction processing and record-keeping. But there must be clearer understanding of the governance that will operate around blockchain and the standards to which this will adhere. We need to establish consistency in these areas.
David – Regulators have an important role to play in promoting this consistency. Distributed ledger technology can be applied to bring important benefits to KYC [know your customer] and AML [anti-money laundering] processing, but practical application of this technology in terms of industry-wide adoption is at a preliminary stage currently. To develop viable applications that operate internationally, financial regulators need to work together with the market to develop a consistent operational framework and legal standards.
We are all aware, more generally, that advances in this area rest heavily on data and how this is used. We invest heavily in data gathering, data cleansing and data analytics in order to provide information that assists our clients’ investment strategy decisions.
Cimino – We are looking closely at robotics and AI to make investment processing more efficient. We have applied RPA to a number of stages across the asset servicing life-cycle, but we are not yet in a position where we can automate from top to bottom. The goal is to push for end-to-end automation – to maximise efficiencies through automation across the full life-cycle.
AI is being applied selectively to some processes – for example, natural language processing is applied to client email queries to identify the subject matter, to assess whether this can be solved via an automated solution (a ‘bot’) and, if not, to route this to the appropriate service desk where one of our specialist staff will answer the question.
We are also exploring use of AI in managing securities lending transactions – to assist pre-matching on receipt of the client instruction and to identify whether the security is held in inventory, before the request is then passed into human hands to complete the execution.
Maurier – RPA is providing some efficiency gains, but this has not radically changed how asset servicing firms are operating at a global level. So far, these have largely been selective fixes to target obvious areas of inefficiency. Some firms have set high expectations, but the efficiency gains delivered by these initial forays into RPA have sometimes not been as large as expected.
Technology is enabling us to become more nimble in our approaches to data management, however. Historically, firms have operated multiple systems to support their fund accounting, TA, depositary bank services, liquidity management, forex and other requirements. Plugging data from one of these systems to another has traditionally presented a challenge. However, new technologies are now allowing us to deliver data in a secure environment and to extract information in a more creative and efficient way.
Smith – Cognitive technology will have a major impact on asset servicing in the next five years. And this will be quick to take effect – the pace of implementation is accelerating and will move much faster than it has done over the past decade. In processing Japanese tax, for example, we have taken roughly 100,000 manual touchpoints out of the process of managing a Japanese tax reclaim. This arrives in a free format message and we use natural language processing (NLP) to manage the request.
This provides a glimpse of our vision of the future. To support this, we have a process called D10X where any staff member can recommend an innovation. If we estimate that this will generate value greater than ten times the cost of development, we will sponsor this through the research and development process.
Bob Currie, Funds Europe – It is interesting that you are processing your Japanese tax requests using NLP from free format messages...
Smith – This allows us to take in instructions via a range of channels, whether via API, web services or other avenues, and we can use technology to analyse this information. This is an exciting development, allowing us to deliver a better client experience and to reduce cost.
Albrecht – The enduring mantra in the IT world was traditionally “garbage in, garbage out”. But technology developments have moved us into a world where we can take in unstructured information and deliver meaningful structured data and analytics from this input.
Smith – In moving our discussion to a conclusion, the take-home message as a group is that Luxembourg is to open to innovation. The Luxembourg authorities have done a dynamic job in supporting technology development through initiatives such as the Luxembourg House of Financial Technology. Policy-makers recognise that Luxembourg is not a processing hub, it is a servicing hub, and it has been important to encourage talent from around the world to sustain these advances.
Maurier – Luxembourg has long demonstrated its ability to reinvent itself. And there is a range of initiatives ongoing within Luxembourg’s technology ecosystem, with backing from the financial regulators, designed to address these areas of inefficiency.
Smith – On that note, the future for Luxembourg looks pretty bright. And it is not just more of the same. It is moving to new asset classes, new distribution channels, new operational frameworks, all backed by investment in technology.
©2019 funds europe