September 2008

CUSTODY: The best of times, the worst of times

Life in custody can be a thankless task, but the last year has been relatively kind to the major players, finds Nick Fitzpatrick ...

It may have been a tough twelve months in financial services, but headline figures from the global custody industry paint a surprisingly upbeat picture. Custodians in our survey saw a sharp increase in global assets under custody (AuC) between March 2007 and March 2008, the period covered by our survey.

BNY Mellon Asset Servicing, the largest provider, saw the biggest jump in its reported global AuC, from e8,800bn (£7,058bn)in March 2007 to 14,700bn in March this year. The next largest provider is JPMorgan Worldwide Securities Services which jumped to €9,909bn from €9,285bn. Although ahead of State Street, which came third (see table below), the latter’s increase is more notable – from €7,501bn to €9,428bn. The figures cover custody assets for external and internal clients.

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During the period of this survey, BNY and State Street completed their integrations with Mellon Financial Corporation and Investors Financial Services Corp respectively, which may explain leaps in their assets. But business wins have also been healthy for the two providers.

In general, the increase in AuC by most custodians is a probable indicator that their ambitions to expand into foreign markets and non-traditional investment categories, such as private equity and hedge funds, are paying off.

Cross selling
For example, JPMorgan Worldwide Securities Services announced in March this year that it had won the contract to provide portfolio administration and performance reporting for the alternative investments of the £3.6bn London Pensions Fund Authority (LPFA). Although not a custody win as such, this nevertheless represented JPMorgan’s first alternative investment portfolio administration outsourcing agreement in the UK for its Private Equity Fund Services arm. It also demonstrated JPMorgan’s ability to cross-sell its custody service, which is the most vital tactic in the low-margin custody business, because JPMorgan was already LPFA’s global custodian.

Meanwhile, on a geographical level, BNP Paribas Securities Services recently mandated its first clients ­– collective investment schemes – in Singapore. In our survey, BNP Paribas’ total AuC globally stood at €3,603bn as at 31 March 2008.

Additionally, Citi Global Transaction Services entered the Nigerian market, it announced recently. Citi ranked fourth in our survey with €8,328bn of AuC, up from €6,929bn in March 2007.

Alternatives is a key area of potential growth for custodians. Only JPMorgan, PNC Global Investment Servicing and BBH were prepared, or able, to disclose the level of success in the non-traditional investment world. Asked to list assets under custody in Europe for hedge funds, JPMorgan responded with e48bn. (See Directory, p52-62 for other results).

Information
Alternatives are an important segment for virtually all custodians, particularly the large-scale players. Valuing alternative portfolios is one of the most difficult tasks that custodians face, but also one of the most lucrative (see previous article). Vital to this activity is the ability to collate data about securities that can be turned into information for clients, which is why the level of AuC counts so much for many custodians. Nadine Chakar, head of EMEA at BNY Mellon Asset Servicing, says transforming raw data into market intelligence is at the heart of BNY’s value-added proposition.

Clearly, then, there are signs of growth for the largest players, particularly geographically in Asia and the Middle East. Consolidation in custody has been expected for some years. Perhaps Asia, the Middle East and North Africa will spur this if local investors gravitate to the larger global players.

©2008 Funds Europe