September 2012

CUSTODY DIRECTORY PART 1

Two French banks saw their global assets under custody shrink during our survey period, while Citi, formerly the largest custodian of European assets,was overtaken by an American rival, finds Nick Fitzpatrick.

BNP Paribas Securities Services
Charles Cock, head of client development

How has your custody business developed from pure custody to become a broader asset-servicing offering?
BNP Paribas Securities Services started providing custody services to institutional investors and financial intermediaries in 1986.

The expansion into a full range of products to serve asset managers and asset owners has been based on a combination of lift outs (BNP Paribas Asset Management) and strategic acquisitions (Cogent in 2002, and Fortis Bank in 2009).

Growth has ensured a constantly expanded product range and geographical presence. Starting from a historical leadership position in Europe, the business builds on the strong, established global presence of the BNP Paribas Group around the world to cover all of the key markets.

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
[There is] a well executed deleveraging plan – including significantly reduced exposure to sovereign debt and significantly strengthened solvency.

As well, a large portion of the global assets safe-kept for our clients are controlled by BNP Paribas in the local markets (where BNP Paribas also acts as sub-custodian), thus reassuring clients by the risk profile of BNP Paribas for the full chain of their activity.

There has been a particular focus in derivatives activity for which BNP Paribas provides both execution and clearing for listed and over-the-counter derivatives.  In terms of product development, we have responded to increased demand for enhanced collateral management to help clients seeking higher levels of protection.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
BNP Paribas believes that its clients are well prepared for tougher liability rules and increased regulation. We work hard to contribute to the implementation of regulatory change in the best interests of our clients and the industry as a whole. On a regular basis, we distribute white papers and briefing documentation about regulation to clients. We also host seminars, webinars and industry conferences about regulatory issues, to educate and inform our clients about all the impacts and costs for them and for the securities services industry.  

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
Having an expansive geographical footprint is an important component to ensure the protection of assets. Our network is made of a mix of proprietary and other expert providers, although our preferred approach is to have our own direct local market access in all countries representing a significant part of our clients’ activity. Any external providers are strictly limited to solid global banking groups, which in most cases are also systematically important financial institution banks.

The selection and monitoring of our sub-custodians is based on a “5C” policy: credit, commitment, compliance, client service, cost with the major objective being the highest protection of our clients’ assets.

During the past twelve months, we have changed sub-custodians in seven markets; for three of them, this was as the result of our expanding proprietary network. Assets in markets covered by our proprietary network represent about 80% of our total clients’ assets, and this percentage will reach 90% by mid 2013, with three additional markets.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
Operational efficiency is a key priority and as well as reinforcing business-as-usual cost management governance, we have invested in and realised regional operational centre’s as part of our internationalisation strategy.  Maintaining a diversified business and geographical mix is crucial to our long-term growth and development and we are continually increasing our global presence.

BNY Mellon Asset Servicing
Hani Kablawi, executive vice president and head of Emea asset servicing

­­­How has your custody business developed from pure custody to become a broader asset-servicing offering?
Our global custody business has its origins in the US where we first started to provide services well over one hundred years ago. Since then our capabilities have expanded to meet the demands of our client base. For example, as fund management clients look to revert to their core competencies, we have expanded our offering to include fund accounting and transfer agency services on a global basis. This expansion of capabilities has continued as fund managers faced continuing pressures to manage their cost bases down and led to us developing additional middle-office and back-office services to meet a growing demand from the market.

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
One of the major ways in which we have reacted to changes in the market is to bring an increased focus to our collateral management services. We have found that our clients have increasing needs for collateral management services, with markets and regulators demanding higher quality collateral in increasing amounts to satisfy margin requirements. Our new service model brings together collateral management teams from across the company’s businesses to facilitate collaboration, expedite product development and better manage operational and market risk.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
Our fund management clients would be aware of the potential impacts of the Alternative Investment Fund Managers (Aifm) Directive and the Ucits legislation. Obviously, the issue of costs is one that has a direct impact on them, either to their bottom line or to the funds that they manage. Development and execution of BNY Mellon’s implementation strategy has been under way, keeping in mind that Aifm Directive Level 2 measures and Ucits changes are not fully formed. At the same time, we are fully aware of the short timeframe for compliance with new requirements. Consequently, while our strategy is not yet finalised, we have engaged actively with clients and others as the industry prepares for full implementation. At the appropriate times we will engage as necessary with our client base.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
Since the financial crisis, we have created a task force including senior members of our risk, legal, credit, client management, operations and global network management to actively review the network and the global markets based on the market information available. In addition, we are monitoring daily events and markets to ensure awareness of any events or issues that may affect the network and BNY Mellon. We have made limited changes to our sub-custodian network due to market events in recent years and we will continue to actively manage our sub-custodian network.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
BNY Mellon has a robust business model that supports clients through every stage of the investment life cycle, regardless of economic circumstances. We have been undertaking a number of initiatives to help mitigate the impact of the current challenging conditions, ranging from a strong internal focus on expense management through to operational and platform re-engineering to increase efficiency. In addition, we will have discussions with our clients with a view to ensuring they receive the range and type of services they require, at an appropriate cost.

CITI
Kevin Bonar, managing director, head of global custody, investment administration and wealth services Emea

How has your custody business developed from pure custody to become a broader asset-servicing offering?
Citi’s custody business launched in 1982. Our custody network and infrastructure is the foundation of our global investment services business. We leverage our settlement and safekeeping resources to add value to our clients across our solution set. Our experience, scale and technology meet the most complex managers custody needs while helping them meet their increase risk and performance objectives.

[Among other features and abilities, Citi has a] flexible platform which handles all types of assets – for example, alternatives, bank debt, exchange-traded funds, precious metals; a choice of which markets to contract — not a one-size-fits-all model; and a complete range of middle (securities finance and collateral management) and back offices, hedge fund and wealth management wrap fund capabilities.

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
Citi’s Network 3.0 solution has made us more relevant for clients, making us a perfect partner by our local sub-custody and global custody network under one technology and processing infrastructure for increased operating leverage.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
Clients recognise that Level 2 of the Alternative Investment Fund Managers Directive has not yet been published, with Level 1 due to come into effect from mid-2013. Without absolute clarity as to the impact this will have on the industry, it is understandable that many are waiting for a workable framework.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
Citi is a direct participant in 59 depositories where we maintain a branch, affiliate or subsidiary in the market while providing local custody services. Our clients choose us for our unique, proprietary network which means they have fewer counterparty and systems risk issues to consider. Our fundamental business approach in the current environment remains unchanged while we are scrutinising all other market members more carefully as our clients choose to move away from local providers to our established network.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
New solutions to counteract the loss of spread income on our client’s cash operating balances and maximise returns – collateral management. Reduced counterparty risk through our consolidated custody model. For example, agency reverse repo solutions and earning credit rebates, and constantly improving internal efficiency.

HSBC Securities Services
John van Verre, head of global custody

How has your custody business developed from pure custody to become a broader asset servicing offering?
HSBC has been providing both custody and other asset servicing solutions, including fund administration and transfer agency, for many years. Mandates and lift outs from fund managers have been one of the key drivers for further integration of our asset servicing model which includes, among others, middle office and treasury services such as cash management, foreign exchange and securities lending.

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
A strong focus on improving operational efficiencies and reduction of operational risk is needed in the current environment. Through sustainable cost savings we can maintain profitability, enabling our ongoing investment in the business, and to manage the increase in costs as a result of the various regulatory changes.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
There is a general recognition in the industry that the cost of asset servicing will increase. The incremental cost is driven by a combination of additional regulatory requirements, investors’ demand for increased transparency, and the likely increased risk for service providers. The cost increases will be partially offset by operational efficiencies and will have to be passed on or shared between the parties.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
Our custody network covers 87 countries and territories, 38 of which are serviced by HSBC entities. This means we are in a very strong position to manage the anticipated increased liability resulting from the Alternative Investment Fund Managers Directive and Ucits V. We have no intention of changing our approach to using sub-custodians. Our network management team manages our sub-custody network on an ongoing basis and, where appropriate, changes are made.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
We have a strong focus on improving our operational efficiency and reducing operational risk. We continue to invest in technology solutions that enable us to provide globally consistent operating models, economies of scale, as well as reduce our technology expenses. We have also been successful in increasing our assets under custody, which contributes to lowering the average unit cost.

JP Morgan Worldwide Securities Services
Rob Ward, managing director, global custody & clearing Emea product executive

How has your custody business developed from pure custody to become a broader asset-servicing offering?
JP Morgan established its first mutual fund custody relationship in the United States in 1934 and was the first bank to enter the global custody business in 1974 when it coined the phrase ‘global custody’. We have custody relationships that date back more than 50 years.

It introduced performance measurement in 1977, securities lending and multicurrency accounting in 1979 and investment compliance in 1996. During the past ten years, JP Morgan has completed several key acquisitions to expand its custody-related offerings including ANZ Custody Services, Cazenove, Bear Stearns, Nordea, and Paloma Partners.

In terms of organic development, JP Morgan has developed an Investment Operations platform that enabled the in-sourcing of JP Morgan Asset Management operations from Bank of New York Mellon.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
Fund managers and service providers have been actively engaged in the debate over depository liability; these clients are well aware that increased responsibilities for the depository may result in higher costs. However, it is not only the Alternative Investment Fund Managers Directive and Ucits V that are exerting pressure on costs: numerous other new regulations will have an impact. The challenge will be to ensure that business models are as robust and efficient as possible; automation and scale will be more important than ever.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
JP Morgan has extensive procedures to monitor sub-custodians in terms of service quality and financial stability. The network service management team monitors performance and service levels provided by sub-custodians using an automated agent performance measurement system to monitor trade settlement, asset reconciliation, settlement confirmation, cash management, corporate actions, dividend processing, and fee management. [There is also] continual monitoring against both existing standards and agreed-upon service initiatives.

Market conditions necessitate additional focus on the financial status of sub-custodians. We constantly review and monitor sub-custodians using the resources of the entire firm against factors including financial condition, contractual arrangements, contingency arrangements with an alternative provider in each market, and ability to execute an expeditious but orderly transition to a
new provider.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
JP Morgan has maintained profitability, market strength, financial stability and healthy capitalisation throughout the past five years. As of 30 June, 2012, JP Morgan held total assets of more than $2.3 trillion (€1.9 trillion), strong credit ratings and a solid and experienced management team.

Northern Trust
Penelope Biggs, executive vice president – head of institutional investor group, Emea

How has your custody business developed from pure custody to become a broader asset-servicing offering?
Servicing European asset managers since the mid-1980s, notable milestones include winning our first full European outsourcing client in 2001, our first cross-border pooling clients in 2005, and bolstering our business through highly selective acquisitions. This includes the Bank of Ireland Securities Services business, which expanded our global fund servicing capabilities, particularly in the area of exchange-traded funds. The acquisition of Omnium, a leading hedge fund administrator, has enhanced our ability to service hedge funds and institutional investors with complex global portfolios.

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
Institutional Governance Services (IGS) – a significant development – is a suite of data and product solutions launched in response to institutional investors’ increased focus on governance and demand for data across all their investments to support this.

Through IGS, clients have access to granular and wide-ranging data – often in a daily environment – with data also aggregated for assets custodied with Northern Trust and third-parties. Information is delivered to the level required from consolidated holdings for multinationals’ plans to providing a single book of record. In addition, clients
have the tools and reporting to analyse this data from multiple perspectives.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
While the final depository rules under the Alternative Investment Fund Managers Directive are yet to be clarified, fund managers are preparing for the implications. At this stage we are working closely with clients to review the implications and assess the strategic opportunities presented by the regulation.  The new higher liability standard, as currently written, applies to certain managers, in certain domiciles and for certain investment types.  However, with the proposed implementation of Ucits V it will also apply across the wider (traditional) European fund industry. With two key drivers being asset type and jurisdiction, any resulting fee discussions will take a phased approach and assessed on a client-by-client basis.

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
Northern Trust’s rigorous approach to establishing and monitoring sub-custodial relationships focuses on prevention management with reviews of credit, service, audit, compliance, risk governance and business continuity.  Certain financial institutions and countries are monitored more frequently, as is any situation where we consider risk to be elevated. Since the financial crisis began, we have made minimal changes to our sub-custody network, and any such changes have been driven by our long-standing commitment to provide clients with the most efficient, creditworthy and quality providers.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
Northern Trust’s philosophy is to build deep, long-term, multi-product relationships with our global client base – relationships that endure all financial cycles both positive and negative. Our aim is to deliver products and services which benefit both our clients and our shareholders. Examples are, working with clients to deliver revenue enhancing capabilities such as securities lending; cost minimisation solutions such as transition management, and operational efficiency solutions such as middle-office services.

Pictet Asset Services
Marc Briol, chief executive officer

How has your custody business developed from pure custody to become a broader asset-servicing offering?
We have been offering custody and fund services to a variety of internal and external clients for many years. We then decided to capitalise on our positive experience in servicing our clients by formally regrouping our asset servicing competencies under Pictet Asset Services.  

We are providing our clients with a flexible one-stop-shop solution around custody and ancillary services, reporting and portfolio analysis, fund administration and transfer agency, as well as dedicated management companies support, including investment controlling, legal support, compliance, risk and director’s office.

What has been the single most important development in your business since the start of the financial crisis for confronting a custody or asset servicing challenge?
There is a renewed and strong emphasis on proper segregation of duties, operational integrity and risk management framework for asset services. We thus decided to
reinforce our fund management companies offering by setting up distinct  legal entities.

Consequently, the single most important development has been that clients have been looking at more agile solutions and connectivity across the value chain rather than imposed solutions upon them; our ‘no surprise – no hidden cost’ model was perfectly suited to this new environment.

How well prepared do you think fund managers are for the expected increase in custody costs resulting from tougher liability rules?
The level of awareness of the clients and of the industry itself has increased a lot. It is now common knowledge that in certain cases pricing levels of certain providers are unsustainable and driven purely by asset gathering strategies; the ‘cross-subsidised’ model is now definitely gone, with a progressive unbundling of the value chain.   

What is your approach to managing sub-custody networks and has it changed since the start of the financial crisis?
We have always been very prudent in our sub-custody network and have been monitoring our counterparty risk for many years. We are fully independent in the selection and appointment of our network. The financial crisis has not changed the way we are supervising, but rather confirmed through anecdotal evidence that our methods and discipline were also adequate in more volatile times.

Given the pressure asset servicers are experiencing, what actions have you had to take to maintain profitability?
We are organised for and around our clients rather than simply pushing our products; we are thus carefully listening to their needs, blending our staff stability and experience with our flexible approach. We are selected for our niche and personalised added-value service provision suited for sophisticated asset managers, banks and pensions. We like our clients to think of us as the leading asset servicing expert known for its client servicing culture, operational integrity and entrepreneurial spirit, rather than its size.

We continue to invest for our clients in our people and in our global integrated platform to make sure we remain distinctively competitive.

End of part 1

©2012 funds europe