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Going
global
Rapid
expansion in global custody means the industry is saying hello to
a fresh new image. Arveen Luthra takes
a look
Global
custody is shedding its dull image to reveal bright new opportunities
and developments. Global custodians deal with billions of pounds
of pension scheme funds in a trillion dollar industry that is experiencing
rapid growth. Reported trends towards equity based investment and
a willingness to invest in riskier assets, coupled with an increasing
amount of worldwide assets are factors that have all assisted in
this growth.
Global
growth
David Hicks, a manager in the financial services group specialising
in custody at Andersen, explains why global custody has been somewhat
overlooked in the big picture. He says: “I think historically,
custody has not been given a high profile. It has been considered
a secondary activity for many investment portfolios both in pension
funds and other financial areas. It is perceived that custodians
are protecting the assets rather than adding any value. However,
people are starting to realise that not only is it a fantastic means
of operational risk control, but it provides value through stock
lending and other secondary services that it can offer.”
Principle services available from global custodians are safekeeping,
settlement, income collection, reporting, corporate actions, proxy
voting, tax reclaims, cash management, securities lending, performance
measurement and fund administration. Hicks elaborates: “Custody
as a basic product is relatively homogeneous, in that one can differentiate
between firms, clients and price. However, differences are apparent
when custodians go into other products such as stock lending and
administration. By offering additional services, custodians can
provide better added value.”
One of the big reasons that the area is so exciting is the move
towards consolidation. The high cost of running a competitive global
custody service has meant that many banks have had to sell off their
custody business to the big players. Indeed, last month the Bank
of New York signed an agreement to acquire the institutional custody
and administration business of the NatWest Bank.
Peter Williams, a marketing manager at Northern Trust says: “The
custody industry has seen a number of mergers and acquisitions in
recent years. In the UK, for example, many of the traditional custody
providers have decided to exit the business. The market is now dominated
by a smaller number of US financial institutions and these organisations
are able to invest the large amounts of capital needed to remain
competitive and innovative in the business.”
He adds that the continuing trend towards using multiple, specialist
investment managers has also helped raise the profile of the global
custodians. “Five years ago, large pension funds generally
only had two or three fund managers, these days they might use six
or seven. That means your pensions department is going to be getting
six or seven sets of reports each month. Trying to get an accurate
bottom line market value can be a logistical nightmare. However,
a global custodian can get consolidated portfolio information for
you on a daily basis.”
The increasing interest in global custody by pension scheme trustees
is something that cannot be ignored. Trustees are now taking a more
active role in choosing a global custodian for their scheme, whereas
in the past, they may have been happy to leave this to their appointed
investment manager. Williams attributes this change to issues that
arose from the Myners Report into Institutional Investment. The
report outlined that fund management firms were outsourcing an increasing
number of functions, such as custody. For instance, 50 per cent
of the fund managers interviewed for the report used independent
custodians in 1997, while 71 per cent did by 1999.
The Myners report brought up issues around transparency and protection,
which Williams believes could have influenced trustees’ increased
interest in global custody. He says: “Trustees have a responsibility
to make sure that the best interests of the members are served.
There are more and more fund managers involved these days and cases
like the Maxwell affair have highlighted protection issues like
safe custody and safekeeping of assets. This is the trustees’
primary duty and function and so has to be paramount when making
decisions about investment.”
Andersen’s Hicks asserts that custodians are the natural choice
when it comes to ensuring that the safe protection of assets is
followed through. He comments that there has been an enhancement
of the responsibilities of consumers and trustees in terms of guarding
and protecting their assets across the market. “I think trustees
are taking a much more proactive approach because custodians hold
the underlying assets and can make sure that investment managers
are complying with any mandate restrictions. So the custodian can
act as an additional control by delivering added value by providing
client reporting.” He believes that scandals such as the Maxwell
affair have caused an awareness about getting to grips with all
the service providers and keeping a watchful eye on the situation.
Technology
Technology has a large part to play in ensuring that custodians
are able to provide an all round, efficient service. Gone are the
days of waiting for statements consisting of reams and reams of
difficult to interpret papers. Nowadays, the system has much improved
and has features that allow trustees or anyone responsible for a
large amount of assets to have real time access to their holdings.
This in turn gives a much greater level of control than previously.
Hicks adds that new technology has reduced the settlement times
for transactions. He explains: “In the old market, transaction
time was trade plus three (T+3), and today it is trade plus one.
As a result, custodians are having to invest in their IT infrastructure
in order to make sure the system can cope with the reduced time
they have to process transactions. That’s certainly a consideration
that people would bear in mind when looking to appoint a new custodian.”
He adds that virtually all of the major custodians have launched
intranet or extranet reporting systems which will enable trustees
or investment managers to have real time access to find investments,
holdings and securities. This will undoubtedly improve efficiency,
but ultimately will increase transparency.
Northern Trust is currently focusing on increasing its range of
web-based reporting products, according to Williams. He says: “We
have recently introduced a new web-based trade communication tool
called Trade Input. It is an on-line facility which allows clients
and investment managers to enter trade instructions directly into
Northern Trust’s custody processing system. We designed Trade
Input, not only to promote straight-through processing, but also
to benefit our clients who do not belong to large electronic trade
associations such as S.W.I.F.T.”
Building on the foundation of the Northern Trust Passport –
a central online delivery system for clients, investment managers
and third-party vendors – the company will be launching a new
bespoke reporting capability called Global Investor Passport to
be released in the coming months.
“Global Investor Passport is designed firmly with the 21st
century in mind,” says Williams. “Using portal technologies,
clients will be able to easily and quickly establish their own home
page, ensuring that they are greeted at log on with useful information
that suits their own individual needs.”
The outlook for this diverse market is certainly positive, and is
moving at break-neck speed. “Custody is coming out of the shadows,
so to speak,” says Hicks.
–
Pensions Age June 2001–
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