Global custodian banks have been rocked by scandals in the past few years: State Street Corp. alone recently paid $382 million to settle allegations of fraudulent foreign exchange practices. Still, new regulations and requirements for asset managers have been a boon to the biggest players in the securities services business.
BNY Mellon, No. 1 in Institutional Investor’s ranking of the World’s Largest Global Custodians for the eighth straight year, saw its assets under custody rise to an estimated $25.08 trillion. The New York–based bank’s new mandates for 2016 include a United Arab Emirates–based exchange-traded fund and a servicing deal with Nomura Asset Management Deutschland.
Paul Fahey, Northern Trust Corp.’s head of insurance asset servicing and its business supporting institutional investors that run in-house asset management, sums up the relationship between regulators and custodians. “Regulation continues to be the single largest product development driver,” he says. “As asset managers, asset owners and insurance companies have gotten additional requirements put on them, they are looking at their options, including outsourcing,” adds Fahey, whose Chicago-based firm ranks sixth, with $6.35 trillion in assets under custody.
Regulators are directly and indirectly spurring demand for a number of services. Global custodians agree that insurers — suffering from years of minimal yield on their fixed-income portfolios — are more open to outsourcing back- and middle-office services that aren’t core to their business. Institutional investors keep pressuring hedge fund and private equity firms to invest in their infrastructure, a trend that has pushed alternative managers to consider external providers like the big custodians.
Investors are hesitant to put money with hedge funds and other smaller firms that haven’t spent big on recordkeeping and other systems and safeguards, such as defenses against cybercrime. At the same time, technological advancements have fueled growth for custodians by making it easier for managers and others to switch to an outside provider via true plug-and-play systems.
For custodians, providing services to manage, strategize, access and make sense of data is probably the most active area. Asset managers not only need to access the right information in real time for regulators scrutinizing their businesses; most also want to be able to make data-fueled decisions on everything from picking investments to promoting staff. They’re turning to custodians for help.
Fahey, who spent 15 years at Boston-based State Street (No. 2, with $21.35 trillion under custody) before joining Northern Trust six years ago, says the bank is building tools and helping clients to develop cost-effective strategies around data. Clients expect the data services they utilize at work to resemble the conveniences in their personal life, he explains, citing real-time UPS delivery tracking and his nine-year-old son’s class, which uses Google Docs to share writing assignments and offer instantaneous feedback. “If that’s the environment you’re living with daily, you’re bringing that expectation to the office,” Fahey notes. “People won’t tolerate that lack of access to data anymore.”
Michael Coleman, New York–based head of global custody and fund services product development at J.P. Morgan, says potential and present clients always evaluate custodians’ data services, which he describes as an area of growing competition among custodian banks. J.P. Morgan, the No. 3 firm in our ranking with $20.47 trillion in assets under custody, focuses on quality because clients rely on data for such critical activities. “If you’re doing fancy things with data, how do you know it’s right?” Coleman asks.
Earlier this year J.P. Morgan became the first client of BlackRock’s Provider Aladdin, a version of the New York–based asset management giant’s existing risk and portfolio management system designed for custodians. BlackRock is also one of J.P. Morgan’s largest clients. Coleman says Aladdin is part of the bank’s effort to offer an integrated data environment that brings together a client’s information from J.P. Morgan, outside asset managers and external operations providers. “This allows clients and providers to work off the same data sources in real time,” he observes.
J.P. Morgan staffers are using Aladdin’s screens on their desktops. In instances where someone at J.P. Morgan used to have to call BlackRock to analyze a discrepancy, both parties can now see it on the system simultaneously. Coleman, who calls this arrangement “extended enterprise,” says it changes the nature of the vendor–client relationship: “Where are the boundaries between clients and their service providers?” J.P. Morgan has also developed data science methods to statistically detect problems with funds’ net asset values and is creating machine learning tools for custody clients.
Late last year Northern Trust and an outside provider released a survey of 201 asset management and insurance executives in the U.S. and the U.K. on data sourcing, management and strategy. Only 13 percent of respondents said they got full value from their data, while 54 percent listed “improving investment decisions” as a top-three goal for data strategy. Other reasons to get a better handle on data included managing risks, lowering costs, and improving internal and external reporting. Custodians are eager to fill these gaps.
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