First and foremost, custodians keep an investor’s assets safe and secure. But as pension plans continue to invest in more sophisticated assets—private equity, derivatives and hedge funds—custodians are no longer simply dealing with traditional stocks and bonds. Add to this the G20 goal of having all derivatives cleared through a central clearing party (CCP), and the custodian’s job just got a lot more complex—and a lot more expensive.
Gurmeet S. Ahluwalia, managing director, securities and fund services head for Canada, with Citibank, says a robust technology platform is critical to a successful custody offering. In addition to providing more services and capabilities, it’s important to have strong technology to improve accuracy. “The more straight-through processing [transactions conducted electronically without the need for manual intervention] you have, the less possibility there is of transactional errors happening. That requires significant and continued investment in technology.”
But what kind of investments are needed? What do custodians need to do to satisfy their institutional investor clients?
An integrated experience
From a service standpoint, when clients are looking at a custodian, they’re looking at two main elements: the technology platform (where the investor can access all of its positions and transactions) and the network (access to the custodian’s network of agent banks around the world).
Let’s begin with the network. “You’re buying access to the network that’s behind the global custodian, and that varies,” says Tim Reucroft, director of research with Thomas Murray (a custodian watchdog). “A lot of people are focusing on that because there are asset safety issues with using third-party sub-custodians.” (For example, if an investor is investing in Greece via a global custodian, who is the sub-custodian? If it’s a BB-rated local bank, you have a problem, Reucroft adds.)
Reucroft says if all of the platforms were the same, offering the same kind of functionality, what ought to differentiate the custodians is the network behind the platform. However, that’s not the case. He explains that when it comes to technology, investors want the “holy grail”: a single platform with all applications on it. “Clients want full integration,” agrees Linda Bernard, senior vice-president, North America, with Thomas Murray. “The last thing you want is one system using one set of F/X prices and another system using another set of F/X prices.”
But clients don’t always get that, for two reasons: time and money.
Arti Sharma, a principal with Mercer Sentinal Group (a dedicated global business group within Mercer Investment Consulting), admits that some custodians have not been able to fully integrate, and this raises further issues. Some custodians are operating multiple platforms, either because of inability to service the various asset classes on one platform, as a result of acquisitions made along the way or due to the different services that a client requires. The question is, Do the platforms update in real time? And are there plans to consolidate across platforms?
Lack of integration may also mean that certain manual operations are necessary. “Those custodians that are not able to support fundamental custody services or fund accounting through integrated platforms may require manual intervention to update the core platforms—for example, alternative investment strategies or sub-advised investment structures. Integration is critical so that the client can see one consolidated view,” says Sharma. “What we worry about is the day that one person is away and that process of keying in the information into that system got missed. [There’s] a risk element there.”
For custodians that maintain a number of platforms, this can be a costly endeavour. “You may be a large provider in terms of assets under custody; however, if you have multiple technology platforms in every country or multiple regions, or legacy systems through acquisitions, your technology spend is just going to get eaten up across all those various platforms,” says Rob Baillie, president and CEO of The Northern Trust Company, Canada.
RBC Dexia agrees about the importance of the platform. “As a global custodian, we have an enterprise custody refresh program well under way,” says John Lockbaum, managing director, Canada, with RBC Dexia Investor Services. “And we have selected to go to a consistent platform for core custody.”
Reucroft adds that investors rely on the custodian to reconcile all platforms and systems in order to present a unified view. “It’s a bit like a swan,” he says. “It’s nice and graceful on the surface, but underneath, it’s paddling like mad.”