Thomas C. MacMillan, CEO of CIBC Mellon, agrees that the industry will see consolidation globally. However, he stresses that there will be some kind of impact on Canada since most of the major players in Canada are global firms. “If consolidation doesn’t impact Canada, [then] I think Canada falls behind and the pension plans themselves aren’t served well enough.”
Another continuing trend is the movement away from investing in traditional instruments toward investing in derivatives and alternatives. According to bfinance’s 2008 Pensions & Insurance Survey, pension fund investors plan to increase their allocations to alternative assets over the next three years. Thirty percent of respondents intend to increase their allocations to private equity, followed by hedge funds and commodities (26% each).
“This is going to place increased pressure on custodians to invest in new technology and hire specialist staff,” says Sharma. “Clients are pushing custodians to service them in areas that [they] have traditionally never done before.”
Help Me, If You Can
Despite tighter budgets, consolidation concerns and the need to meet the demand for more non-traditional investments, custodians still have to assure plan sponsors that they’re working for them. That’s particularly true in this economy, when communication becomes all the more important.
“When things are going [well], a custodian is usually seen as a commodity,” says Scobie. “When markets are down, there’s a lot more interest in your custodian again.”
“We’ve heard from clients where custodians have been all over them, communicating what they’ve done to weather the storm, what they’re going to do on a continuous basis—there’s been a lot of dialogue,” says Sharma.
That dialogue has been flowing at CWT, which focuses on the small- to medium-size businesses. CWT communicates with its clients on a daily and weekly basis. “We still have a very personal touch to our relationships,” says Scobie, adding that the company sends out newsletters as well as numerous press releases and emails.
Scobie says the communication has certainly increased in the past year because of the trying times in the markets. In fact, the company’s vice-president and chief operating officer makes more than 100 calls to regional centres and visits at least 100 clients each year. “That’s something new that we’ve implemented because [our clients] want to see more of us,” says Scobie. “Our communication is really geared around the safety of the assets and making sure that our clients know that we’re there.”
José Placido, CEO of RBC Dexia, couldn’t agree more. “From our perspective, it’s really important that we have a disciplined, proactive communication plan with our clients, so when they do have questions, they’re receiving accurate information.”
And that accurate information must be delivered promptly. Case in point: when the Lehman Brothers catastrophe hit during the week of Sept. 15, 2008, MacMillan says CIBC Mellon organized a “call tree.” The company made 490 verbal communications (including phone calls and face-to-face meetings) and sent 551 written communications (emails and letters) to clients in that week. MacMillan recalls what one large pension plan told him: “Don’t go quiet on me.” Reflecting on the severity of the situation and the importance of communication, MacMillan remarks, “Lehman went down. The concern was that two or three others were going to go down. AIG went in that week. That was not a week to go quiet on your clients.”
As well as communicating, custodians need to continually ensure that their technology helps clients with reporting of trades and, even more importantly, with risk analysis. “Clients want accurate, timely snapshots of their positions much more frequently,” says Placido. And, as derivatives become more commonplace for the institutional investor, the requirement to process these instruments efficiently falls to the custodians. “[We have introduced a] financial product markup language, a messaging format that allows us to accept and deliver trade messages electronically regardless of our clients’ underlying hardware or software,” says Rob Baillie, president and CEO, The Northern Trust Company, Canada. “This is a huge step toward improving the accuracy and timeliness associated with processing these instruments.”
State Street, too, has invested in derivatives processing capabilities. “That’s an area that is experiencing explosive growth, yet perhaps some of the settlement and clearing procedures supporting that marketplace hadn’t kept up,” says Smit. “We saw a huge backlog of settlements occur in the marketplace in the U.S. in credit default swaps.”
However, all the top-notch technology in the world isn’t going to do any good if clients are confused by all the bells and whistles. “There’s not a lot of value in it if [clients] don’t know how to use the tools,” says Baillie. “That’s why we’re so focused on training and retraining clients.”
Unfortunately, while some custodians are pushing communication, innovation and training, others, Sharma has heard from clients, are remaining silent. “This really shows the client that when the times are good, the custodians are all gung-ho, but when the times are bad, are these the partners we want to be with through good and bad?”
Scobie also suggests that you look at your existing contract. “Fear tends to make you look at your contracts and relationships and see if they’re still working.”
Neither a Borrower Nor a Lender Be?
Certainly one area where custodians have been feeling the pressure from their clients is securities lending. With the falling markets, Sharma says that institutional investors are a little fearful. “Over the years, when the markets have been less turbulent and earnings have been great, people just signed up for lending but never really understood the risks.”
