Inside the biggest custody deal of all time

Global Custodian digs deep into the $1 trillion agreement between BlackRock and its new custodian JP Morgan, a landmark deal with far-reaching impacts beyond the eye-catching numerical headline.

By Joe Parsons & Jonathan Watkins January 31, 2017 1:10 PM GMT
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ONE TRILLION DOLLARS. We rarely speak about sums of money in trillions; perhaps only when highlighting the level of US debt, the notional value of the derivatives market or quoting Dr Evil as he holds the world to ransom.

But now the largest custody deal of all time has seen BlackRock transition $1 trillion of assets under management from State Street to JP Morgan for custody and fund services, a move that has shaken up the custodian stratosphere.

The landmark deal even had the respective big-name CEOs of these financial giants – JP Morgan’s Jamie Dimon and BlackRock’s Larry Fink – involved in the agreement, Global Custodian understands.

Sources explained that the deal had been a long-time in the making, and that following BlackRock’s due diligence evaluation of custodians, JP Morgan came out on top, in a bid to diversify from solely using State Street.

When it comes to the top tier quartet of global custodians - JPM, Citi, State Street and BNY Mellon – these multi-billion and trillions deals can see them leap frog each other in a Game of Thrones-style battle for the iron throne. Here’s how the four shaped up as of 31 December 2016 in the assets under custody league table.

BNY Mellon - $30.5 trillion
State Street - $28.7 trillion
JP Morgan - $20.5 trillion
Citi - $15.1 trillion

The BlackRock deal will see JP Morgan gain ground on State Street, but not overtake it. However, the custodian has been investing in its custody and fund services businesses in recent years through technology, infrastructure and personnel. Daniel Pinto, CEO of JP Morgan’s Corporate & Investment Bank called the deal a “validation of the investments” JPM had made.

Whatever the future, a big bonus is on its way to whoever initiated this agreement. Here’s everything you need to know on the trillion-dollar megadeal, including how it came about and what it means for JP Morgan and State Street.

What’s the deal?

JP Morgan will provide custody and fund services for over $1 trillion of BlackRock’s clients’ assets moving the assets away from Boston-based State Street.

The assets will be largely common trust funds, with State Street continuing to provide services for BlackRock’s ETFs business, iShares.

It is believed that JP Morgan will onboard the assets over the next 18 months.

Why did it happen?

The main reason behind the BlackRock-JPM deal was said to be diversification, according to State Street’s CEO Joseph Hooley, but some industry experts have dismissed this as the principal motive.

“I believe that diversification was not the primary reason for the move,” said Michael Barrett, global head of collateral managements services and solutions at Genpact Capital Markets. “My guess is that BlackRock has negotiated a very good deal with JPMC which - as the media has reported - will reduce the overall costs to the BlackRock funds and improve their performance.

“In addition, JPMC is a top provider of global collateral management services, and the new rules around the uncleared swaps for margin movements is challenging for a firm like BR. JPMC is positioned very well to help them meet the operational requirements of moving collateral and meeting margin in an sharply increased call environment.”

Another theory from one industry expert is that the move could be regulatory driven, with authorities keen on contingency providers.

Either way this major deal was said to be a long-time in the making and considering the work that will go into the transaction, in all likelihood a combination of diversification, costs and efficiencies were behind the move.

“With people like State Street and now also JPM in the saddle, investors can be relaxed on custodian risk and quality,” said John Gubert, former head of HSBC Securities Services.

Has a deal like this ever taken place before?

Ironically, the last time a deal of this magnitude took place in the custody world, JP Morgan was on the receiving end of the sucker punch, when Norges Bank Investment Management - manager of Norway’s $866 billion sovereign wealth fund - axed the custodian in favour for Citi.