A Custodian’s Guide to the Galaxy…or Guide to Getting Through 2015

A change is as good as a holiday is the oft-heard saying, and fitting as year-end reviews and wrap-ups take place before the holidays start.

On the theme of change, Global Custodian corralled the sell side and buy side of the industry last week to put together a self-help list of do’s and don’ts for the custodial industry as it approaches a year of uncertainty with many challenges ahead (…with apologies to Eckhart Tolle).


Do

• Consider re-pricing. “Custodians should continue to work on the division between cores services versus value-add,” says Josh Galper, principal at Finadium. “Custody is not a free service. Helping clients to understand that in the context of other services that a custodian provides is ultimately better for the custodian and their clients as well.”

• Find a way to make switching custodians more palatable. It could be an effective way to take existing market share from your competitors. “The reason why we don’t switch is switching costs are so high,” says one pension fund. “It’s likely going to cost more to change, and it’s going to be such a painful and time-consuming process.”

• Communicate with the client. It sounds obvious but it is not always the case, apparently. “There’s a lot of no’s: ‘No we can’t fix that, no that’s just how it is…The answer is always no, and then I have to push to elevate it up the chain,” says a client of one global custodian. “It’s never ‘Let’s see what we can do.’ They’re trying to make things more automated so we don’t have to contact them, but I honestly think that’s bad. At the end of the day, we need more communication with them.”

• Help the buy-side understand compliance and manage collateral. “In terms of collateral the buy side is not aware of the implications of moving to a cleared world,” says Rob Scott, head of custody at Commerzbank. Continue developing expertise and products to support clients across jurisdictions. “Global custodians have to leverage their expertise in a way for clients to use, whether that’s in custodian technology or person-to-person. They have a competitive advantage in that space,” says Michael O’Brien, head of global trading, Eaton Vance.

• Take a serious look at your liquidity management. Demonstrate to regulators you have robust intraday liquidity management processes in place. You must prove that you have full visibility of available intraday liquidity, complete control of your liquidity flows and ready access to funding. “By doing so, they (banks and brokers) will also have a stronger case for reducing liquidity buffers which has tangible benefits for their revenues,” says Orla Mc Tiernan, head of liquidity management at BNP Paribas Securities Services.

• Invest in smart data solutions. Find ways to monetize the vast amount of data you sit on. This can be done “by visualizing and delivering analytics (e.g. risks, transaction volumes/values, currency exposures, emerging regulations, market infrastructure insights) via a digital dashboard,” says Markus Ruetimann, group COO, Schroder Investment Management.

• Offer execution services. “There are third-party consultants that will help you execute if you want to do direct trades, so where I see custodians could add value is doing that for us, because they do have trading desks,” says one pension fund.


Don’t

• Don’t slow down the front office. One pension fund shares their experience with their custodian: “They have automated custodial reporting systems online, and they’re not as user-friendly as some of the other custodians, so when we have problems with them…it’s usually time consuming, even if I just want to find the answer to a simple question like ‘Did the money move? Where is the money?’ If you’re sitting in an investment person’s seat, anything I need from my custodian should not take me much time; it should be very quick and easy, like looking something up on Bloomberg. It should be that simple.”

• Don’t change the relationship with legacy clients following M&A. Consolidation continues to play out, but when it occurs, the clients aren’t always satisfied with the new culture that comes in. Whether it’s working with a new contact, dealing with new technology, etc., take the extra time to ensure that legacy clients are comfortable with the change.

• Don’t take on any client just for the sake of adding a client. “Keep a close eye on client yield management,” says Finadium’s Galper, meaning that the revenues from the client need to be worth the effort to have the client, similar to the way prime brokers are reexamining the relationships they want to have.

• Don’t stretch resources without ensuring it won’t affect service. Turnover can frustrate a client who ends up having their contact change, and when custodians’ stretch their resources, the effect on client service can be obvious. According to one pension fund speaking about their custodian: “It does seem like they’re a little bit more stretched on their end, and obviously we want them to be happy where they are and be sure there’s sufficient resources on their end so that the morale remains high there.”

• Don’t offer more unbundling. Instead, help clients understand the costs better. “People are not ready for unbundling but they are ready to have a conversation about the risk you take on,” says Scott.

• Don’t ignore T2S. It may seem like it’s all happening behind the scenes, but in order to gain the full benefits of the platform, take action. “Aside from settlement, T2S comes with a range of features in each market that banks and brokers, working with their custodians, should be taking full advantage of; don’t let this opportunity pass you by,” says Alan Cameron, head of relationship management, banks and brokers, at BNP Paribas Securities Services.

• Don’t let performance measurement slip away from you. The data sits with you. Don’t let another third party provide performance measurement instead of you. “I think where most custodians fall down on performance reporting is when a number is super out of whack, they don’t have the expertise to say why it’s out of whack,” says one asset owner. If that’s true, find a way to hire or partner with the right expertise so you can truly offer a value-added service.