An expanding network

Andrew Osborne

The concept of network management was based on sorting out problems at the operating level to one that focused on service, quality, and the risk of sub-custodians. This concept of managing risk is what got Andrew Osborne interested

Andrew Osborne started in the custody industry in London in 1977 when it was, he says, an art, rather than a science. “The ability to get a trade settled in Japan was something extraordinary,” he recalls. “There was no technology. Communication with the few custodians we worked with was by telex.”

ERISA was the major catalyst in the development of the global custody industry. It drove the diversification of U.S. pension fund investment into the global markets.

‘The growth in the investment appetite certainly outstripped the skill sets and the knowledge available in the industry and we were all learning at a massive pace,” he says.

The rapid growth of foreign investment into the global markets challenged the local infrastructures, which struggled to cope with the influx of investment activity, creating a number of issues. For example, Central Securities Depositories (CSDs) were in short supply and archaic settlement periods created operational inefficiencies. “In the early to mid-1980s many markets exhibited high levels of stress. The two best remembered were the Italian and Spanish markets which had a period where you couldn’t get any trades settled or accrued benefits collected. It took years to unravel the aftermath of that and it was these issues that generated the G30 recommendations that set in place the momentum to create the modernized markets we are working with today,” says Osborne.

There were more sub-custodians in each market than you could shake a stick at, he recalls.

A landmark development was the installation of 17F5 into the Investment Company Act in the US in 1984. For the first time, this dealt with the quality of the sub-custodian – a $200million net worth for any non-US sub-custodian that explicitly safe kept assets for a U.S. mutual fund. It also dealt with, among other things, making sure assets were segregated safely and the soundness of those assets. “Before 17F5, if there was no local office of a US bank offering sub-custody services in a given market, assets of US mutual funds would have to be held at the branch of the global custodian. In the early 1980s we actually held for a period of time in our vaults at Chase London, physical, bearer shares in French and German companies in which our US mutual fund clients were invested. Trying to maintain and asset service them was one of the more interesting operational challenges of that period.” Chase, where Osborne worked at the time, managed to get a release from the regulations that preceded 17F5.

Then, in the mid-1980s the emerging markets began to grow. Osborne was working in the New York office of Chase when his manager said to him that a prospective client wanted to invest in a range of emerging markets, including Argentina, Chile and Brazil. “At the time it seemed surreal that we had an investor looking to explore those markets, looking to us to appoint sub-custodians and manage the risks. While that is business as usual today, back then it was truly groundbreaking. And that was the start of my interest in network management and managing risk in the local markets. There was rapid growth in the demand for market coverage and dedicated expertise on local market conditions to assist clients in making balanced decisions.”

“We had to look at a huge amount of risks that occurred in the operating environment. It was really the start of investors going international on a wide-scale basis. The growth of these investors into emerging markets was when the industry realized we really had to get under the skin of these markets and how they work. The network management function was truly born.”

Today Osborne describes network management as one of the most fascinating jobs in the industry. “The range of issues you manage today are different and constantly changing – no two days are the same,” he says. “However, the key thing that was always apparent to me in network management is that its primary role is to ensure that the global custodian can fulfill its fiduciary obligations, a philosophy that was not always recognized in the early days.

“When network management first started it was heavily oriented towards resolving errors and problems that accumulated at the operating level due to the historical lack of standards in the management of sub-custodian service, quality and risk. However, for some of us, the fundamental fiduciary obligations became paramount and the safety and soundness of client assets is a philosophy that Northern Trust shared. In our governance structure, risk and client safety were important for me.”

That paid off in September 2008 when the global markets wanted to know where investors’ assets were post–Lehman. Northern Trust could point to the strict governance and processes around its network management function to demonstrate that sub-custodians kept assets safe and sound.

Today, the significance of network management is in the value it brings to the industry, says Osborne. “We expect that investors will continue to expand their footprint and regulatory development will continue to evolve. We may also see a reduction in the number of intermediaries in the custody chain. Focus on enhancing safety and soundness for client assets will remain the order of the day, and this will lead to more direct participation in markets, via more account operator models. In the long term, this will become the exception rather than the norm.”

“Since my first day in this industry the pace of change was extraordinary, and that continues unabated. It is an exciting and dynamic business, and one I am pleased to be a part of.”