Editors letter: Clearing out the summer notebook

It’s ‘quiet season’ in the industry, which gives us pause to reflect on some off-piste themes going on in the asset servicing space. Plus some suggested reading.

We don’t use the term ‘quiet season’ on the editorial desk here at Global Custodian. That period of the year was replaced many years ago with the production of a behemoth of a fund service annual – which we publish every August – which usually weighs in at somewhere around 132 pages. 

So right now we are interviewing prime brokers, fund administrators and outsourced trading providers along with conducting analysis of our survey results on all those sectors.  

Traditionally, the news updates at this time of the year are restricted to regulatory and enforcements, as the big people moves and launches usually occur post-summer break, and – this year especially – around the time of Sibos. 

But last week I was having a chat with a prominent industry association about the current themes of the industry and how the space might change in the coming years – and it got me thinking.  

There are ‘themes’ and then there are ‘themes’. Perhaps that sounds better when said aloud, but sessions at Sibos and other industry conferences are rightly steered towards some long-term aspirational stuff, while tackling current issues like T+1. The conversations we have behind the scenes are rarely about these topics, so here are a few themes at the top of my mind as we hit the ‘quiet season’ for news announcements.  

State Street hits the headlines for ‘ETF dominance’…which seems to be a bit of a storm in a teacup 

It must be quiet season for the FT as well! The publication ran a story on whether State Street’s back-office ETF dominance was a concern (which kind of struck me as a backhanded compliment) which was also picked up by another ETF publication a couple of weeks later.  

This is an angle you could apply to any firm in pole position in any sector; of course if something went wrong with the most prominent provider, it would cause a disruption – the same is often said about AWS or any major cloud providers. But I feel like one opinion does not make a story here. State Street has built up quite a business in this space and – yes it was probably looking to bolster even further through the BBH deal – but investments have been made in its offering and it’s obviously dominant for a reason. Plus – just so I’m not coming across as flying the flag for State Street here – there are plenty of providers in the market – just read our ETF administration survey to discover more. 

File under: nothing to see here. 

Citi takes an interest in SGSS according to Bloomberg story  

It’s worth reading the story here as I don’t have anything to add from a development perspective at this point, but this didn’t surprise me to see. On the one hand, I had an interesting recent discussion with Societe Generale Securities Services about its transformation journey – which it sees being complete at the end of this year – and some milestones it’s hitting in sectors like private markets servicing, but on the other, we did allude some time ago that the unit was in a bit of a unique place in the service provider landscape – possibly a crossroads, if you will. After some strategic exits, SGSS was essentially cornered into selling its Russia securities services unit which had been a good business for it previously. 

It’s a tough business to be in for all custodians, but full regional coverage, scale and technology enhancements are so essential that full commitment and significant investment are needed.  

In Europe, Soc Gen has been leapfrogged by CACEIS in terms of assets under custody and administration, while BNP Paribas is in a whole other league. Outside of that you either have the very large players or the domestic only, with the number of the latter dwindling with each passing year. 

Deutsche Bank was probably once in a similar situation but has spent the last few years rebuilding and injecting life into its custody franchise – showing that when you’re in a situation where you’re assessing the future of the business you go into fight or flight. 

SGSS continues to win mandates, build up its AUC/A and post good revenues (though it did receive a bump over the past few quarters from its Euroclear stake) but there’s no doubt it’s been a trying few years for the business – which one network manager once described to me as “a patchwork of odd markets.” 

As for Citi, the custodian has swept up clients from Nordea in the Nordics and RBC in Australia in recent years, while NAB Asset Servicing is also said to be recommending clients to the bank. 

File under: keep an eye on. 

The SEC custody rule is edging nearer and we don’t have any further clarity 

I’ve spent a huge chunk of time discussing the SEC custody rule with some of the largest players in the US custody world this summer and wow is this a big deal! We have written about this before, but the cash segregation requirement is being seen as an absolute non-starter, which could have catastrophic consequences to some asset servicers.  

Client cash is held on the balance sheet of custodians, generally in an omnibus account, and is used for a variety of redeployment purposes, supporting intraday liquidity, foreign exchange and settlement purposes. It’s a longstanding practice which benefits custodians and clients alike and taking it away would require clients to have to prefund trades as liquidity would not be available during the day.  

Under the proposal, custodians might have to park cash with each other to segregate and lose the ability to earn essential interest which supports this low margin business and allows them to offer the low fees they currently support. While it may seem partially self-serving, let’s not forget the significant investment and scale needed for custodians just to survive – despite being such a critical function in the capital markets.  

We could be getting an update on this as early as Q3. 

File under: panic stations. 

Custodians are going all-in on outsourced trading 

State Street, Northern Trust and BNY Mellon are really backing themselves in the outsourced trading world, a space which has been dominated traditionally by prime brokers and independent specialists. It makes for an intriguing new battleground in the future as custodians look to add the front-office to their middle and back offerings.  

State Street announced earlier this year that it was set to acquire CF Global to boost its offering and it wouldn’t come as a surprise to see other trust banks eyeing some of the independent providers in the future. We’re currently analysing our inaugural outsourced trading survey results which saw over 200 responses from asset managers, hedge funds and asset owners and we have discovered that this is a fast-growing space with the largest custodians representing one of the biggest talking points when it comes to service provision. 

File under: One to watch. 

T+1: Testing, testing. 1,2,3 

We are moving into the next phase of T+1 preparation, both literally (in terms of testing) and metaphorically (in terms of ‘the time for complaining is over’). Our T+1 Industry Issues Forum is building up with queries – which we will be answering through upcoming webinars and a dedicated digital handbook – and many are in relation to FX, ETFs and pre-funding. Very specific questions and concerns are out there and these need to be answered in the coming months.  

The message about manual processes keeps popping up again and again, for good reason, while experts are encouraging participants to partake in testing in order to reveal the cracks and discover what work still needs to be done, and which processes need updating. 

File under: This isn’t going away, take action! 

Opinion season! 

While news may be slow, opinions are not. This summer we’ve seen some great opinion pieces posted on Global Custodian. Here is some recommended reading: 

A token gesture? By Virginie O’Shea, founder and CEO of Firebrand Research 

What can funds expect as capital markets move to T+1? By Ross Fox, managing director and head of UK and Europe at Calastone 

Is India an emerging or advanced market? By Viraj Kulkarni, founder and CEO, Pivot Management Consultancy 

The settlement efficiency imperative. By Daniel Carpenter, CEO of Meritsoft (a Cognizant company). 

Generative AI in custody and clearing – empowering competitive advantage. By William (Bill) Capuzzi, chief executive Officer at Apex 

The road to automation is fraught with difficulties. By John Gubert