Highlighting the big US securities services talking points on 4 July

Though most of our US audience will be offline today, our managing editor took this opportunity to look at some of the biggest trends we’re seeing in the US custody and fund services space right now.

When I had just graduated from university, I spent a summer working at a camp for kids in a very remote location in Pennsylvania – a stone’s throw away from New York state – and my 4 July experience was quite memorable, for more reasons than just the fireworks. 

There was a group of around 20 ‘Brits’ working at the camp – in stark comparison to 300+ American workers and children – and on 4 July we were invited to stand on our chairs and sing our national anthem at lunchtime in the cafeteria. Obviously, our voices didn’t carry very well being situated on different tables around the room – which turns out was the point of the entire exercise as the camp director then invited the rest of the cafeteria to sing the United States national anthem and ‘show us how it’s done’. The delivery was impressive and full of passion, and as the only Independence Day I’ve spent in the US it gave me a great insight into what the day was all about and how much in means to Americans. 

Anyway, the point of the telling this story is that US readers account for about half of Global Custodian’s global readership and when it comes to comparisons with any other country around the world, they are very much that ‘majority in the cafeteria’. However, when it comes to news and analysis, the fragmented nature of Europe and Asia means that there are often more developments coming out of those regions than in the US – so they tend to dominate our coverage. 

So on 4 July, we thought we’d take a look at some of the current talking points in the US, despite the fact that most of our American-based readers are on leave today (the irony isn’t lost on us there). 

Worries about the SEC custody rule 

Though just at the proposal stage, the industry is very, very concerned about amendments tabled by the Securities and Exchange Commission (SEC) to the existing custody rule which is enhancing the scope of assets. 

The proposal, which goes beyond traditional funds and securities to all client assets, would add burdensome responsibilities to custodians, lead to a change in relationships and contractual agreements between multiple parties, and ultimately –  according to associations – fail to realise the benefits the SEC believes it is bringing.  

This rule is being brought up increasingly in our meetings at present and while in one corner you will have serious pushback from associations, custodians and registered investment advisers, in the other corner you have a very determined Commissioner in Gary Gensler who is not afraid to upset the apple cart.  

The US shift T+1 has become a global problem 

Despite it being a US transition, most of the attention has been on foreign participants and how they will cope with the changes to the world’s largest equities market. Time zone difficulties, pre-funding and FX have been the headline issues around the world, as the US has taken the lead in shortening settlement cycles – which didn’t occur with T+2. But while data from the Value Exchange suggests the pain of complying with the shift to T+1 will be hardest felt in Europe and APAC – let’s not forget that US firms will still be impacted, and particularly on the buy-side where operational readiness and preparation is still a concern. 

The message from service providers is clear that there is no more room for manual processes in a T+1 world, while the big question on everyone’s minds (though it would be dangerous and foolish to rely on this) is whether the 28 May 2024 implementation date will stay as it is or move four months along, or maybe even a whole year. While we wait and see on the deadline, in the meantime, if you do have any concerns we recommend logging them in our T+1 Industry Issues Forum tracker. 

A whole new world for global custodians in 2023 

Interest rates and inflation have hit the entire world and for the biggest global custodians it means increased revenues, but new challenges when it comes to pricing and their staff. Increasing prices for clients isn’t so easy when fees have been squeezed for some years however, and beyond the macro influences, these client demands are changing how custodians operate in this new era. 

Digital transformation is required along with front-to-back capabilities, data needs and – depending on who you talk to – capabilities around servicing digital assets in the future. I mentioned in another opinion piece recently that we’re almost halfway between the old world and the new right now, but the most important thing is to have the right people driving a future-proofed strategy for these banks doubling down on technology, data and the right partnerships to deliver innovation that can’t necessarily be achieved so quickly within the bank. 

Innovation and partnerships  

There are some fantastic examples of innovation and budding fintechs springing up in the US and changing the way custodians approach technology and overcome some of the legacy burdens. But after waves of funding rounds and partnerships we are seeing some of these come to fruition and others fall by the wayside, or lead to quick break-ups.  

Some reports of rifts between major custodians and fintechs have cropped up in recent months – on other sites than ours, so we cannot confirm them – but if true, then we may be entering a new phase of ‘time to deliver’ when it comes to these partnerships. 

Digital asset regulation can’t come a moment too soon 

You might say the US is not looking like the most attractive crypto location right now, with the SEC clamping down on more retail focused crypto exchanges. Meanwhile, other countries are establishing regulations and laying down foundations to open themselves up to digital assets. Europe has taken a step in the right direction through its MiCA regulation, while the likes of Singapore, Germany and Switzerland are working on their own initiatives and laws. Following the FTX saga and recent actions taken against crypto exchanges, all eyes are now on the flurry of Bitcoin ETF applications which have been sparked by BlackRock. 

Fund services season at Global Custodian 

The fourth of July tends to mark the beginning of a five-month spotlight on fund services here at Global Custodian as we put to bed our second quarter magazine and turn attention to our Fund Services annual. This edition contains Hedge Fund and Private Equity Administration surveys along with our Prime Brokerage survey – giving us the chance to dive deep into the alternatives world and its current trends.  

Prime brokerage has had a significant reshuffle of late, but a few themes are continuing: firstly the dominance of the biggest PBs, secondly the ascension of firms moving upstream to capitalise on offboarded clients and those seeking new providers as their incumbent has exited the business and finally that this remains a burgeoning sector.  

Private markets continue to be lucrative and subsequently we continue to see consolidation in the administration sector with the big players snapping up boutique providers in this space, while new entrants continue to pour in. The assets under administration numbers seem to be rising across the board in this sector (interestingly we saw that Gen II Fund Services declared themselves the largest fund administrator by US assets recently) with the space representing a fruitful area for securities services providers.  

In our upcoming Fund Services issue we intend to dive deeper into the SEC’s private markets reporting and disclosure requirements, the evolving nature of multi-strat hedge funds and whether their needs are changing when it comes to PBs, along with the usual focus on data, tech and ESG. 

Outsourced trading 

Global Custodian is on the cusp of closing its inaugural Outsourced Trading Survey after following the breadcrumbs when it comes to industry trends and landing at the conclusion that this is becoming a big deal! A large number of the 200 responses we’ve had have come from US hedge funds and asset managers (while there were also a large number of Swiss respondents) so it’s going to be interesting to see how they view the space and their current providers. One thing that we know for sure is that this space will keep growing and the big custodians – BNY Mellon, State Street and Northern Trust – are ready to dive headfirst into this space alongside the large prime brokers and compete for clients in this rapidly growing space. 

Consolidation in custody? 

We’ve seen it in all other parts of the world, but in the US and the home of the world’s largest global custodians, the biggest players may be deterred from entering into such deals following the collapse of State Street’s proposed acquisition of BBH Investor Services last year. However, the pressures that existed at the time that deal was announced have not disappeared and it’s a tough industry to see yourself in decades down the line with scale and the ability to invest heavily in technologies – continue to watch this space. 

In conclusion

Though there are plenty more trends occurring in the US (do get in touch and let us know what’s front of mind for you right now) we thought these were some of the prominent topics across the pond (do people really say that out loud?) which we intend to continue to cover here at Global Custodian. If you’re reading this on your day off, then we thank you for your commitment to our publication, and wish you a happy fourth of July.