How BlackRock could shake up the ETF custody landscape 

BlackRock's decision to diversify service providers for its massive $2 trillion iShares portfolio could have major ramifications on the custody and ETF servicing world.

BlackRock holds so much weight in the financial services industry that any landmark decision it makes can cause a seismic impact. This makes it part of a very exclusive group of organisations with such headline-grabbing power.  

In terms of the global custody landscape, the decision to transition from using State Street as its only service provider for its $2 trillion iShares portfolio to a multi-custodian model cannot be understated and starts a battle among rivals for the coveted assets.   

Over the years, BlackRock has emerged as a buy-side behemoth, and its flagship exchange traded fund (ETF) and index product range – iShares – has dominated the passive management scene. Therefore, whichever decision BlackRock makes as to who will hold these assets is going to have major ramifications on the custody world. 

BlackRock stated this week that it holds a fiduciary responsibility to mitigate risks that could be associated with holding such a vast portfolio of assets with a single custodian. “We must continue to take steps to mitigate potential operating risks and support the growth of the iShares business by seeking out partners to help us execute on our commitments,” the firm said in a memo. 

But should we be surprised by BlackRock’s announcement? After all, in 2017 the firm made the monumental decision to move $1 trillion of assets – largely common trust funds – from State Street to JP Morgan in the largest ever custody deal awarded to a single bank. 

Contrary to what Jay Hooley, State Street’s former CEO and chairman said at the time, this was not a “one-off adjustment to diversify” by BlackRock.  

For the very largest asset managers, the motive behind spreading the operating risk of safeguarding their assets across multiple providers is abundantly clear.   

“Moving away from a single service provider model to multiple ones is a prudent approach to managing the risks from being overly reliant on one asset servicing partner. The added benefit of course is being able to easily compare and benchmark service levels, performance, rates and fees etc. This model already exists in clearing services and asset management, so why not for asset servicing/custody,” said Naresh Subramaniam, who leads the investment advisory team for PwC in Australia.   

But BlackRock’s decision could also spell major implications for State Street’s assets under custody (AUC) and its position in the ETF servicing market.  

As of March 2020, State Street provides custody and fund administration services to 70% of the US ETF market, and the $2 trillion iShares portfolio represents approximately 6% of its total AUC.  

Obviously, State Street will still have a hold on the ETF market as it services not only its own range of ETFs, but that of Vanguard, Invesco and other high-profile buy-side firms.  

But other global custodians – including BNY Mellon, Citi and JP Morgan – have made concerted efforts to build their ETF servicing arsenal, and this decision by BlackRock to use a range of service providers spells the perfect time for them to capitalise. 

The good news for State Street is that they will maintain business from BlackRock and the Boston- based custodian is still seen as a long-term partner for the world’s largest asset manager. Furthermore, this process by BlackRock to select new custodians is a multi-year project, so any impacts it may have will not be felt immediately.  

What the US bank might have to do in preparation for that time is further solidify relationships with its other large asset manager and asset owner clients, and continue to make itself relevant to all parts of the buy-side firm through its other front-to-back office initiatives.   

As for the rest of the ETF service providers, the race is on for those prized assets, and a lucrative reward awaits the winner.