The winter issue of Global Custodian might just be my favourite to put together. It’s an opportunity to examine the year we’ve had and set the agenda as we see it for the 12 months ahead. It’s also a reminder that unless you go bold – and I mean really bold – with your predictions, you’re unlikely to hit on an exact event and be able to claim amazing foresight.
Take 2021 for example, in what very much felt like a sequel to one of the most monumental years this side of the millennium for most of the world, nobody could have predicted the headlines for the securities services market: retail platform Robinhood drags settlement cycles into the mainstream and argues against T+2 in Congress, State Street buys BBH’s Investor Services unit and incumbent custodians dive headfirst into the digital asset world with takes on non-fungible tokens (NFTs), Web 3.0 and crypto custody.
Perhaps the last of these could have been prophesied without too much imagination, but mark my words, this trend is exploding before our eyes. Our year at Global Custodian has been bookended with a story on the launch of Standard Chartered and Northern Trust’s Zodia in January and a chat about Web 3.0 with BNY Mellon in December. We talked NFTs with Citi in the summer, DeFi with the world’s biggest central securities depositories (CSDs) during Fall and awarded initiatives between established providers like State Street and their crypto partners in winter.
In 2021, things are going to move even faster. Digital Asset has followed up its work with exchanges in Asia Pacific with projects alongside Goldman Sachs and Deutsche Börse and tells me they have over 100 more projects in the pipeline. Institutional managers – not just hedge funds, but traditional asset managers – are finalising their playbook with their custodians to enter this space, so expect a banner year for this space when it comes to tokenisation and digital asset launches.
As for what else to expect, conversations around ESG, settlement cycles, data, cloud, front-to-back, FinTech partnerships, digitalisation will rumble on. Within regulation you can expect some drama right off the bat with the introduction of the Settlement Discipline Regime (SDR) in February in Europe, while the US is eyeing up securities finance regulations and its stance on ESG. Uncleared margin rules in September 2022 will be a big deal and forewarnings of shocks for those underprepared buy-siders will continue until the time of implementation. On the topic of SDR, we can expect another quick update to start the year on the future of buy-ins as we estimate a long delay (let’s put the over/under at three years) followed by a scale back in the years to come.
As for the unexpected, don’t be surprised by some further big M&A activity between global custodians, sub-custodians and CSDs as the players with their chequebooks open are hardly being coy on their intentions. Euronext said lately it would consider acquiring Euroclear, while some of the biggest fund administrators are not shy in forking out for multi-billion-dollar deals. It will be no surprise to see some of the big independent fund administrators get even bigger, but by the end of 2022 keep an eye on just how sizable the amount of assets the likes of SS&C and Apex Group will be sitting on and how we view those organisations in the grand scheme of financial services.
Also in the fund services space, keep an eye on the prime brokerage landscape – partly following Archegos – and the emergence of new players and resurgence of others, as there might be some opportunity to capture some of Credit Suisse’s former clients in this area.
On the network management side, as cost-effective as virtual due diligence has been – aided by the AFME questionnaire – we believe network managers will be making a strong case for resumption of on-site visits as soon as the threat from Omicron (or Pi or Rho or Sigma) has sufficiently diminished.
In the ETF space, expect another announcement from BlackRock in the near future on how it is splitting the custody and administration between service providers for its Irish ETF assets, in what we would imagine to be another big story after it did the same with its US-domiciled ones. The previous split saw $2 trillion diversified from State Street as the assets were spread among the Boston-based custodian, BNY Mellon, JP Morgan and Citi, with the latter winning the lion’s share.
Next year will very much feel like a continuation of the COVID era themes – part three – as ESG becomes embedded into the financial industry and we reach the tipping point on digital assets and digitalisation. For me, the themes prior to the start of this decade have run their course and we’re slowly transitioning to an industry that is almost unrecognisable to the one which spent countless years grappling with post-financial crisis regulations.
After all, take a look at the headwinds the securities industry is facing; to avoid them will require evasive action, and the biggest players who want to remain in the business seem ready to act. Everything, and everyone is in play, and nothing is off the table.