In the last two decades, one thing that has not been in short supply for the investment industry is cash. Persistent low interest rates have created conditions whereby the biggest borrowers can borrow for virtually nothing and depositing cash in developed market currencies has yielded non-existent or even negative returns. The lack of scarcity of cash for the biggest players has indeed brought its price near zero.
However, while returns to be gained from cash deposits and overnights are minimal, investment managers and their technical platforms have become far more savvy and demanding in their handling of cash and cash-relevant information intraday. Though custodians remain firmly in the settlement space, providing—among many other services—the previous day’s cash balances and activity, managers have sought to integrate this information in a more dynamic, intraday framework. Order management systems no longer spend the business day cast adrift from account activity as reflected at the bank.
Although single-market, long-only funds still exist, the search for yield has driven clients and managers into a multi-asset mindset. Investment managers have needed to be ready with front-office expertise in all instrument classes and prepared to support more complex instruments’ lifecycles. For this, visibility on intraday cash is essential. Although there may not be a lot of changes to the products and services provided by a custodian to an investment manager, there are notable drivers that may change the type of support required:
- Dynamic maintenance of front-office cash and positions- Many front-office platforms incorporate dynamic cash and positions that are not flushed and filled overnight by accounting systems. This requires the front-office platform to be reconciled as an accounting system would. It is no longer good enough for the front-office to know the custodian’s balance each day, rather, order management systems now integrate custody, middle-office and back-office components to enhance the front-office experience.
- Managed balances in all currencies – Reconciled information on what is happening within cash and stock accounts intraday has put additional knowledge—and thus responsibility—in the hands of the front-office. Best-of-breed order management systems are built to assume that transactions occur in the security currency rather than the portfolio currency, because there is far more efficiency to be gained in the persistence of transaction and security attributes throughout the workflow than value from providing choices on these attributes at various stages during that workflow. The notion that non-portfolio currency activity needs to remain invisible to the front-office through custodian “sweeps” no longer coincides with the multi-instrument, multi-currency universe of today’s investment products.
- Variety in account “traffic” – Although custodians may not be involved in facilitating most transactions in the alternative, private and OTC markets, these markets are a major hub of activity that is no longer restricted to specialised buy-side firms. The origins of transfers to and from custodian accounts will continue to broaden in scope, including profit and loss from OTC derivative life cycles, liability-driven investments, insurance linked products, private debt, private equity, infrastructure investments and an ever-expanding range of instruments. Custodians’ knowledge of the characteristics of these products and their clients’ activity in this space will help to smooth daily processes as investments become more varied and portfolio strategies more customised.
As technology and investments become more sophisticated, the investment management industry would be well-served by custodians prepared to support clients and managers that will not stop searching for excess returns in a world where cash remains plentiful, but markets remain volatile.