Custodians face requests to move closer to the front-office for ETF innovation support 

In day two of Global Custodian’s Leaders in Custody Week, industry experts explained how ETF servicers are filling an important role to facilitate innovation. 

By Joe Parsons

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Custodians and fund administrators are increasingly being asked by asset managers to have greater involvement in the front-office, as more firms look to expand into the exchange traded fund (ETF) market and explore new product structures.  

Assets under management in ETFs have surged to nearly $9 trillion, as of the end of April 2021, following a dramatic rise in popularity in new innovative products focusing on everything from ESG to Bitcoin.   

A growing number of asset managers are also converting mutual funds into actively managed ETFs, while interest in non-transparent ETFs has taken off following their introduction last year. 

In day two of Global Custodian’s Leaders in Custody Week, industry experts explained how ETF servicers – including fund administrators and custodians – are filling an important role in consulting and educating asset managers to migrate and launch these products, in addition to their traditional back-office functions.  

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“If it is for an existing ETF issuer or a new institution looking to get into this space, they need guidance around how they can optimise their front-to-back-office model,” said Jeff McCarthy, global segment head, ETFs, BNY Mellon.  

“What we will engage in is being that consultant to understand all of the impacts if you launch an ETF and the differences involved on the capital markets side, and building that infrastructure is what we identify is one of the most important things a traditional asset manager needs a plan around.” 

Custodians and fund administrators have become increasingly vital for new entrants to the space as they educate them on the key differences between a mutual fund and an ETF.  

As innovation in the ETF industry continues to accelerate, panellists agreed asset managers are increasingly relying on their providers to support their capital markets desks, to respond to both regulatory and market structure changes, and how they can manage their ETFs alongside their mutual fund ranges. 

“We see it as a partnership with our custodian and fund administrator, in the same way we see a partnership with our index providers,” highlighted Juergen Blumberg, head of ETF product and capital markets, EMEA, Goldman Sachs Asset Management.  

“There is so much innovation in the ETF space, and the industry is still not on the same standard, there is a lot of room to out-perform if you design a process that can serve parts of the ecosystem better, and how they can lower the trading costs as much as possible. There are a lot of things to do differently and gain an advantage.” 

Furthermore, for those firms that are expanding into new structures such as active and semi-transparent ETFs, service providers face new technology challenges to co-develop an operating model alongside their asset manager clients.  

“What we are doing long in advance of these products being approved is making sure that we are prepared to support them, have a workflow established and an operating model in place so as soon as they are approved, and that our clients are able to launch them seamlessly,” added Peggy Vena, director, ETF product development, Citi.  

“This involves a lot of testing. For example, we will run the fund behind the scenes as if it was live such as testing the NAV [net asset value] and the creation/redemption order process in a test environment. 

“What we are looking to do is the heavy lifting for them and making it a normalised experience, enabling them to run the ETF alongside their existing funds without a major technology lift.”