The transition management (TM) industry will continue be a challenging business for custodians due to decreasing margins, according to industry participants.
State Street revealed earlier this month it would cease its TM operations in London and Hong Kong due to a fall in demand for the services.
Citi and Northern Trust remain the other major custodians still in the business, while State Street is also retaining its business in Boston, Sydney and Singapore.
Industry experts explained to Global Custodian how tight margins within the industry may be forcing providers out of the market.
“Transition management margins continue to compress. One of the reasons we have seen a number of providers exiting the industry is because as in any other business, management have to consider the costs of running a business versus the revenues,” said Artour Samsonov, head of transition management for EMEA at Citi.
“So now transition managers need to have scale or cost-efficient access to the market.”
Custodians viewed TM as an area of growth in the early 2000s, but recent years has seen a major reshuffle among service providers. In 2013, Credit Suisse and JP Morgan both exited the business, only to be followed a year later by BNY Mellon.
Such exits have led to a smaller number of TM providers who also offer other custody and fund services which industry participants claim will impact on clients at the end of the value chain.
“The decreasing number of TM providers is pushing clients to consolidate their business among the remaining transition managers. The client potentially may see impact not in pricing but in a decline in the quality of service and concentration risk,” said Samsonov.
Ben Jenkins, global head of transition management at Northern Trust, explains how the State Street move may exacerbate issues clients currently face with a limited number of providers.
“In the same way you have an exit in any business, there are going to be participants that no longer have the solutions they had yesterday,” he said.
“This is a particular consideration for TM clients because it’s very much a relationship business between clients and providers so both parties need to be comfortable with who they are using as transition managers,” said Jenkins. In spite of issues concerning margins, TM services provided by custodians are well regarded according to results from GC and CIO’s 2016 transition management survey.
In the survey State Street achieved a global client satisfaction score of 4.85 which ranked second among providers to Macquarie. Citi ranked fifth with a score of 4.42 (very good) respectively.
Samsonov suggests that despite facing issues the TM business can be viable for providers who are a smaller part of a larger business.
“CitiTM is in a strong position as we are a part of the Citi Markets franchise because as a broker-dealer provider, Citi owns its own execution network and has direct access to the market which lowers the cost of access,” added Samsonov.
“CitiTM is also part of a multi-asset solutions business so we are credited with the benefit we bring to the whole of Citi’s franchise rather than an individual product group.”
Citi’s approach is having the desired effect achieving good scores in client satisfaction in the US and APAC regions particularly during GC’s survey.
In spite of challenging times for custodians in the TM industry, Jenkins suggests that industry may become more complex and that a balance between TM’s traditional space as a people-based business and technology developments will be crucial.
“In 10 years at Northern Trust we’ve seen the number of TM transactions decrease by 40% but at the same time you’re seeing the market value increase by the same level. This means we’re seeing clients conducting more complex transactions and they are centralising them.
“Also, although this is definitely a people–based business, analytics matter and technology matters. So it is a balancing act between people and technology and deeper analytics is where the industry is going,” said Jenkins.