Inside the biggest custody deal of all time

Global Custodian digs deep into the $1 trillion agreement between BlackRock and its new custodian JP Morgan, a landmark deal with far-reaching impacts beyond the eye-catching numerical headline.
By Joe Parsons & Jonathan Watkins
ONE TRILLION DOLLARS. We rarely speak about sums of money in trillions; perhaps only when highlighting the level of US debt, the notional value of the derivatives market or quoting Dr Evil as he holds the world to ransom.

But now the largest custody deal of all time has seen BlackRock transition $1 trillion of assets under management from State Street to JP Morgan for custody and fund services, a move that has shaken up the custodian stratosphere.

The landmark deal even had the respective big-name CEOs of these financial giants – JP Morgan’s Jamie Dimon and BlackRock’s Larry Fink – involved in the agreement, Global Custodian understands.

Sources explained that the deal had been a long-time in the making, and that following BlackRock’s due diligence evaluation of custodians, JP Morgan came out on top, in a bid to diversify from solely using State Street.

When it comes to the top tier quartet of global custodians – JPM, Citi, State Street and BNY Mellon – these multi-billion and trillions deals can see them leap frog each other in a Game of Thrones-style battle for the iron throne. Here’s how the four shaped up as of 31 December 2016 in the assets under custody league table.

BNY Mellon – $30.5 trillion
State Street – $28.7 trillion
JP Morgan – $20.5 trillion
Citi – $15.1 trillion

The BlackRock deal will see JP Morgan gain ground on State Street, but not overtake it. However, the custodian has been investing in its custody and fund services businesses in recent years through technology, infrastructure and personnel. Daniel Pinto, CEO of JP Morgan’s Corporate & Investment Bank called the deal a “validation of the investments” JPM had made.

Whatever the future, a big bonus is on its way to whoever initiated this agreement. Here’s everything you need to know on the trillion-dollar megadeal, including how it came about and what it means for JP Morgan and State Street.

What’s the deal?

JP Morgan will provide custody and fund services for over $1 trillion of BlackRock’s clients’ assets moving the assets away from Boston-based State Street.

The assets will be largely common trust funds, with State Street continuing to provide services for BlackRock’s ETFs business, iShares.

It is believed that JP Morgan will onboard the assets over the next 18 months.

Why did it happen?

The main reason behind the BlackRock-JPM deal was said to be diversification, according to State Street’s CEO Joseph Hooley, but some industry experts have dismissed this as the principal motive.

“I believe that diversification was not the primary reason for the move,” said Michael Barrett, global head of collateral managements services and solutions at Genpact Capital Markets. “My guess is that BlackRock has negotiated a very good deal with JPMC which – as the media has reported – will reduce the overall costs to the BlackRock funds and improve their performance.

“In addition, JPMC is a top provider of global collateral management services, and the new rules around the uncleared swaps for margin movements is challenging for a firm like BR. JPMC is positioned very well to help them meet the operational requirements of moving collateral and meeting margin in an sharply increased call environment.”

Another theory from one industry expert is that the move could be regulatory driven, with authorities keen on contingency providers.

Either way this major deal was said to be a long-time in the making and considering the work that will go into the transaction, in all likelihood a combination of diversification, costs and efficiencies were behind the move.

“With people like State Street and now also JPM in the saddle, investors can be relaxed on custodian risk and quality,” said John Gubert, former head of HSBC Securities Services.

Has a deal like this ever taken place before?

Ironically, the last time a deal of this magnitude took place in the custody world, JP Morgan was on the receiving end of the sucker punch, when Norges Bank Investment Management – manager of Norway’s $866 billion sovereign wealth fund – axed the custodian in favour for Citi.What does this mean for JP Morgan?

Aside from the custody fees that JP Morgan will earn from BlackRock, the deal will allow the bank to greatly integrate with BlackRock’s Aladdin, one of the industry’s most used risk and portfolio management systems.

Last year JPM CIB chief Pinto, said how the bank was integrating with Aladdin to enable it to link up directly to its other custody clients connected to the platform (see

The custody agreement is the latest step for JP Morgan as it becomes further integrated with the workflow of its largest clients.

“By partnering with their Aladdin system, JP Morgan becomes part of the BlackRock ecosystem, where there is no longer a clear diasctintion between front, middle and back-offices, but a seamless end-to-end optimisation of the trade flow,” said Jessica Hynes, senior associate head of custody consulting, UK, Europe and Middle East, Mercer Sentinel.

The deal also validates the bank’s investment into its custody and fund services business over the years. JP Morgan has looked to boost its offering in the data management and exchange traded fund (ETF) space to meet with the growing trend of passive investment strategies.

While BlackRock’s ETF business, iShares, remains with State Street, this could be the next chunk of business that may transition to JP Morgan.

What does this mean for State Street?

State Street is still sitting pretty in second spot in the custodian league tables and are also still responsible for providing custody services for BlackRock’s remaining assets under custody – most of which is in its ETFs business.

Despite the decision by BlackRock, State Street still boasts high profile clients including the likes of Pimco and Allianz Global Investors, and even expanded its deal with the latter on the day the JP Morgan news broke.

A research note from Fitch shortly after the news stated that following the BlackRock announcement “this event could potentially place greater pressure on State Street’s AUC (assets under custody) and prompt State Street to reduce prices to maintain volume.”

While JP Morgan has been heralded for its technology advancements and investment into its custody and fund businesses, State Street has also emerged as an innovative leader in this space, making for an interesting duel between the two banks for second spot.

Will this spark a trend among the biggest asset managers to diversify?

Probably not. The world’s largest asset managers tend to pick a custodian that is well suited to their business and stick with them.

“The overwhelming trend in the industry is to consolidate with fewer providers. For reasons of cost, it's more expensive for an asset manger to deal with multiple counter parties,” said Jay Hooley, CEO of State Street, shortly after the agreement was announced.