Network managers rethink playbook for switching sub-custody providers

Network managers are having to re-write their processes when selecting a new sub-custodian in a post-COVID operating world.

By Joe Parsons

Playbooks that were once used by network managers to enter new markets or switch sub-custodians are no longer suitable for their current operating environment, and many are adopting new strategies.

Speaking at the Network Forum’s Annual General Meeting, an increasing number of network managers said they have been reviewing the sub-custodians they use for certain markets.

At the top of their enquiries is how committed local providers are to running a long-term custody service. This has been exacerbated by the exit of Nordea from the Nordic sub-custody business in February last year, agreeing with Citi to recommend existing clients to appoint the US bank as their replacement provider.

“Some organisations are exiting sub-custody in certain markets or regions as they retrench around their core markets and services,” said Simon Goodman, global head of securities network management, JP Morgan.

For local and regional providers, they have had to make tough choices about their securities services business in the face of increased costs from regulation, such as the Central Securities Depository Regulation, while updates from market infrastructures has required banks to make significant updates to their systems.

Against this backdrop of consolidating providers, in combination with rising costs and an increased need for operational efficiencies, network managers are having to re-write their processes when selecting a new sub-custodian.

“We have gone through a tremendous amount of change with the custodians and cash banks we use over the past year. We have learned that every transition is different, and because we haven’t made many in a number of years, our organisation needed to modify our previous conversion playbooks. It needs to be a living, breathing plan that you are willing to adjust and evolve going forward,” explained Michael Perkins, head of the direct access model service team, State Street.

Earlier this year, State Street ended its long-standing sub-custodian relationship with Deutsche Bank across a dozen markets. According to sources, this was decision was based on fees and a perception that Deutsche Bank was not as committed to the sub-custody business as State Street would like them to be.

RBC Investor and Treasury Services (RBC I&TS) has also undergone major changes to its network. Over the past 18 months, the Canadian custodian has reduced its providers from 23 to 11, transitioning $3.5 trillion in assets across 88 markets as part of an initiative it calls Network 2.0.

During this period, RBC I&TS also had to revisit its playbook to meet the current operational challenges in a post-COVID world.

“Under our Network 2.0 programme, we have moved half of our network to new providers over 18 months. When we carried this out, we realised how we previously went about this was out of date, but after completing the first few, this became easier. We have been preparing to transition our Nordic business in the summer,” said Emma Newman-Osborne, senior network manager, RBC I&TS.

“Whilst the pandemic has not made things easy, we have been able to evolve our approach to not only be more up-to-date with the current operating environment but ensure deeper relationships with our sub-custodian partners.”

However, deciding to switch providers is no easy undertaking. When launching a request for proposal (RFP), panellists highlighted that network managers must be ready to switch providers and be prepared to take on all the work that goes with it.

“There is a huge amount of effort that goes into an RFP on both sides, so it is important to gain a consensus of all stakeholders involved prior to reviewing a market. There is no point reviewing a market if your firm has no intention or the ability to support a move,” commented Sharon Hunt, global head of network management, Deutsche Bank.

“Migrations can be extremely costly and when transaction volumes are high an element of risk. Those providers that can assist with the transition ensuring it is seem less can be a differentiator when selecting a new provider.”

Going forward, network managers believe the RFP process will centre around how sub-custodians can not only guarantee asset safety, but their long-term plans for that market and how they plan to invest in technology that will sustain the business.

State Street’s Perkins added that being able to meet deadlines and the account opening process is one of things most important to them when selecting a sub-custodian and can help providers differentiate themselves. In addition, JP Morgan’s Goodman said they will look to partners that will improve how they service their own global custody clients.

“Clients look to us to engage sub custodians who can contribute to an overall improved operating model at an efficient cost, provide quality and timely market intelligence and be strong / influential voices for advocating for the foreign investor,” said Goodman.