Northern Trust has taken a measured approach to growth and is deriving opportunities through regulatory change. Specifically, the custodian’s asset owner and asset manager client bases are converging under common impacts of those regulations, presenting it with the opportunity to do more with its existing set of capabilities.
“At the top of the list affecting all of our clients is the Alternative Investment Fund Managers Directive, which I think has taken the industry a bit by surprise, but not in the obvious way in that it is costly, expensive and all-encompassing but I don’t think people had envisaged that pension funds, for example would be impacted,” says Penelope Biggs, head of Northern Trust’s Institutional Investor Group for Europe, Middle East and Africa.
In response to the increasing impacts of AIFMD on clients, Northern Trust expanded its depositary services capabilities in The Netherlands and the UK, in addition to expanding its existing depositary capabilities in Ireland and Luxembourg. “Our Dutch Depositary services enable us to serve clients who are fiduciary managers as well as pension funds, who were inadvertently impacted by AIFMD,” says Biggs. “So as a result of this one new regulatory change we have had more new business opportunities in the Dutch market than we’ve seen in years, so we’re growing our capabilities in the market as a result of regulation.”
Derivatives regulation, such as Dodd Frank and EMIR, has presented Northern Trust with further opportunities, as a result of its client mix. “For example, we have many institutional investor clients who are holders of large pools of assets,” says Biggs. “The intersection of these regulations will impact them as there will be a requirement for greater amounts of eligible collateral and increased demand for liquidity. So again, it’s the convergence of lots of things that take lots of resource but I think creates lots of opportunity.” On collateral management, Northern Trust recently enhanced its collateral management and liquidity solutions in order to help clients optimize and transform their collateral. The solution will help clients support their short-term liquidity needs so they are not required to liquidate assets unnecessarily in order to meet the variation margin requirements.”
Strategically, Northern Trust is starting to reshape itself around data, specifically to meet its institutional clients’ governance requirements. “I think people will start to pay more for data, and analytics than they will for the core custody,” says Biggs. The demand for data is particularly relevant in the Dutch market, she adds, where clients religiously measure performance, monitor risk and report to the regulator. “At Northern Trust we took a set of products and services that stood on their own from compliance, to risk monitoring, to transparency reporting and we built a whole new product suite around it called Institutional Governance Services,” he says.
To a degree, says Biggs, data analytics has enabled Northern to re-price. “Because custody and servicing assets is at the core of everything we do, we probably didn’t bundle quite as much in the first place,” says Biggs. “But we do take a fairly long term perspective on relationships because we never price an individual product as standalone. [Pricing] has evened out a little bit more than if we were just very custody transaction processing orientated.”
While capital requirements have prompted cost cutting among custodian banks in recent years, Northern Trust maintains one core custody infrastructure platform or processing engine for its worldwide operations. “Having a single custody and accounting system does make life easier because all investment is focused in that area for the benefit of all clients on the platform – even when we’ve taken on big investment manager outsourcing, they go on the same platform,” says Biggs. “So I think we get a little bit more economy or efficiency of scale through doing processes only once. Northern Trust also has operations centers of excellence in Bangalore and Limerick for example and this has really benefitted our efficiency initiatives so we will continue down that path of finding the right centers to be in.”
With that focus on efficiency, Northern Trust has continued to invest, and there are “pockets where we are beginning to see it pay off,” says Biggs. “Whether you’re making an acquisition or you are building a new capability – or even with something like the AIFMD where we expect to hire 100 new people dedicated to that business – the revenue won’t just flow from day one so you have to take a longer term perspective on your investments.”
Biggs singles out the strategic decision to buy Omnium, the hedge fund/middle office technology capability from Citadel, in 2011 as producing a good return on investment. “We find that across the globe and across various different client bases we’ve had interest in this sophisticated platform and different types of client are buying into the same product need,” she says. “It’s those acquisitions that really add the value. We bought that platform because it was going to be a perfect solution for hedge fund managers who wanted to outsource. And it went very quickly from that into an optimal middle office solution for asset owners.”
Northern has also seen a return on investment by entering new markets, albeit on a conservative basis, growing organically and in line with its strategy of expanding with its clients. Its growing client base in Saudi Arabia prompted the custodian to open its second office in the Middle East region, in Riyadh in 2013. Biggs describes this as a calculated investment. “For us having five people on the ground there supported by our global capabilities mean that we’ve won probably our third or fourth biggest global client ever.”
The ability to aggregate assets will be the endurance test for custodians going forward, says Biggs. “For me in future it will be about how we aggregate assets regardless of the type of client and type of investment. People have such diversified portfolios these days and they simply struggle to get information in the right place at the right time. So to me at the most fundamental level our role has to be around being better than everybody else in bringing data onto our platform and deploying our integrated product solutions because the value won’t be solely in the physical custody, it will be in handling the information.” This is somewhat validated by the recent ATP pension fund mandate Northern won in 2013 and the recent Saudi mandate. “I think they attributed a value an organization they could work with for the long term.”
Northern Trust has also recorded growth in other areas, including in transition management, foreign exchange and currency overlay services. The custodian recently recorded transition volume growth of more than 50% in its global transition management business, an area that has seen several notable exits across the industry in the last year. From those exits, says Biggs, “we’re certainly starting to see the opportunities. It’s not as though the floodgates have opened because people have not been doing quite as many restructures but the potential is there. But I suppose it’s like anything else, either you invest in it as a product or you don’t because it’s not your core business – for us it is core.”
Going forward, Biggs believes there is scope to generate more value. “There is scope for people who see things differently and save their clients huge amounts of time and money. For example, we have created market leading fund structures over the last few years that have helped clients to gain multi-million dollar financial efficiencies. We’ve gone from the traditional fund structures to the Authorized Contractual Scheme vehicle, which could really change the landscape for some investment managers and insurers, as well as pension funds. It’s embryonic at the moment but we’ve probably got about five or six of the biggest insurers in Europe asking about how they can use this vehicle and how much it could save them. Who knows, that’s probably one of the thoughts for the future. There’s no shortage of opportunities, we just have to address them efficiently.”
The Future of Custody: Northern Trust’s Penelope Biggs on Regulation
Northern Trust’s asset owner and asset manager client bases are converging under common impacts of regulatory change. Penelope Biggs tells Global Custodian what opportunities this convergence has presented the custodian with in the last few years and what lies ahead.