Three Custodians Partner With Spaulding Group for Benchmark Data Fee Transparency

When custodians provide benchmark data for their clients, the costs can be unexpectedly high, often due to licensing fees. For years, custodians absorbed the costs as part of doing business, but in some cases they are passing the costs on to clients, especially as the costs increase.
By Jake Safane(2147484770)
When custodians provide benchmark data for their clients, the costs can be unexpectedly high, often due to licensing fees. For years, custodians absorbed the costs as part of doing business, but in some cases they are passing the costs on to clients, especially as the costs increase.

In an attempt to reverse this trend, BNY Mellon, State Street and Northern Trust have partnered with the Spaulding Group, a performance measurement service firm, to launch the “Custodian Guidelines for Transparency in Benchmark Cost,” and Nasdaq has agreed to license its low-cost index family at no cost to these custodians.

In agreeing on the guidelines, BNY Mellon, Northern Trust and State Street will implement over time the principles of providing transparency to end-clients on the relative cost of benchmarks, and conducting a free customized benchmark cost analysis upon request from clients that would demonstrate the relative cost of benchmark data options.

And with the partnership now in place, NASDAQ will license its index family for free not only to these three custodians, but also to any other custodians who agree to implement the guidelines.

The guidelines could potentially be very helpful to custodians, since its the asset owner’s choice for which index to use, not the custodian’s, but asset owners often don’t know what the custodian has to then pay for when providing the benchmark data.

The drive to change this dynamic started about three years ago when Northern Trust reached out to The Spaulding Group to express these concerns, hoping that The Spaulding Group could orchestrate a gathering of custodians and possibly asset owners and asset managers to discuss these issues. Yet the discussions progressed slowly, and it wasn’t until a few months ago that things really changed, when NASDAQ separately raised the same topic with The Spaulding Group. From there, the partnership took off.

“We’ve been spending a lot of time on this topic since we launched our global index family in December 2012,” says Sean Wasserman, managing director at NASDAQ OMX who led this initiative for the firm. “We very much feel that the market cap weighted global equity space has become very much commoditized, and we’ve entered ourselves as the low cost player in the market, but the big challenge we’ve had is raising that awareness that cost is an issue in this space.”

“What’s beginning to happen in the custodian space is they can’t afford to continue to eat these costs,” says David Spaulding, founder and CEO of The Spaulding Group. “When the costs were relatively low a few years ago, that was just part of doing business, but now those costs have gone up significantly so they’re turning around and passing those costs back to the asset owner. And in some cases the asset owners make what they think is a simple request. For example, they may want a global index without Japan. The custodian may have all the data and could very easily create the index for that client, but because of licensing agreements, they must go to the index provider, ask for that index and pay, in many cases, a very high cost. And so the custodian is going to that requester who thought it was simple and say ‘it’s going to cost you X number of dollars,’ and the asset owner may say ‘forget about it, we can’t justify that cost.’”

Custodians have “essentially reached the point where they need to be able to provide that transparency to their clients on the relative cost of the different options so that [price] can actually be factored into the decision-making process when they’re choosing between one [index] provider or another,” adds Wasserman.

Both Wasserman and Spaulding agree that a large part of the rise in pricing has to do with brand names, and many asset owners have grown more comfortable with one brand name over another, even if there isn’t a significant difference in the products, just like in many other industries.

“There’s a number of different products in the market from different index providers, but the methodologies and the returns of the different indexes have converged over the years to where you’ll see for apples to apples matches of different index exposures from different providers and many times you’ll see correlations of 1 or 0.99,” says Wasserman.

Thus, these participants hope that asset owners will choose lower-cost indexes that results in cost savings without materially changing benchmarking capabilities.

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