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The development of the Global Custody industry beyond the financial crisis of 2008/9 and into 2011 has seen an increased emphasis on risk minimisation and asset safety, together with increased monitoring of the global custody providers. The Madoff scandal highlighted the issues around the lack of transparency for investors in pooled vehicles and reinforced the need for separating functions such as asset management from administration and custody. For global custodians there has been a dramatic increase in regulatory pressure, both in the US (Frank Dodd) and EU (AIFMD, UCITS IV).
There has been continuing consolidation in the provider community with acquisitions, primarily by the larger service providers to (a) build increased economies of scale and (b) to add niche capabilities by the acquisition of small niche players with specialist products. This latter has been driven by an explosion in the asset classes invested in by large institutions, to include direct property, REITs, hedge funds and fund of funds, private equity and derivatives.
Service Providers
The service providers face a regulatory ‘tsunami’ coupled with a loss of revenues from traditional business lines, especially securities lending, foreign exchange and net interest income, at a time when increased investment is required to support the new asset classes. This will, we believe, impact fees both for core services and “added value” services in the future. Custodians have been more prepared than in the past to request increases in core fees should a client not wish to continue to participate in securities lending programmes and sometimes proposing fee schedules with and without lending to prospective clients. Custodians have been investing heavily in developing their capabilities to support the new asset classes and enhancing their client web portals.
Investors
Many clients suffered unexpected losses following the collapse of Lehmans as a result of securities lending cash collateral reinvestment vehicles managed by global custodian banks suffering realised and unrealised losses. Several custodians have forced their clients to take losses, with some custodians sharing in the losses of some clients. In addition, for some of the newer asset classes such as OTC derivatives fees charged by custodians are significantly higher than those for core services as custodians seek to recoup some of their investment.
The Future
Thomas Murray predicts that the long period of fees for core services declining will end, due to the higher bank capital adequacy requirements and the other issues highlighted above. We see a continuation of the consolidation of the industry as more mid-size players and specialists get acquired by the largest. A result of AIFMD and the upcoming UCITS V being implemented will be a placing of increased responsibility on global custodians/depositories to take responsibility for unforeseen losses on funds in custody (Madoff). This additional level of responsibility will percolate across all funds over time, as no client type will be willing to accept a lower level of responsibility than that provided to UCITS vehicles and will result in many providers exiting some parts of the business or increasing the amount of sub-custody they do in house.
Roger Fishwick, Director, Investor Services
rfishwick@thomasmurray.com |
