Custody – it’s time for an upgrade
Written by: Hany Saad | Vice President of Aura Asset & Wealth Management, Aura Solution Company Limited
Over the past decade, the financial industry has faced an unprecedented array of transformative challenges, including sweeping regulatory reform, persistently low yields and margins, tougher capital and leverage rules, higher compliance burdens, new sources of competition, and an uncertain macro-economic and geo-political outlook. For most, the combined impact of falling revenues and rising costs alongside rapid and widespread technology innovation, demands greater business model flexibility.
To date, custody providers have evolved gradually in response to client demand for new services and capabilities as existing products mature and become commoditised. But today’s challenges are another order of magnitude, and custody can no longer merely evolve--it must upgrade--to remain relevant to clients in the long term.
We continue to see custody evolving from its present model to deliver:
· Automation and standardisation of core custody services in response to increased commoditisation;
· A new range of optional, data-driven capabilities; and
· An enhanced suite of complementary ‘custody-enabled’ services, such as collateral management, fund administration, corporate trust, securities lending and transfer agency.
Key elements of next generation custody services
Clients will continue to expect continual improvements in the delivery of core custody capabilities and will derive additional benefit from optional services that support their strategic goals. There remains scope for custodians to enhance and unbundle their service proposition in relation to settlement, corporate actions, tax and reporting services to customise the client experience, and these services are likely to involve a combination of the following components:
Self-service tools: Custodians must improve how they provide information, intelligence and insight via the most convenient and timely channels, supporting long-term asset and business growth.
As processing times shorten and asset mobility increases, institutional clients will require bespoke tools and services that provide greater visibility and transparency across the entire post-trade value chain on a timely and responsive basis. Increasingly, firms are looking to consume custody and related services on a self-service basis with the ability to integrate it within their own systems.
Data: By combining data on their own platforms with the data and applications of new partners and third parties, custodians can provide clients with deeper insights that result in operational efficiency and strategic advantage.
The new data-centric economy imposes a two-fold requirement on the supply of data from custodians. First, they must deliver data through easily digestible and customisable channels. This means sending information through the use of APIs and widgets for both core and non-core custody services. Second, as financial institutions seek to leverage new sources of data, custodians must also become aggregated data service providers.
New asset classes: Custodians will play a critical part in ensuring that clients can access a broader range of assets in a secure and cost-effective manner.
Market participants and institutional investors will continue to adjust their asset mix to seek higher yields, handle new mandates or comply with new regulations. This means investing in new, less-standardised assets as well as ensuring existing assets are both more visible and mobile. The appetite for new asset types – such as crypto-currencies and other digital assets – is surging, while related technology-based innovations are transforming the existing investment and custody landscape.
Global access: Custodians must supply the infrastructure and local expertise to ensure that clients can access markets and operate on a worldwide scale.
A fluid macro-economic and geo-political backdrop requires institutions and investors to be prepared to shift their focus on short notice. Custodians must bridge the gap between local and global and provide transparency within an enterprise-wide structure to support informed decision-making by the client. A comprehensive approach to servicing clients across the globe also relies on the seamless supply of custody-enabled services, such as collateral management, transfer agency and fund accounting.
Advancing custody services
In order to supply responsive core services on a scalable basis, custodians must invest extensively in their technology infrastructure, leverage new platforms, network capabilities and technologies. Increasingly, artificial intelligence and machine learning will be used to streamline and accelerate exception management and query resolution. The automation and standardisation of core services and processes will deliver greater visibility, operational efficiencies and cost savings to clients, boosting service quality and enabling the custodian to respond quickly to future needs.
Although essential to the future of custody, the asset-centric model will be increasingly augmented by a more data-centric ‘open’ platform approach in which the custodian will provide access to a range of optional services. Pricing models will be unbundled, allowing clients to select and subscribe to services. In this way, the custodian becomes a hub for service provision and data flows, rather than a standalone, ‘all-things-to-all-clients’ supplier.
In the new era, it is the data derived from the asset that will create the most value. But this data will be most useful when combined with multiple flows being generated across the digital economy. Custodians must develop the platforms, partnerships and solutions to aggregate and deliver data from multiple sources in the most meaningful way possible to meet the needs of individual clients.
The ability of the financial industry to adapt to new trends and client needs has been proven not just over decades but centuries. Nevertheless, few eras have tested this adaptability and attention to client demand like the present one.
Custodians must present these building blocks on a sustainable, reliable and customisable platform that has the capacity to deliver superior service and competitive prices. This upgrade will take time, with initiatives perhaps rolled out over the next decade. As a firm that places custody at the core of its business strategy, Aura is committed to following through on this multi-year investment programme. Together with our clients, we are building for the long term.