[ I N - D E P T H | C U S T O D Y F E E S ] custodians have not remained static , but actually increased . “ Asset managers are demanding their custodians provide them with more data and reporting ,” adds Van Verre . “ This is having a significant impact on custodians ’ operating models . The industry is reacting and has rationalised its platforms and increased efficiencies . This has been done through streamlining IT systems , offshoring operational processes to lower cost locations , and identifying new products and innovations .” Some asset managers have told their global custodians to set up hot contingency networks in their markets , whereby two sub-custodians provide coverage at the same time . However , such operations are not cheap for custodians , particularly in jurisdictions which adopt segregated account structures . Asset managers are frequently reticent about paying for such services and custodians have little choice but to oblige , as fund managers have made it no secret they will switch providers if pricing is not competitive . Fortunately for custodian banks , a revenue stream that had once been extremely lucrative and subsequently fell off a cliff , has made a reappearance . Securities on loan , according to DataLend , surpassed the $ 2 trillion mark , and saw a $ 180 billion year-on-year increase . This is the biggest increase since DataLend began tracking the market in 2013 . The return of securities lending is a positive development for the custodians and it has been driven by regulation of the over-the-counter ( OTC ) derivatives market . The Commodity Futures Trading Commission ’ s ( CFTC ) – as part of its Dodd-Frank mandate – phased in clearing for OTC instruments in 2013 . Markets across Asia-Pacific ( APAC ) and Europe – through the European Market Infrastructure Regulation ( EMIR ) – have also introduced centralised clearing .
New revenue generator Clearing under EMIR has been applicable to Category one and Category two clearers since 2016 , and it will be introduced throughout 2017 and 2018 for the remaining categories . In order to clear OTC products in a central counterparty clearing house ( CCP ), users need to post initial and variation margin , which must be best in class collateral . Un-cleared or bilateral OTCs will comprise of instruments that are very niche or risky , and will not be allowed to pass through CCPs . However , bilateral OTC transactions will be subject to firmer collateral rules as the Basel Committee on Banking Supervision ( BCBS ) and the International Organisation of Securities
Commissions ( IOSCO ) have told national competent authorities to implement margining requirements on such trades . Counterparties to bilateral OTC trades will have to post initial and variation margin , although as with centralised clearing , its introduction will be implemented in stages . Trading in any type of OTC instrument henceforth will have to be guaranteed with collateral . Financial institutions which are long cash or high quality bond instruments will find compliance with these rules fairly straightforward provided they have a coherent collateral management plan . For entities which do not have such assets at their disposal , it is much harder . These organisations need to identify cash or AAA government bond rich institutions to borrow from , in order to meet their OTC margining requirements . Many custodians are therefore looking to lend out securities in exchange for a fee to institutions for their margining needs . Collateral is a lucrative revenue generator as it is scarce . Quantitative Easing ( QE ) has eliminated a lot of the supply while banks and broker-dealers are being forced to sit on high quality liquid assets ( HQLAs ) for regulatory purposes . As such , this type of lending activity by banks could be a massive commercial windfall . “ We have seen a huge demand for high quality collateral because CCP collateral eligibility criteria
“ Asset managers are demanding their custodians provide them with more data and reporting .”
JOHN VAN VERRE , HEAD OF GLOBAL CUSTODY , HSBC SECURITIES SERVICES
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