[ 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
Summer 2017 globalcustodian. com 25