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The two banks have served informally as NPSÆ custodians for several years, ever since it began investing internationally. But according to Korea law, the NPS was not deemed officially to be an ôinstitutional investorö. It had to go through a rather cumbersome technical process to move funds offshore via Korea Exchange Bank, which continues to serve as the official trustee for foreign exchange transactions for domestic financial institutions. KEB in turn channeled processing and transactions to BNY Mellon and State Street.
Now NPS can cut out the middleman, because the National Assembly has approved changes to the 1988 National Pension Act that now recognize the NPS as an institutional investor, alongside the Bank of Korea and the Korea Investment Corporation.
BNY Mellon and State Street will continue to provide custody and securities lending services. They do not as yet sell analytics such as performance measurement to NPS but bank executives say they are pitching these. They also hope the direct mandates will make it easier to provide custody and administration for alternative asset classes such as real estate and private equity, in which the NPS has begun to invest.
The NPS projects its AUM will expand to KRW415 trillion ($449 billion) by 2012, with up to 20% of its assets invested in overseas equity and fixed income, as well as other asset classes. That works out to nearly $90 billion, and while a lot of that would still be managed internally, it puts NPS on track to remain the biggest source of mandates from Korea.
Moreover the two custodians hope the prestige and experience of working for NPS will translate into additional mandates as more Korean institutions such as its life insurance companies and other quasi-public entities become serious overseas investors.
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