2009 was a year of growth for global custodians in Asia, at least for the big players. New mandates were announced across the region and some of the largest Western firms expanded their presence in key markets.
A result of 2008's credit crunch was the confirmation that global custody is a scale business with razor-thin margins. Eddy Rhemrev, Asia-Pacific chief executive of IT and business services firm Logica, highlighted this in an interview last year when he said in no uncertain terms that "volume and scale are the key words for transaction banking". Global custody forms part of a financial institution's transaction-banking business.
Institutional investors responded by increasingly taking their business to large global custody players. Brown Brothers Harriman opened an office in Beijing, its third in the region, in response to growing demand in the country for its services, while Citi picked up a number of intra-region qualified foreign institutional investor mandates from Japan and South Korea. JP Morgan created a single bundled prime brokerage and custody group and migrated its transfer-agency business to its worldwide securities services segment in response to customer demand for more bundled services.
Increased demand for these bundled services, transparency in the custody process and intra-region services were the dominant themes last year, says Shaun Parkes, Asia ex-Japan head of worldwide securities services at JP Morgan in Hong Kong. He offers some insight on the year ahead for global custodians in Asia.
Looking back over 2009, what were the leading trends in global custody, especially as they relate to Asia?
There are two dominant trends that stand out for 2009: an increased interest from clients for transparency across all their servicing needs -- especially as it relates to risk and operations; and the demand for 'bundled' product offerings that can offer total solutions (custody fund services, middle office, prime services), driven in part as clients investigated their own procedures, explored cost savings and sought to accelerate the establishment of new products.
What developments do you foresee in Asia-Pacific global custody in 2010?
We expect to see the trends of transparency and bundling to be carried over to 2010. We also see both price compression and a greater demand for increased local or in-country support for global custody emerge as trends.
Additionally, we expect to see an increasing focus on emerging markets and in particular those in this region. There will be more intra-region flow, with Asian clients investing in Asian markets, as evidenced by the recent memorandum of understanding between China and Taiwan.
Do you expect the proposed financial regulatory overhauls in the US and Europe to have any impact on global custody?
The era of 'light-touch' regulation is over. Both the SEC [Securities and Exchange Commission] and European Commission have set out clear plans to 'increase investor protection by reducing losses arising from fraud and the misuse of investor's assets' that would impact global custodians and have ramifications on the business as a whole.
The objective of these changes is to preserve the security of investors' assets, but it could also result in reduced returns for the end investor due to the increased cost for the end investor (to pay for the added burden placed on depositaries) and the more restricted access to emerging markets (as these markets would be too expensive to open up, given the risk involved).
Some areas that could be considered are the establishment of best practices to assess sub-custodian suitability, or the reinforcement of practices regarding custodian delegate oversight and monitoring.
Do you think the overhauls will happen in 2010?
The current situation requires change, which may take some time to be fully implemented, but there are strong controls already in place in terms of governance, oversight/selection of sub-custodians and audits (SAS70) that provide a strong governance basis.
What other issues could impact global custody in 2010? Should institutional investors look out for anything new from their service providers?
Bundled solutions will continue to impact global custody in 2010. The ability of an organisation to stitch key products together to provide a multi-product solution will be important to institutional investors.
Institutional Investors should look at service providers that have increased their focus on risk management by continuing to improve control and efficiency, and providers that continually focus on building out local capabilities in key markets, provide Asian time zone processing support and can successfully address emerging-market issues.