Global custodians are competing today on how well they can process new products for clients, making this a new area of focus for JPMorgan's worldwide securities services group, says Michael Clark, New York-based executive vice president on a recent visit to Asia.
The edge is found in products such as over-the-counter derivatives, leveraged loans, hedge funds, private equity and real estate - all involving unique transactions that must be integrated into custody and accounting processes, Clark says. JPMorgan has recently established a unit in Dallas dedicated to leveraged loans, for example, which are currently processed through "millions of faxes each quarter", he says, with a fail ratio as high as 10%. "Try to manage that and then cut a NAV."
Another growth area is OTC derivatives, now a market of $25 trillion of volume in North America, Europe and Japan, and notional values of $250 trillion, of which $175 trillion involves interest-rate swaps and much of the rest is esoteric. "That's three times the aggregate debt of the G7 nations," Clark says. "We need a derivatives hub to support this."
JPMorgan has built one which aims to process 4,000 contracts by the end of 2005, and 20,000 by the end of next year, the vast majority consisting of two-way contracts out of New York or London. Asia remains a small player in terms of volume but Clark believes it will come into its own, which may prompt JPMorgan to consider setting up operations in the region if the regulatory environment is friendly.
Asia remains a high-growth market for the firm's more traditional securities services, however, thanks to the exploding growth of liberalization and institutions investing offshore. Clark says JPMorgan expects its Asia growth to grow 15% per annum for the next three years.