There is a new orthodoxy among commentators in the global custody business stating that the business is now at the commodity stage of the product life cycle.
This is especially true, their argument goes, for the core element of the custody package-settlement, safekeeping and asset servicing.
In reality, the global custody business is not yet at this point and this ortodoxy should be challenged.
The most basic question an investor should ask a custodian bank is Do you offer settlement, safekeeping and asset servicing in all the markets in which I am invested?" Every global custodian worthy of the name will offer these core services in the major markets. but what about the emerging markets?
Today's global investors are just as likely to be buying the shares in Brazil as in London. Likewise, a global custodian must not merely be able to offer settlement, but should be sure-footed in dealing with complex local practice in Sao Paolo. Maintaining high standards among sub-custodians is also vital, whether they are a custodian bank's own proprietary branch network or local third party agents. In emerging markets, which often have enforced buy-ins, failed trades are expensive. In these markets size helps - a large global custodian bank gets a closer hearing than a small one.
Further, settlement itself is not an undifferentiated service. For example, how settlement is communicated to a client is vitally important as portfolio assets become more complex. On-line electronic links between sub custodian, global custodian and client allow for the efficient delivery of information. Such links cut out the manual paperwork of faxes and telexes, with their potential for human error.
Another example of differentiation is how widely available is contractual settlement. the more markets covered by contractual settlement the better for fundmanagers, who can confidently deploy cash in portfolios to securities markets and help en-hance performance, reduce fails and unnecessary overdrafts.
Differentiation is also clear as one gravitates away from the core to so-called 'value added' services. There are benefits of being part of a broad organisation. Foreign exchange transactions are an important part of global investment. The interaction between the custody area and a broader bank's treasury should ensure the best rates for clients. Competitive foreign exchange rates in turn translates to enhanced portfolio performance.
Overall, global investors look to global custodian banks for excellence of execution. Increasingly they are asking custodian banks to create a new paradigm for customer service. Custodian banks have had to develop new skills and techniques around re-engineering, and work more closely with their investor clients as partners to continually improve technological effectiveness and electronic information delivery.
In spite of the essential role of technology, securities services is still a people business. People joined together in a large global network is a custodian bank's greatest asset. A custodian's network differentiates it from the competition and enables it to design new products and to gain access to new information flows based on on-the-ground local presence.
But the very best custodians will stand out by their ability to determine how the global custody business is to be carried forward. We believe the business will lead to substantial changes in three areas: first, the use of technology; second, the need to adopt a more client focused product delivery structure and third, the provision of local market expertise to investors.
The custodian that can recognise these drivers and respond creatively to them ably demonstrates why global custody is far from being a commodity product. At the core of the service there is plenty of room to stand out from the crowd. Value added services offer scope to provide creative solutions to the demands of the investment community.
Robert Binney is managing director worldwide securities services Citibank"