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Impact Investing

IPE special report May 2018

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Custodians under fire for inadequate services

Clive Davidson reports from Sibos in Munich
Outdated and inefficient working practices and a lack of investment in new technology by brokers and custodians means they are giving inadequate service to fund managers, said Gerald Hough, director of group operations at Morgan Grenfell Asset Management.
Speaking at the Sibos banking and securities conference in Munich in September, Hough slammed brokers and custodians for failing to modernise their working practices to enable the industry to achieve greater efficiency in processing securities transactions.
Cultural issues rather than technology stand in the way of the industry reducing the settlement period from three days after the trade (T+3) to one day (T+1). Technology-focused industry initiatives – such as the Global Straight-Through Processing Association’s proposed Transaction Flow Monitor for automating the processing of transactions from post- trade to pre-settlement – miss the point, said Hough.
These initiatives distract firms from dealing with their own internal systems, where there is the greatest room for improvement.
Hough cited the way brokers had signed up to electronic trade confirmation services (ETCs) but often only input trades to these systems a few days after execution.
Custodians, meanwhile, have neither yet agreed a common method of receiving instructions nor of the electronic message types they will use. Hough said his firm dealt with 63 custodians around the globe, “and all require slight variations in standards and some even still use faxes”.
He added that there was a need for benchmarks to measure the performance of brokers and custodians, and that the results should be made available to fund managers, clients and others so they could make informed choices about which services to use.
James Hiatrides, managing director of Scudder Kemper Investments, weighed in alongside Hough to attack custodians for not dealing with their outdated systems, thus holding back the industry. He also complained about service firms not taking advantage of technology that was currently available.
He said: “If we don’t do better with what we have got today, how are we going to make use of the [GSTPA's Transaction Flow_Monitor]?"
But the brokers and custodians hit back in the debate, saying many fund managers often have limited technology, which makes it difficult for brokers and custodians to provide a standard modern service. Also, many often persisted in using outdated electronic message types, and were unhelpful in providing information relating to transactions.
Steve Conway, vice-president of worldwide operations technology for custodian Northern Trust, said his firm dealt with around 1,200 fund managers, of which only around 300 could provide them with electronic information. His firm’s problem was encouraging the other 900 to automate.
Hough suggested that custodians used cost as an incentive, with a large differential in favour of those fund managers that made the investment in new technology. David Gilks, managing director of operations at AXA Sun Life Investment Management, called for greater co-operation between fund managers, brokers and custodians in addressing issues that were in their mutual interest. Until now, industry initiatives tended to be bilateral rather than among all three parties.
The GSTPA’s initiative does try to address all three, but others in the debate pointed out that much existing technology, such as ETCs, were under-used.

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