Any attempt to map the technological topography of the custody business five or even three years down the line is a fraught enterprise. Certainly, back in 1996, few custodians could anticipate the profound transformation wrought upon the commercial landscape as the internet came of age in the late 1990s, a seismic shift whose aftershocks are still being felt today. With that caveat in mind, it is safe to say that the process of change – not just in terms to how we do business, but critically how we expect to do business – precipitated in recent years by emergent technologies will only accelerate going forward.
Looking at the custody business as a whole, it should be expected that demand for traditional securities movement and control functions will diminish, the inexorable standardisation and commoditisation of core custody functions accelerated by industry initiatives such as the Global Straight-Through Processing Association’s (GSTPA) Transaction Flow Manager or the trade management workflow solution being developed by Omgeo, the joint venture set up by Thomson Financial and the US Depository Trust and Clearing Corp. Similarly, ongoing rationalisation at the depository level is paving the way for the eventual abrogation to CSDs of the safekeeping and settlement functions on which the business of custody was originally founded.
Custodians will accordingly look to move still further up the value chain, encroaching on the middle and front office spheres to an ever more significant degree and continuing to broaden their service offerings to add value for clients vis-à-vis their investment management, trading, order routing and distribution activities. 1, this progression beyond their traditional asset servicing role has been going on for some time, with custodians pushing into areas such as transfer agency, performance analytics, risk measurement, compliance monitoring and accounting.
As clients seek to rationalise their activities to allow them to focus more closely on their core competencies, so the demand for the outsourcing of back office processing will grow. Full outsourcing remains an onerous undertaking for any custodian, however, and to counter the resultant imbalance between supply and demand custodians will need engineer cost reductions and performance and service enhancements via other, less overt, means.
As already intimated, the internet casts a long shadow over the business. In some respects, custodians are well placed to exploit its potential – custody, after all, has always encompassed the collating, sifting and management of data. The challenge for custodians over the past few years has been to tap the vast reservoirs of data accumulating within their systems as a by-product of transaction processing and, rather than discard it as before, repackage it and deliver it back in a form that will help enhance their clients’ productivity and timeliness.
Internet and browser-based technologies are also cheaper to roll out than the inflexible proprietary systems that have dominated the business for so long; these technologies take the established ‘thin client’ ethos to the next stage, allowing upgrades to be effected with minimal disruption to the end-user. (Whether the established ‘client-server’ concept that underpins the internet as we now know it will be superseded by the ‘network computer’ concept advocated by the likes of Oracle’s Larry Ellison – with ‘dumb’ workstations connected to a separate virtual data hub reducing still further roll-out/maintenance costs while improving data integrity – remains to be seen.)
Of course, this move away from a proprietary past to a more open architecture is something of a double-edged sword as far as custodians are concerned. Internet technologies have the effect of ‘democratising’ information and service delivery – with all providers working essentially with similar interfaces and formats, the quality of their actual product offering is more ruthlessly exposed; and if they are perceived not to be delivering the goods, then it will be easier for clients to switch to another custodian.
Indeed, without proprietary systems tying them to one provider, clients will in theory have greater freedom to ‘cherry-pick’ specific products and services from a number of custodians to create a ‘best-of-breed’ package; consequently, custodians are having to pay far closer attention to tailoring their offerings to suit individual clients’ needs than before. Furthermore, individuals – and by extension corporations – are becoming increasingly acclimatised to the ‘anything, anytime, anywhere’ nature of the Net, which in turn is driving up client expectations as regards access and speed of delivery. Going forward, the rule will be more, sooner.
The challenge for custodians is to instil much greater interactivity into their internet-based offerings, to move from what is today essentially an information sharing architecture – taking in research, reference, access to client accounts and so forth – to a service that not only offers greater data enrichment but also a transactional capability. It seems certain that we will see the lines between the public internet and private intranets become more nebulous; in particular, thanks to a recent agreement signed with telecommunications solutions provider Global Crossing, the Secure IP Network infrastructure now being developed by SWIFT will exist as a virtual private network within Global Crossing’s existing IP extranet infrastructure. The existence of this new infrastructure will be a critical step towards creating a high speed network wherein custodians, settlement and payment agents, clients and counterparties will be able to access trade details simultaneously, eradicating problems such as reconciliation errors. A broadband network coupled with more sophisticated technology should also allow the use of multifaceted ‘intelligent’ message formats to allow the automated processing of more complex securities financing products that fall outside the scope of existing SWIFT messages; valuation and payment data could also be incorporated into the flow of transaction traffic.
The huge success of virtual fund supermarkets is proof positive of the benefits that can be derived from the internet in terms of distribution, and we should expect to see custodians directing still more resources towards building on and evolving this most critical facet of their business.
Perhaps one of the most fundamental changes lurking just over the horizon is the emergence of ‘co-opetition’ above and beyond industry initiatives such as the GSTPA – custodians working not only alongside third-party systems vendors to meet clients’ needs, but also with other custodians. The concept of a single portal has already been mooted, offering one custodian’s clients access to a number of separate providers’ pools of information, Web-based query and reporting products permitting clients to ‘slice and dice’ both information about their own activities and data pertaining to third-parties.
Tim Steele is a freelance editor & consultant.