Most custodians will greet the end of 1999 with a huge sigh of relief. The year has been a tough one, topped and tailed by the euro and Y2K, and they will be hoping for better things to come in 2000. But why have the last 12 months been such a trial?
Things started badly with the birth of the euro. Custodians were faced with the immediate problem of implementation, sinking large amounts of cash and energy into a project with no tangible benefit for them. Even worse, the euro almost guaranteed that their revenues would fall, a fact borne out by lower foreign exchange earnings for nearly all the specialist custodians.
Earning money has been a major challenge in 1999. The custodians knew that, mindful of Y2K concerns, few clients would want to change their supplier in the second half of the year, and so it has proved. Mandates since mid-year have been as rare as hens’ teeth. That is not to say that custody sales people have been idle: they have been busily stroking next year’s prospects in the corporate hospitality tents of the Rugby World Cup whilst dreaming up ingenious ways to justify their claims for outrageously high bonuses for
If that didn’t keep them busy, they could always discuss the state of the industry. In the UK, both The Royal Bank of Scotland and Lloyds Bank decided to call time on their custody businesses. The former sold RBS Trust Bank to The Bank of New York (BoNY), which now has a staggering $6trn (e5.8trn) of assets under custody, whilst the latter struck a private deal with State Street over the transfer of clients. It almost defies belief that, in a global investment market as important as the UK, there is now only one indigenous bank offering custody services. HSBC itself went through some big changes, dropping the Midland name and, perhaps more critically, losing the charismatic chief of its custody business, Terry McCaughey. After much delay, it also launched its fund administration subsidiary in Edinburgh, signalling its intention to move up the value chain.
At least two European banks saw a gap in the market, and both MeesPierson and Societe Generale launched custody services for the UK. The Dutch bank already has a very solid reputation as a high quality provider, but the French bank has yet to prove itself. Meanwhile, at the higher end of the business, Deutsche Bank wrestled with integration issues and lost its head of custody services, Roger Booth, whilst very little was heard of the progress of the ABN AMRO/Mellon alliance.
All this was happening against a background of dramatic change within the investment industry. Eight European exchanges formed an alliance that, so far, has failed to deliver any concrete benefits but may yet do so; electronic crossing networks (ECNs) sprung up everywhere to challenge the primacy of the exchanges; depositories built linkages or, in the case of Cedel’s European Clearing House, merged with each other; and the US began talking seriously about moving to T+1 settlement. The Global Straight Through Processing Association (GSTPA) ground its way towards a conclusion on vendor selection, even though the best qualified supplier, Thomson Financial ESG, refused to bid because of concerns over intellectual property rights.
Unsurprisingly, senior custody managers are reaching the end of the year with a look of frazzled bewilderment
on their faces. Very few of them appear to have any coherent view of where all this will lead them and their clients. BoNY’s head of custody, Tom Perna, issued a document on the concept of a European super-depository, but his peers at State Street and Chase have been strangely silent on their vision.
To be fair to them, and to the other big players like Citi and Northern, their focus for 1999 has been necessarily introspective. But they must begin to address the issues raised by the creation of the European Clearing House (ECH), already the largest sub-custodian in the world, and how that will affect cross-border clearing and settlement. Cedel is at pains to point out that custodians are its shareholders, and that it has no plans to compete with them, whilst simultaneously admitting that it has plans for an initial public offering. With Euroclear still struggling to come to terms with Cedel’s bold leap ahead of it, the custodians should be concerned about the power of ECH.
And the year to come? The first quarter will see banks fixing Y2K problems, and a continued reluctance on the part of institutional investors to move their assets until they are convinced that all the bugs have been eliminated. And, as if that were not enough, there remain some major infrastructure projects to address, such as NYSE decimalisation, extended trading hours, GSTPA and T+1. Will life be easier for custodians in 2000? Don’t bet on it.