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Custodians join the rating game

The ratings game has finally caught up with the custodian sector of the investment community, with Paris- based Fitch-AMR ready to publish the results of its first contract. “The development of the methodology to rate custodians and trustees is one of the major areas we’ve progressed in during the last year,” says Alain Mera, deputy managing director at Fitch-AMR.
The basic methodology barely deviated from the established formula used for asset managers. “Obviously the questionnaire was different, but the underlying approach was the same, as were the scale, presentation and final synopsis. We basically used an added-value cut-and-paste methodology.”
The concept isn’t new, however, as the ratings community has been wanting to penetrate this area of the market for some time. Consultants Thomas Murray and Standard & Poor’s say they have reached the consulting stage in their joint venture. But others have yet to progress beyond discussion.
Shane Norman, director and chief rating officer at RCP & Partners in London, says that whilst RCP still intends to develop a ratings methodology for custodians, other obligations have meant that it has had it put it on the back burner for the time being. “Our efforts in this area have somewhat stalled, but we remain committed to its development. There is currently a draft document concerning methodology in circulation.” He blames the lack of progress on the shift in emphasis at RCP to create a strategic global platform.
Fitch-AMR naturally sees this as a something of a coup. “We decided not to make any noise until we had something concrete to shout about. We’ve heard a lot of a talk about rating custodians but to my knowledge, nobody else has secured any contracts.”
One major difference that Mera stresses needs to be taken into account when rating custodians and trustees is that, whilst custodians can be looked at on a global level, trustees can only be rated at local level, since they are bound by local regulation.
Elsewhere sees Moody’s enter the asset managers ratings arena, as they have successfully published the results of three contracts in Brazil. “Rating the asset and fund manager community is definitely something that we are capable of, and the recent contracts in Brazil should serve as a platform from which to launch ourselves in Europe and Asia,” comments Vanessa Robert, an analyst at Moody’s France in Paris.
“The Brazil ratings were done by our teams in the US but we have adopted their methodology here and, as such, we should see the first rating in France in September, whilst another is being prepared in Germany.” Moody’s is targeting all the major countries where it has a presence to win contracts.
At RCP, Norman reports further progress in Germany and Austria. “The Germans have a very punctilious approach, and whilst development in terms of winning business has been rather slow, it is at least assured.”
But the proposed drive into the UK and French markets has been overhauled. “Initially we intended to open a fully incorporated company in London to cover the UK, France and Ireland using local companies as partners, but the plan has shifted somewhat.”
RCP is now putting together a platform at group level, which will involve several strategic partners to cover different asset classes across different geographic regions. The plans are now relatively advanced.
Nonetheless, there has been growth outside Germany and Austria. “We’ve just completed a contract in Switzerland. We’re working on an international Asian hedge fund specialist and we’ve been commissioned by a large fund distributor to carry out a rating on a manager in Belgium,” Norman confirms.
Fitch-AMR has also enjoyed growth in the number of asset manager contracts it has won. “We’ve published 14 so far, but are working on a total of 28, most of which are French. There has been particular growth in the number of UK managers but we’re also working in the Netherlands, Switzerland and Germany.”
The methodology remains standard irrespective of location, though allowance is made for asset class. “We are basically trying to bring more clarity, transparency and accountability to the investment community. Where they’re based is irrelevant,” says Mera. This view is supported by Norman. “It is very important to us that methodology remain consistent and standard.”
In general, according to the raters, managers are proactively seeking a rating. “Companies generally come to us and ask for a rating and this is helping the industry regulate itself,” says Mera.
Norman says that, whilst there is some feeling that rating places a burden on a company to perform well and can be “invasive”, nine times out of 10, it is the managers who ask to be rated. “This is leading to peer pressure to follow suit and certainly puts us in a healthy position but what is really important is not the rating itself, but that we deliver a rating that is credible and offer a good service follow-up in terms of distributing and publicising that rating.”

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