Running to stand still
The deal between JPMorgan and Swedbank, which resulted in the launch of CustodyConnect, JPMorgan’s white label custody service, is one that is likely to be repeated in other regions.
Stuart Thompson, head of new business development for the Nordic region at JPMorgan Investor Services, says: “Local or regional global custodians have great local brand, reputation and have been offering custody for many years, as well as servicing their clients in other areas. But they are struggling with the levels of investment in technology needed to support the increasingly sophisticated investment requirements of their clients.” As Thompson points out, JPMorgan spends $600m (€423m) annually on custody related technology. “If you are a local or regional custodian your clients’ needs will be just as sophisticated - they want the same online tools, risk management, reporting and asset servicing that our clients require.”
Neal Meacham, head of custody at Swedbank, says the bank conducted an extensive review of its custody operations two years ago and found that the bank performed very well in terms of client servicing and relationships, it had fallen behind in terms of technical ability. “The catch-up costs would have been astronomical and there was also a question of how we would continue to make the necessary investments to stay in touch,” says Meacham. “The custody industry is extremely costly on the technology side.”
With an existing, long-term relationship with JPMorgan in place, Swedbank decided to use JPMorgan’s technology while retaining its own client base and relationships. “The deal future-proofs us as we benefit from the improvements JPMorgan makes to its
systems. Our clients will see better reporting tools, a better suite of Swift messages and improved risk management tools,” says Meacham.
Meacham says he would not be surprised if there are other custodians in the world who are facing the same issues. “Technology is running away from us; the price is too high and it is difficult to motivate the investment necessary to keep up to date.”
Thompson adds that the banks that CustodyConnect is targeted at have good local or regional custody businesses. Simply getting out of the custody business would cause problems for them, given the other services they offer to these banks. “CustodyConnect is a way to support these banks in their custody business without the need to make a huge investment or to exit the business.”
Swedbank services domestic funds, asset managers, insurance companies and some large corporates. Internationally, its clients include broker dealers, global custodians and banks. During the past few years, the funds business has grown substantially and Swedbank’s clients are also using more structured products, says Meacham. “Our clients are now focusing on the value added that can be offered above and beyond the core custody products such as international settlement, clearing, corporate actions and reporting,” he says. “They want to know how we can service their business in the most efficient way.” This requires more tailor-made products to cover client needs.
Göran Fors, senior vice-president and head of investor services at SEB, says the bank’s mutual fund clients are becoming more global in their outlook and are expanding their businesses into emerging markets, particularly Africa, South America and Eastern Europe.
“With regard to the traditional custody products, there is an increasing demand from clients for better reporting and information,” he says. “Clients are also asking for help on moving into more exotic markets and instruments, which increases the need for us as a custodian to support them in the countries where information flow can be poor. To do this we work with other participants and regulators. Our clients want to feel comfortable that we can provide support to them in markets that are difficult to invest into.”
SEB recently opened an office in Ukraine, which is a good example of where the bank is supporting its clients by taking a more active role in a market, says Fors. “We are trying to influence how the market works in a way that supports our investors. Being an established, large custodian helps as we have the market experience and knowledge to help local regulators to create a more structured market.”
JPMorgan’s Thompson agrees clients are expanding into emerging markets. “We are seeing a much bigger demand for emerging market services and this year it has been very noticeable that people are moving into Africa, along with the Eastern European markets.”
Fors says the Nordic market participants are fairly efficient in terms of processing, and there have been improvements in the clearing and settlement processes in the region during the past two to three years. Much of this progress has been driven by the global custodians, encouraging users to automate processes and adopt standards.
Meacham agrees: “A trend among fund managers is that they are looking to focus on what they do best, which is managing funds and are getting away from managing back and middle offices, outsourcing them to custodians or fund administrators.”
Fors says outsourcing of fund administration is growing, driven by the fact that people now feel more comfortable outsourcing. Deals are also driven by the continuing push towards finding more efficient solutions in order to handle volume growth and more complex reporting standards.
JPMorgan is one of the leading international global custodians in the Nordic region, both in terms of assets under custody and its footprint. Thompson says the region is heavily predicated on long-term relationships, trust and technology. “These are countries with small populations and therefore need to leverage technology in order to make up for the high people costs,” he says. “We are always upgrading technology, improving STP and minimising risk.”
One significant trend that has emerged in the Nordic region, says Thompson, is a demand from clients for private equity administration services. There is also growing demand for OTC processing and collateral management of derivatives.
The one remaining bugbear for the Nordic markets is clearing and settlement. While the markets have consolidated under OMX, there are still four separate central securities depositories for the Swedish, Norwegian, Danish and Finnish markets, along with four separate currencies, languages and central banks. “Custodian banks have done a good job in packaging their services as one region, but the key will be to get the CSDs to move together. If the model of providing a single CSD for multiple markets proves to be correct, then it would be appropriate to have a similar arrangement for the Nordic region,” says Meacham.