There is a wave of change sweeping across the global custody market, according to two of Asia’s top practitioners. In particular, an onshore presence in the various markets and the integration of investment products and services is becoming more important.
Laurence Bailey, CEO for Asia Pacific at J.P. Morgan Worldwide Securities Services (WSS) says Asia is evolving quickly. “There’s significantly more change occurring than ever before. Shifting economic priorities in domestic markets, evolving regulatory frameworks and an increasing pool of assets are key drivers of this change. However, the one constant that we see in Asia is the growing sophistication of clients and their sharper focus on leveraging new cross-border investment channels and entering new asset classes.”
Additionally, according to Jitendra Somani, Head of Asia Pacific Global Custody at HSBC Securities Services, the trend is for global custodians to offer a holistic approach on product solutions: “Risk analytics, compliance monitoring, performance measurement, increased support on class actions and proxy service are becoming an important component of service.”
Bailey agrees, saying that J.P. Morgan is now adopting a ‘client first’ approach, rather than product first. “Investors are willing to consider a much wider array of opportunities; emerging markets, private equity, long/short. The want the choice and from a securities point of view, they want people on the ground they can deal with.”
“There is a very clear need for custody providers to offer end to end securities services, including safekeeping, fund administration, middle office support and treasury,” says Somani. This trend is seen as a fundamental shift in attitude, and Bailey adds: “I can’t remember the last time we won a custody mandate in isolation. Today’s dialogue centres on the bundling of solutions on the asset servicing side. We’re also seeing opportunities to link in with our investment banking and asset management franchises to incorporate elements such as passive currency overlay, futures and options clearing, derivatives pricing.”
Part of this shift is the evolving relationship between local and global custodians. Local custodians are seeking opportunities offshore as they look to extend the capabilities they can offer their own domestic clients. Bailey says, “From a global custodian’s point of view, this is an opportunity to work even more closely with our domestic clients, advising them on industry best practices and educating them on the most appropriate internal infrastructure set-ups.”
Over the last decade, the region has experienced tremendous asset growth and a rapid accumulation of official reserves, with large onshore pools of capital developing in China, Japan, Singapore and Korea. This is reflected in the growth of assets for custodians, especially those who were relatively new to the region a decade ago such as J.P. Morgan. Growth in the firm’s assets under custody has gone from US$100 million. $1.7 trillion today. In 2010 alone, J.P. Morgan Treasury & Securities Services increased its Asia Pacific headcount by 600, of which 200 were for WSS.
In terms of capital flow trends, Somani notes: “As a global custodian, we are witnessing substantial pick up in South-South flows between Latam/Asia/ME/Pan-Asia and in particular, an increased investment in Asian sovereign and corporate debt.”
There is still a lot of investment in offshore funds domiciled in Europe where clients have to work within a European time frame and speak to people in English. The ability to provide an Asian-based capability will be even more of a factor in future, says Bailey, as banks roll out services allowing clients to transact in Asia time: “It will remain an important consideration, because I don’t believe there is going to be an Asian funds hub developing - at least not in our careers.”
You’ve got to be able to support clients in the jurisdiction. Investors want a product manager in the locale.
Somani adds, “the demands placed on Asian service providers has changed a lot. The financial strength and stability of the custodian is obviously important, but an onshore presence in the markets and the ability to put a large infrastructure in place to service clients is becoming an important differentiator.”
Bailey says JPM is working to further extend its in-country direct custody and clearing capabilities. “We’re exploring opportunities to act as a direct custodian for our global clients in markets where it makes sense. This means that we can offer our global clients a consistent approach to their international operations along with other revenue generating solutions such as FX or securities lending, risk mitigation and operations support.
Bailey says, “The extent to which we are able to tap into and support the market activities of the rest of the bank. Our development of staffing local markets has always followed on from the treasury service business. They have had to be in 15 countries over the last 15 years, whereas WSS was focused on three or four core areas. There are some markets where it is difficult to do so, such as Taiwan, where local administration and distribution is all packaged up by local providers.”
Although both banks see collateral management as an integral part of this more holistic approach to client servicing, the market has been slow to develop, especially post-Lehman. Bailey comments: “We thought there would be higher demand for it, but clients are still cautious on bank security. We think having a cash collateral facility in your locale is a sensible approach, but in Asia it’s been slow to pick up.”