Funds in Australia are adjusting to seismic regulatory changes brought about by the government’s pension reforms - key among them is a potential five-fold increase in data to be supplied under emerging rules.
While the increased costs associated with new rules have led smaller funds to merge to gain economies of scale, J.P. Morgan says its role as a custodian has expanded and deepened. It is boosting technology spending as it rolls out its mobile strategy amid clients’ demand for data-on-the-go and instant snapshots of risk exposures.
Australia’s “Stronger Super” reforms were introduced during 2012 under the Superannuation Legislation Amendment Bill. At stake is $1.4trn worth of assets. Under the changes, the government will create a simple, low-cost default pension product “MySuper”, accelerate the processing of everyday transactions and strengthen governance of the system. As part of the “Stronger Super” legislation, the Australian Prudential Regulatory Authority was granted law-making powers for the super industry for the first time. The APRA has since released prudential standards.
“It’s raising the bar in line with the banking and the insurance sectors,” says Marian Azer, Executive Director and Head of Product Global Fund Services at J.P. Morgan Worldwide Securities Services. “We’ll be enhancing our existing products and launching some new ones, specifically to help clients meet the requirements.”
J.P. Morgan WSS plans to spend about $30m to improve its technology platform. William Fraser, Head of eSolutions at J.P. Morgan WSS Australia and New Zealand, says: “We started a programme where we were updating and enhancing our local platforms and the whole objective was to become more integrated with our global technology providers to make sure that we were linked into our standard security and reference market data sources.”
Among the major regulatory changes are an increased regularity of information and a drastic expansion in the number of data items required by regulators, says Fraser. “What this means for the global custodian is that we are moving from about 400 data points to about 2,000 or 3,000 data points that needed to be provided in order for our end-clients to meet some of these new regulations.”
The trend towards increased data disclosure is global as governments and regulators imposed rules on better transparency and governance of financial markets especially post-Global Financial Crisis (GFC). Besides Australia’s “Stronger Super”, European regulators are introducing Solvency II and the Basel III banking requirements have already made significant impact on bank capital adequacy, stress testing and market liquidity risk. “I expect to see a proliferation of data requirements across many financial markets where pension funds operate because of the regulatory regimes.”
Benjie Fraser, Managing Director and Global Pensions Executive, Investor Services, adds: “Custodians are now not only involved in processing securities and managing information in a more easy to use way, we’re also very involved in helping clients navigate the regulations.”
Amid the rigorous rules pension funds are forced to heighten their risk monitoring, says Benjie Fraser. “The GFC has really complicated pension funds on their exposure reporting requirements and in understanding what their risks are.
“A lot of them see themselves as risk managers now and many are expecting the custodians to report on the management of that risk.”
Another development in the global custodial industry is caused by a trend towards investments in non-traditional asset classes such as derivatives and private equity. Benjie Fraser says: “The ability to handle more complex areas, particular, in the field of private equity, derivatives and real estate; these are areas where custodians tend to differentiate themselves.
“Big funds at the moment, particularly in Europe, are using swaps in areas like inflation and interest rates to de-risk pension plans and that lead into the challenges that differentiate custodians - the ability to value those derivatives and manage the collateral around those derivatives.”
J.P. Morgan is investing between $18m-$20m this year to improve its global technology platform outside Australia. Amid the increased use of iPads and the trend towards tablet- and mobile-computing, custodians are stepping up their technology offering as clients demand “friendlier tools to interrogate information”.
Benjie Fraser says: “The industry as a whole has talked about and made tremendous investments in custodian technology and clients have already seen that because that investment has been in the infrastructure, but I think now for the first time you are seeing custodians really improving their tools that actually apply to the clients’ experience.
J.P. Morgan recently rolled out its Performance Attribution programme for pension and superannuation funds, a set of techniques that explain why a portfolio’s performance differed from the benchmark. Other areas of focus include client and mandate monitoring and derivative exposures, says William Fraser. “Clients are coming to us for greater and quicker access to high-level summaries for board reporting as well as the low-level detail.”
The role of the custodian is evolving. While its core duty remains keeping assets safe on behalf of trustees, its functions in the areas such as the collecting and the providing of information, administration, legal, compliance and accounting support have become more challenging.
“It’s that combination of doing things better and faster in a more complex investment world and also holding the hands of the clients when it comes to new regulations,” says Benjie Fraser.