Investment managers are rated by all manner of agencies yet custodians have no equivalent. Last year London-based consultants Thomas Murray and Standard & Poor’s announced that they were going to introduce ratings, as did consultants RCP & Partners, but as yet nothing has emerged. Both have confirmed that they are continuing to develop the notion and that there should be something in the public domain within a year or so.
Thomas Murray has been busy consulting global custodians and, more importantly, a number of large institutional investors both in the UK and US. The basic structure of the prospective ratings remains unchanged: they are to gauge a custodian’s credentials, basic services, core operations and internal functions, and indemnification policies and procedures. During the consultation, it emerged that relationship management needs to be quantified and so it shall be.
In addition there is an accompanying subset of service quality evaluations (SQEs) for each of the nine basic services that are evaluated – settlement, safekeeping, income, corporate actions, corporate governance, transactional cash and FX, taxation, strategic cash management, and securities lending. It is also producing a similar set of domestic custody ratings.
Thomas Murray visited 10 of the largest institutional investors in the UK and five in the US and received encouraging feedback. “They thought it was a great idea and they raised the point about the opacity of the global custody business and the difficulty of comparing custodians,” says Roger Fishwick, director of Thomas Murray.
Feedback from the dozen or so custodians was mixed. Says Fishwick “The reaction from the very biggest was ‘we’re too big to need ratings, everybody knows us, we’re famous worldwide’.” In contrast, the smaller, less established groups welcomed the proposal as a potentially useful marketing tool (if, presumably, they do well).
In practice, the ratings are likely to remain private for the moment. This is in part due to procedure. Once a rating is constructed, one of three fates await it. Its subject can either reject it outright as inaccurate; agree on it but not want it published (“generally part of a self- improvement cycle,” says Fishwick); or give its blessing for it to be published.
Fishwick says it’s unlikely there will be ratings for the public before next year. And this seems in line with developments at the rating company RCP & Partners which, as reported last year, announced it was producing a similar product. RCP already covers hedge funds, traditional funds, private equity and venture capital and is now taking what it calls a TACs approach- trustees, administrators and custodians.
The TAC ratings will mirror the overall philosophy at RCP, the concept of fiduciary risk. RCP’s Shane Norman says the ratings will ascertain whether the trustees, administrators and custodians are fulfilling the expectations of their counterparties in terms of diligence and care of the assets. Ratings will in practice concentrate on issues like management controls, technology, resource commitment, consistency in delivery, understanding of fiduciary responsibility and compliance procedures opposed to day-to-day performance
RCP asked Robert Kay, managing director of Global Securities Consulting Services, to head a working party of seven large custodians last summer. Kay did so but there has been a minor delay in the proceedings. According to Norman, the ratings are still well under way but the group is in the middle of negotiations with potential investors interested in creating a proper platform to roll out the concept of fiduciary rating. “Trustees, administrators and custodians have somewhat taken second place to the development of a proper strategic platform,” he says.
Nevertheless, the ratings are under construction and Norman says the first to be rated are likely to be the large custodians’ subsidiary operations, particularly their offshore ones. “A lot of the initial work will come from parents asking us to look at their subsidiaries and from subsidiaries who wish to establish themselves in the market,” he says.
The ratings, when they finally emerge, will help highlight inefficient custodians and promote those better run and more efficient. Says Richard Hogsflesh, managing director at R&M Consulting and author of an annual global custody review: “Custodians are always anxious not to reveal their weaknesses and they all have weaknesses in different areas. Understandably they want to avoid having anything published that might show them up.”