It is inevitable that asset managers want to retain their investment gains by reducing uncertainty and risk from their activities as much as possible and increase straight through processing (STP) and transparency, particularly in today’s volatile environment. One way to achieve that is to use a custodian that can provide all of these benefits through a streamlined product offering to help reduce both costs and risks while keeping up with the ever-
changing regulatory environment.
The objectives of asset managers present their own challenges, particularly with a regulatory reform agenda framed by G20 commitments, which culminated in the Dodd Frank Wall Street Reform Act and the European Market Infrastructure Regulation (EMIR). Since 2008, regulation has been constantly evolving and expanding. In addition to those two regulations, investors also have to adjust to the second iteration of the Markets in Financial Instruments Directive (MiFID II), UCITs IV, AIFMD, FATCA, Basel III and Solvency II.
To understand and execute on what regulators expect from them, asset managers today look to their service provider for help with the provision of an industry-leading global custody and securities services offering with innovative technology to meet their daily requirements; seamless execution to increase STP and reduce risk; thought leadership to help them understand how regulation and potential market events could affect them (as well as their end-clients) and provide appropriate and timely data analysis.
Inevitably, the most sophisticated asset managers want to work with a securities services provider that can provide global reach and which has sufficient resources of capital to invest in industry-leading systems and technology. That means all of their requirements are met in one place. Investors then benefit and can have confidence in the fact that whatever complexity is injected into the market, whether by unexpected market events or by regulators, their custodian will be able to manage it.
Next, asset managers want seamless execution to help them eliminate risk and costs. Recognising the important role that asset managers play in the savings and pensions industry, regulators are putting pressure on them to provide their end clients with transparency and as little risk as possible. To do that, fund managers must tighten up the chain in their post-trade activities.
For their part, custodians have been moving into more consultative technology-driven services for years, which asset managers and other users of custodian and related securities services have greatly benefitted from. Increasingly, these users of securities services are looking to their providers to move even closer to their front office, even coming just after the trading and investment decision.
In the past, using one firm’s investment bank to execute trades and using the same bank’s custodian arm might have raised concerns about whether this one-stop-shop provided the best execution and cost in the market. Regulations, particularly MiFID, have removed that uncertainty.
Finding a provider that can tick the first two boxes as well as provide the critical consultative thought leadership all asset managers look for to keep up with regulatory and market changes, isn’t easy. Asset managers look to their service providers to provide information about changes arising from the rapidly evolving regulatory environment, to ensure that new requirements are understood and prepared for. Large international firms that are present in multiple jurisdictions are best placed to have a view of regulatory changes and to adapt their services to new requirements on a global basis.
Lastly, asset managers also rely on service providers to help them provide up-to-date and transparent data analysis, which is a critical reporting requirement to regulators, governments, trustees and other stakeholders, and is part of their own internal risk reviews.
This means asset managers want detailed information about their transactions, securities held, and breakdown of the core characteristics of those assets. They also want this data delivered in a fast and efficient manner, which requires a strong STP framework. This presents a challenge and an opportunity for service providers as it is not an easy task pulling together different sets of data and presenting it in a format that asset managers can consume and customise.
To meet all of these requirements, a service provider has to continuously invest in technology, and have regulatory experts who can quickly analyse new regulations and understand how they will fit and potentially impact existing regulations with which asset managers are already complying. This requires a delicate balance between investing in business enhancements and people, while maintaining required capital levels. Large global custodians with the capacity to invest in its technology and systems are more able to make these investments than smaller firms.
Asset managers are looking to securities services providers to act more strategically then ever before. By using one bank for all activities following the investment decision, asset managers are recognising their ability to cut potentially weak links from their post-trade chain, and rationalise the number of providers they use. This coordinated servicing effort across a firm, usually a bank, enables the large and fully-integrated players to really understand an asset manager’s needs, requirements, product and geographical expansion plans. This support across many distribution channels helps fund managers reduce cost,
outsource the risk by leveraging operational capabilities, risk management capabilities and therefore offers a much better and broader value proposition. Today, a service provider must have all the necessary tools in the tool box and be willing and able to use them.