February 2012
Twenty years of custody in Canada
The technology, players and market demands of Canada’s custody industry have changed significantly over the past 20 years, but one thing remains the same: clients continue to value a custodian they can trust to deliver consistent, professional and highly-responsive service.
Compared to 20 years ago, the investment world has gotten much more global and complicated, with a proliferation of strategies, investment vehicles and regulatory requirements – even as timelines continue to compress. The numbers are bigger and the stakes are higher, and we see more instability and more frequent crises.
Today’s investors have more robust governance standards, routinely requiring performance information and real-time data. Increasing demands in the market have led institutional investors to become much more focused on their custodians’ performance, looking at the health of our companies, systems, controls and technology.
Clients want to know about our internal and external audit results, about our risk management and business continuity preparations, and even our employee engagement performance. I heartily applaud clients’ rigor and diligence in this area, the custody industry is the better for it.
From custodian to asset servicing provider
Historically, custodians have always been expected to deliver operational excellence, including timely reconciliations, smooth trade settlements and consistently accurate valuations – we are still judged on these factors today. What has changed is that clients have come to see custodians as critical business partners and problem solvers. Technological advances have enabled exchanges, depositories and custodians to perform market operations much more efficiently. At the same time, clients have recognized that custodians’ view to the entire trade lifecycle can enable access to valuable information. Repositioning themselves as “asset servicing providers”, custodians have expanded their capabilities and deployed rich new reporting and information management systems in response to clients’ needs.
Fewer players – but greater competition
We’ve seen significant consolidation in the industry – from more than 15 custodians 20 years ago to four large providers today who service 90 per cent of the market. Custodians need enormous scale to support the necessary R&D investment to keep up with clients’ needs, which is driving consolidation around the world. An example of this was the formation of our 50 per cent parent BNY Mellon in 2007, which now is the world’s largest custodian, servicing nearly US$27 trillion of assets. Ironically, having fewer suppliers has actually made the market much more competitive: we are on our toes, as clients choose among ever better offerings.
2008 financial crisis and a new focus on risk management
Today’s emphasis on risk and transparency was perhaps born out of the events surrounding the 2008 market collapse. I was never prouder of our company than when we were able to successfully manage all of our positions with Lehman so that none of our clients experienced an operational disruption, a loss or trading restrictions. Our risk management programs performed as planned, and with a huge amount of effective teamwork, we passed this test with flying colours.
The Lehman bankruptcy underscored the critical importance of strong governance and risk management, and I would say the entire industry is better for the experience.
The next 20 years
Looking forward, I believe that the demand for reporting, risk management, transparency and market information will continue to accelerate. Institutional investors will be under tremendous pressure – from regulators and their clients while operating in the expected low-return environment over the next few years. We are going to see increased trading volumes, more sophisticated investment vehicles, more globalization and a continued shortening of timelines.
By Tom MacMillan
This article originally appeared in the 20th anniversary edition of Benefits and Pensions Monitor.
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Trade Talk® is provided for general information purposes only and CIBC Mellon Global Securities Services Company, CIBC Mellon Trust Company, CIBC, The Bank of New York Mellon Corporation and their affiliates make no representations or warranties as to its accuracy or completeness. Readers should be aware the content of this publication should not be regarded as legal, tax, accounting, investment, financial or other professional advice nor is it intended for such use.
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