The global custody market is at a crossroads in its
development, beset by thin margins in a difficult economic
climate, but also on the verge of technological developments
that could bring substantial efficiency savings and regulatory
changes that could open up new opportunities.
"There is a large volume of confirmed or potential
regulatory initiatives which will influence custody banks'
business models over the coming years," says William Slattery,
executive vice president of State Street Corporation, head of
the global services business in the UK, Middle East and
These initiatives include the Alternative Investment Fund
Managers (AIFM) directive, Target2-Securities (T2S), Ucits V
and new client money and securities rules in the UK - to name
but a few.
"In many cases, they impose increased obligations on custody
banks - perhaps the most important being the provisions around
strict liability for depositaries stemming from the AIFM
directive and potentially Ucits V," says Slattery.
In addition, T2S will completely change the settlement
landscape in Europe by enabling participants to operate
centralised securities settlement and cash pooling, with
implications for global custodians, their custody networks and
central securities depositories (CSDs).
Some of these rules will require custody banks to examine the
business case for further self-custody. They also encourage
custodians to fundamentally re-examine their contractual
obligations and oversight models applicable to the more than
€9trn ($11.9trn) held in Europe-regulated fund
By applying a common depositary model across all European
jurisdictions for the first time - including those markets not
previously requiring a depositary - these new regulations allow
opportunities for economies of scale.
"But given the level of responsibility demanded, a very
detailed understanding of local regulations and clients'
operations is required to carry out the contracted services
The AIFM directive, which came into force for new funds in
July, and will take effect for existing funds from next July,
establishes a framework for supervising unregulated funds, and
the requirement for a depositary for the post-trade work,
including position recordkeeping, cash monitoring, and asset
oversight for each investment fund. It also sets out provision
for the restitution of assets.
"If you want to offer depositary services, you had better be
a custodian bank given the liability on the assets," says
Florence Fontan, head of client segment, asset managers for BNP
Paribas Securities Services.
"We believe that AIFs should choose a depositary that has
experience, has the backing of a Global SIFI, is well rated,
and hence will still exist when the investor comes looking for
The second element is the question of the custody
"The global custodian will want to ensure it has control of the
chain of custody because it will be responsible for any asset
loss. All custodians have undertaken a full review of their
network in the light of the AIFM directive, and BNP Paribas
currently holds an average of 90% of clients' assets in its
A new era
The current raft of regulations is primarily focussed on
risk, compared with previous eras when regulation centred on
harmonisation and level playing fields. It means new
obligations to undertake functions that reduce risk, ultimately
creating opportunities for custody firms to grow their
businesses by monetising these additional functions.