Unbundling custody, FX and sec lending on the rise at US funds

Unbundling custody, FX and sec lending on the rise at US funds

  • Export:

A growing number of US pension funds are separating contracts for custodian bank services, FX and securities lending according to a Michigan-based consultant.

A recent report by Funston Advisory Services, which works with US public retirement systems, says splitting the services into separate mandates is increasingly common and the right way to go in order to improve performance and transparency.

Funston is currently working with the New York State Common Retirement Fund - third largest public pension fund in the US with assets of $178bn - which is considering preparing and receiving bids for three separate RFPs, one each for custodian, FX and securities lending services.

“We believe this would be the best direction for the fund, even if the same provider were selected for all three services,” Funston said in a recent fiduciary review of the fund. 

Funston's experts added that they are increasingly seeing other major funds unbundle contracts for the services. In some cases, pension plans are already utilizing three different providers.

The change of approach comes amid increasing concerns throughout the investment industry as to the FX rates pension funds receive from their custodian banks and excessive service charges.

BNY Mellon and State Street have both been under regulatory scrutiny for allegedly overcharging clients either in FX transactions or other custodial services to pension fund clients.

Even if New York’s Common Retirement Fund ultimately contracts for FX and securities lending services from the custodial bank, Funston's paper suggests there should be three separate contracts and service level agreements governing the services and relationship.

“Issuing separate RFPs increases the opportunity to find the best provider of each of those services. In addition, it makes it easier to change Common Retirement Fund's securities lending or FX provider, should that become necessary, without disrupting the custody relationship,” Funston added.

While this approach may result in higher apparent costs for custody, the firm suggests it should improve transparency of actual costs, enhance securities lending and/or FX performance, and provide the opportunity to consider use of agency firms whose sole responsibility is to the client.

Speaking to Global Investor/ISF, a Deutsche Bank representative agreed with Funston's comments: "The bundling of services can in some way be blamed for problems many clients had with both sec lending and FX with the custodians.

"By signing separate contracts the clients selects the best provider and is able to hold them accountable – very similar to hiring asset managers."

Another individual working within JP Morgan's securities services business added: "With so many large US funds, there are clearly differences in how they approach this.  

"Whether the RFP’s are bundled or not, the selection process still evolves around the best provider. Of course some funds choose not to unbundle and that is there choice."

  • Export:

Related Articles