Brian Leddy | BNY Mellon Asset Servicing

Brian Leddy, managing director at BNY Mellon Asset Servicing, discusses the SWF space.

A recent survey by BNY Mellon found that companies are focusing more on sovereign wealth funds (SWFs) and emerging markets investors. Some 59 per cent of surveyed firms meet with SWFs, of which 40 per cent are targeting investors in emerging markets.

By a wide margin, the most frequently engaged wealth funds are based in Singapore, Norway and Abu Dhabi. Western European companies are the most likely to meet, at 69 per cent or consider meeting, at 24 per cent, with SWFs, while North American firms are least likely to engage sovereign wealth funds, at 42 per cent.

The survey was conducted through July and August 2011 and features input from 650 companies across 53 countries. Respondents cover the range of market cap and sectors, including financials, industrials, consumer, technology and healthcare.

Essentially, the numbers are pointing to a noticeable shift in investors relations strategies to expand outreach to SWFs, and that means that asset servicing providers will increasingly need to accommodate the unique regulatory and client management characteristics of these funds.

AST: Can you tell me about BNY Mellon’s role and which regions you are seeing the most asset servicing business from?

Brian Leddy: BNY Mellon delivers a full range of products to a number of SWFs. Recognising their specific requirements, we have instituted a Sovereign Advisory Board, under the chairmanship of Jai Arya, to ensure that we identify and meet the changing needs of this constituency. We are engaged with sovereign clients from all continents and support their global service requirements. While the Middle Eastern SWFs are perhaps the most renowned, thanks to some high profile investments in the UK, we have seen growth in this sector on a global basis. Central and Eastern Europe is a growth market, but equally we see continuing opportunities in Asia Pacific and South America.

AST: What are the unique characteristics and fund administration requirements for the different regions?

Leddy: It is not necessarily the case that characteristics and requirements of these funds is shared on a regional basis. SWFs are in general instituted as a result of national regulation and each is unique in their mandate and aims. The fundamental issue is to understand their reporting requirements in terms of what needs to be delivered to their Board of Directors or Governors and ensure that all of the necessary data to support those requirements is delivered promptly and accurately.

AST: Which regulations are you looking out for most? Are global regulations or regional regulations the more prevalent in terms of the time you spend in monitoring developments?

Leddy: The increasingly dynamic nature of both the global and regional regulatory environment requires us to monitor closely the impact of new regulations on our services and on our clients. It is natural that many SWFs treasure confidentiality in their dealings with both service providers and with the markets. Legal disclosure requirements compel custodians to discuss the implications of these requirements with our client base and ensure that any information that leaves our organisation is authorised appropriately.

AST: In general, what are the challenges and opportunities for working with SWFs?

Leddy: An important point to bear in mind about Sovereign Wealth or Reserve Funds is that, unlike much of the more traditional custody business, they do not have a defined set of liabilities that their assets need to be managed towards. That being said, there may be a call upon the assets of the fund at any time to meet specific national priorities, such as infrastructure development or support of broader fiscal policies. As a service provider, we need to be in a position to support any requirements and respond to significant inflows and outflows of capital on an ad hoc basis.

AST: In terms of future trends, do you see any shifts in the kind of services you expect to be providing?

Leddy: In the wake of the global financial crisis, the single most important issue for investors - indeed, for our entire industry - is risk. For SWFs, who often control very large pools of assets, exposure to asset servicing providers has become a key aspect of their view of overall risk. Some funds are developing approaches whereby they are examining the factors that drive custodian risk - credit ratings, asset values, balance sheet, contractual protections, etc. - and determining whether they are adequately protected. Others are taking a “look through” approach and examining the institutions where their assets ultimately reside – subcustodians; CSDs - to determine whether they are comfortable with their exposure. Dissemination of information which supports these efforts and delivery of transparent monitoring of market entities will soon be a vital part of custody reporting.