Asset servicing providers are facing increasing responsibilities. Valérie Gilles of CACEIS explains how these can be overcome without breaking the bank
The network management business has evolved considerably over recent years. Today’s challenges are the ever-greater complexity and tightening supervision and monitoring. Regulatory issues no longer solely concern sub-custodians and cash correspondents but extend to all types of third-party holders, such as collateral managers, clearing brokers, prime brokers, transfer agents, and central counterparties—any party where the fund’s depository or the custodian could be involved, whether directly or indirectly.
The aim of a network management operation is both to enable investment managers to access market opportunities worldwide and to provide a well-supervised secure monitoring infrastructure. Asset servicing providers’ network management departments are a nexus of sales, operations, compliance, legal and risk expertise, which is combined to offer global asset safekeeping under optimal conditions.
Asset servicing providers are facing increasing responsibilities due to their obligation to return assets, as enshrined in various European fund directives, for funds for which they act as depository. Subsequently, there has been increasing focus on compliance, audit, risk and legal elements of the network management business, and demands for regulatory and management reporting have become more complex. This increasing complexity nevertheless ensures that safekeeping assets globally is a highly-regulated and now very competitive business to be in.
A best-of-breed network at the right price
Sub-custodians must be selected from among the top three in the market to ensure services are of sufficient quality, there is an appropriate level of expertise, and that the players are large enough to offer highly competitive rates. To guarantee these rates remain competitive for clients, a dedicated cell must constantly negotiate fees downward.
Teams should be coordinated at group level but be based in different locations in order to manage the relationship with clients, providers, and regulators. This ensures efficiency, responsiveness, in-depth understanding and knowledge of local market practices.
Network management is about connecting investors to the market, managing, supervising, monitoring the various stakeholders, and keeping track of interactions through a high-quality, secure and competitive process.
In addition to overall performance and high operational efficiency, network management divisions put a high value on developing and enhancing a close, long-term business relationship with correspondents. Commitment is required from both sides. Maintaining the close relationship is also one of the major challenges in the way that business is done today. The growing role digital technology and data management plays in daily interactions certainly needs to be balanced by process transparency and true inter-personal relationships, which can generate further value. A close relationship helps to promote a long-term vision in an environment that favours immediacy and the short term.
Attaining broader global coverage in an increasingly regulated world
This is clearly not only a network management challenge, but also an industry-wide concern. Risk is a key factor when looking to enter a new market and a new relationship for a client.
Even though the selection and monitoring process is very detailed and time consuming, it ensures that an accurate and complete analysis of the impacts and opportunities for the asset manager and the client, while providing added value by generating in-depth knowledge of the local market practices. Correspondent banks understand these risk and compliance obligations and so due diligence processes are efficiently completed.
The influence of tech on network management
Levels of straight-through processing in process flows with correspondents are usually high. However, for network and operations teams, dealing with the exceptions and/or complex items such as corporate actions and tax issues can be time consuming and a source of operational risk. Blockchain technology may go some way to providing a solution to the operational risk issues and manual processing required, and the industry is looking at ways of incorporating distributed ledger technology (DLT) to bring more transparency and further cost savings. Whether seen as an opportunity or threat, they cannot be ignored and will have a large scope of application (for example, in know-your-customer compliance, reconciliations, monitoring and registration).
Most industry events have a DLT feature. It is potentially the key technology development that will influence and change the entire asset servicing industry most in the coming years. The European Securities and Markets Authority has launched discussion papers on it and we are likely to see regulators soon taking it more seriously and drafting legislation to govern its use. It is still in its infancy, but its potential to reduce costs and barriers to entry, along with industry disruption, will see it continue to advance.
T2S impacts on network management
The Target2-Securities (T2S) platform brings operational and liquidity management facilities and enables clients to access all the T2S markets from a single entry point. For the time being, the impact on network management is indirect, however, as T2S implementation progresses, it will be liquidity management that is most affected, rather than the settlement facilities. Only once the most significant markets have been onboarded, all the expected settlement features are made available by all the participants, and the costs of the project have been absorbed, we will have an idea of the increased settlement efficiency under T2S.
However, it will be a number of years before the full benefits of the enhancements offered by such a huge initiative are seen. At CACEIS, from a network management and operational perspective, we have taken a combined approach—act as a direct participant on markets where we already have direct access to the central securities depository (CSD), and then remain with our best-of-breed sub-custodian network for the others.
Depending on the above elements, we are open to reshaping our set-up should we need to adapt, using T2S to broaden the number of CSDs we access directly while continuing to rely on local custodians for the other markets or any other model that shows evidence of operational, financial and risk efficiencies. AST
