The role of the custodian has evolved rapidly over the past years. The pandemic has even further bolstered the evolution of the custodian and amplified the need for more automation in this space.
Custodians are responsible for the safety of assets and securities but the role of the custodian is changing and we are seeing a rise in digital custody as the popularity continues to grow for digital assets. The direction is pointing towards digitisation and automation.
Caroline Butler, global head of custody at BNY Mellon, predicts that COVID-19 will serve to accelerate progress towards a fully digitised and automated industry.
She suggests that automation and digitisation have “long been the direction of travel in the industry but the impact of the COVID-19 lockdown has both highlighted the benefits of automated processes and clarified for some firms the vulnerabilities in parts of their architecture. The COVID-19 experience will no doubt prove a catalyst for investment to address such issues and streamline operations,” Butler says.
So with a potential catalyst of change occurring in this space, industry experts discuss the hot topics in the custody market at the moment.
The big talking points
Some of the big talking points in the custody space revolve around data, technology, automation and custody of digital assets.
BitGo’s CEO Mike Belshe affirms that custody of digital assets continues to be a critical and complex specialised endeavour, which requires the highest level of proper internal controls to protect the assets.
“Trust and security at a large scale is an absolute necessity for banks and industry to adopt cryptocurrency in a meaningful way. BitGo’s custody solution gives institutional investors the assurance they need to accelerate their investment in digital assets,” Belshe says.
Elsewhere, Ciaran Roddy, head of global custody product for Asia, asset owners and managers, securities services at HSBC, observes a few other important talking points in the custody space.
One talking point is around connectivity. Roddy notes that clients are increasingly looking to identify opportunities and connect directly with their own platforms to build synergies and ensure the information that companies such as HSBC are providing is timely, accurate and as broad a data set as possible.
“The second is around data and delivery channels in terms of how we are communicating with clients, who are looking to understand if there is an opportunity to leverage new technologies like application programme interfaces (APIs) and Chat-Bots,” Roddy says.
He continues: “As clients look for faster access to the latest trade status of a transaction and whether it has achieved straight-through processing (STP), the challenge, therefore, is for custodians to provide clients with data sets beyond mere SWIFT messaging standards which both of these channels facilitate.”
Additionally, another talking point, Roddy suggests, is around the different investment opportunities clients are seeing and how those opportunities can be enabled.
For example, Roddy explains: “Trading in new emerging/frontier markets, collateral management, accessing China through various channels, and, as clients chase yield, alternative and digital assets are becoming increasingly attractive. Custodians need to ensure they can help facilitate clients accessing these investment opportunities in a timely and efficient manner, and provide the full range of services.”
“The last is around operational efficiency between service providers, clients and the market. It is about understanding opportunities for utilities to be created with an increased level of standardisation,” he adds.
A rise in digital custody
As previously mentioned, digital assets are continuing to grow in popularity, and they are also becoming increasingly welcomed by institutional investors. Digital assets require enterprise-grade market infrastructure that can be integrated with existing technology and processes to run properly in regulated environments. This is so they can trust and align digital assets with the existing business. As such, the rise in digital custody and properly regulated digital exchanges is something that is continuing to gain momentum.
Discussing whether we will see an increase in digital asset custodians and whether there will be a rise in new firms or existing custodians expanding into the digital asset space, Belshe comments: “For future custodians, we do expect to see new entrants. We expect some of the incumbent financial services firms to enter the market and that they will likely often choose to use BitGo technology to ensure safety, security, and compliance for their own clients.”
Weighing in on this, Roddy adds: “It is a very interesting area at the moment. There is a huge number of existing digital asset custodians. We have done a lot of research on how mature the ecosystem actually is. Traditionally, most of these custodians have focused very much on the cryptocurrency side, whereas we are now seeing these fintechs looking to pivot and offer services to an institutional client base.”
He adds: “From our perspective as a traditional custodian, the client base that we serve would still expect existing providers to offer services to support digital assets – they will continue to look to minimise the amount of counterparty exposure they have, and will expect consolidated reporting across all asset classes, both traditional and emerging, and therefore we do not expect specialised digital asset custodians to take significant market share away from traditional custodians.”
Effects from the pandemic
The pandemic caused unprecedented challenges for the global securities services industry, but experts say overall it coped “remarkably well”. Challenges throughout the pandemic included adapting to a new way of working remotely and handling manual processes.
Butler observes that investment in digitised, automated processes over previous years made possible the rapid shift to remote working for most in the industry within a matter of days.
“It’s a feat that would have been considerably harder to achieve ten or even five years ago. Even so, COVID-19 exposed weaknesses within the wider ecosystem, in particular those processes where cross-industry automation and digitisation have not yet been achieved or even seriously attempted,” Butler remarks.
According to Roddy, it is evolving, but it has also helped identify whether there are any inefficiencies in client operating models.
“A lot of clients have been quite open to reviewing some of those bespoke processes we have been undertaking on their behalf. In some cases, we have also been asked to identify for them best practice in working from home arrangements. So it has been challenging but also interesting in terms of the new definition for ‘ways of working’ in large organisations,” he adds.
Looking to the future
Looking to the future, as the markets evolve, experts say that becoming increasingly transparent is something that will continue to be important. Roddy explains that being transparent is more important than ever in a continual low-interest-rate environment.
“There continues to be a lot of scrutiny and focus around ongoing regulatory changes, both global and local. We have to ensure we are able to provide clients with the appropriate level of service and reporting to help them meet their regulatory obligations,” he says.
As well as this, custodians must also support evolving client needs, such as different communication channels, asset classes, and markets, according to Roddy.
He comments: “As the markets are evolving, identifying the opportunities to collaborate with clients and different financial market infrastructures to enable more seamless communication flow is becoming increasingly important.”
Also commenting on the future landscape, Belshe concludes: “We expect the market structure to continue to evolve to reduce the risk for institutional investors. Future digital asset market participants will be able to trade more safely, with larger, more established firms, and a better understanding of risk.”
“In terms of technology, fiat and digital assets will blur – enabling a new wave of safer, more transparent financial systems, as we’ll be able to achieve atomic delivery versus payment and finality in trading settlements.”
