Bankable Insights_The Custodian Edition_June 2022
Our second edition of The Custodian for 2022 shares insights on the latest challenges and opportunities in the custody and securities services industry. Fi
*Bankable Insights* The Custodian Edition
Emerging markets, hidden gems
June 2022
They say spring is for fresh starts and new opportunities. This certainly seems to have been the case for securities services.
In recent months, it’s been encouraging to see – and be part of – more in-person industry interactions. Most recently, I was delighted to connect with peers and clients alike at the International Securities Services Association (ISSA) Symposium 2022.
And with this year’s big events like The Network Forum Annual Meeting and SIBOS returning to in-person meets, we’re excited at the engagements ahead.
That’s not to say there aren’t challenges. The conflict in Ukraine, the lingering effects of COVID-19 and the changing monetary and fiscal responses to these events are presenting an unfolding set of risks and opportunities to both developed and emerging markets. Volatility, interest rates and prices are on the up. Economic recovery continues to be uneven, particularly in emerging and frontier markets.
Looking ahead, we see opportunities arising from these challenges – particularly in emerging markets. Take Africa where we’re seeing a great amount of innovation to develop APIs, chatbots and mobile apps. All of which are designed to make it easier and more enjoyable for investors to access and trade the local market.
While digital assets and ESG can be tricky to navigate in emerging markets, they also arguably offer the world’s most exciting investment possibilities. In both cases, we’re seeing increased investment in regulation and supporting infrastructure. Moreover, with less saturation than developed-market counterparts, there are first-mover opportunities to be had and hidden gems to be found. Working with a global partner that can help uncover these is more important than ever.
We explore the story of one such gem in our first article, Untapped Africa: A frontier for ESG. COVID-19 spurred volatility in many African equity markets, and sudden regulatory changes dented investor confidence. But with international investor attention returning and with regional efforts to strengthen sustainable bond markets increasing, Africa now presents enormous ESG investment potential.
In Smart regulation for digital assets: How the UAE and Singapore led the way, we assess the risk-reward equilibrium in the digital asset space. The fostering of digital-asset innovation and growth needs to be balanced with robust due diligence – something the UAE and Singapore have worked towards in recent years. And despite their different approaches, both markets now offer investors a gateway to digital assets across emerging markets in their respective regions.
Back to ESG, we reflect on the severity of the world’s climate change emergency in The climate crisis in numbers. Via the results of our new report on financing a just transition to net zero, we highlight the critical role the private sector – our industry included – must play. Once again, emerging markets are at the centre of the challenge, and the opportunity.
India is another emerging market peaking international-investor interest with its rapid pace of current industry development. In India’s reforms building momentum for increased investor interest, we review how the market is adapting to progressive regulatory developments. We also look at market practices that still need strengthening, and how such changes could spur both the adoption of new technology and a spike in foreign inflows.
In a first for The Custodian, we’re featuring a podcast. Listen to Innovative financing: a powerful tool to unlock investment as a force for good, to learn how capital projects could solve some of the world’s worst problems.
And finally, we head back to the digital world in Meaningful data products: Custodians enhance their solutions. While data is increasingly being sought to boost returns, investors and their sub-custodians must both act before we can all reap the efficiency rewards. Here, we look at how smart investments into flexible strategies will be critical to mutual success.
We hope you enjoy this mix of content and we look forward to seeing more of you in-person later in 2022.
Margaret Harwood-Jones
Global Head, Financing and Securities Services,
Financial Markets
Untapped Africa: A frontier for ESG
Untapped Africa: A frontier for ESG
Africa’s capital markets are reputed to be challenging for foreign institutions to navigate. Despite this, the region could be the next frontier for ESG (environmental, social, governance) investing.
Tough headwinds throw SSA off-balance
African economies – along with many other frontier and emerging markets – suffered from heavy foreign investor outflows during the initial stages of COVID-19. Despite recovering somewhat, the recent flurry of macro headwinds is limiting foreign investment into Sub-Saharan Africa (SSA).
In many of the smaller SSA countries, the local equity markets are thinly traded and broadly un-tapped – although this could potentially give forward-looking international investors first mover advantage and the ability to identify market mispricing opportunities.
While African fixed income has historically been traded by local investors such as pension funds and insurance companies, global institutions are starting to take an interest. However, many are sitting on the side-lines owing to concerns about inflation and the impact which interest rate hikes could have on the region.
Nonetheless, investing into Africa is not always a straightforward undertaking. For some of the largest institutions, the risk-reward benefits of investing into the smaller, more illiquid African economies do not make sense – primarily because their sizeable capital allocations risk saturating the local market.
There are also a number of logistical and operational challenges which investors need to be cognisant of when building up exposures in the region, not least of which is the propensity for certain markets to impose currency controls and FX restrictions.
Take Nigeria, where thin FX liquidity is a persistent challenge for foreign investors repatriating their funds. In this market the mandatory conditions of FX allocation now include the bundling of spot and forward deals. Intermediaries and foreign investors whose risk management frameworks do not allow FX forward deals in Nigeria have limited access to repatriation funds in the market. This is a risk which still continues today. Additionally, investors have occasionally found themselves being blind-sided by the authorities making sudden changes to tax rules or regulation – often with little forewarning.
All of these risks need to be carefully considered by investors in Africa.
Chasing the ESG opportunity in Africa
Fuelled by an assortment of investor demand and regulatory pressure, ESG assets under management (AuM) have skyrocketed - with the Global Sustainable Investment Alliance putting AuM at $35 trillion in 2020, up from $30.6 trillion in 2018, and $22.8 trillion in 2016.1
1 Investment Week (July 21, 2021) ESG assets on track to exceed $50 trn by 2025
As capital continues to accumulate in ESG funds, Africa is likely to be a major beneficiary – especially as many countries in the region have strengthened their sustainable bond markets.
For instance, Ghana announced in 2021 that it was considering issuing $2 billion worth of green and social bonds with proceeds being deployed to fund development programmes.2 Other African markets are also following in the footsteps of Europe and parts of Asia and North America by forcing listed companies to disclose information about their ESG policies.
While African markets are giving serious thought to ESG issues, governance continues to be an Achilles heel in certain countries. In the absence of strong governance, companies are at risk of not meeting their ‘E’ and ‘S’ objectives. If ESG in African markets is to thrive, then governance is something which needs to be urgently improved upon in many countries.
In addition, globally there are potential flaws in the scoring systems at ESG analytics companies. This is because some of the methodologies used to score companies and markets on ESG are not harmonised - frequently leading to anomalous results. It is therefore not unheard of for competing analytics’ firms to award contradictory ratings or scores to identical companies and markets. If the momentum behind ESG investing is to keep growing, these data deficiencies need fixing.
2 Bloomberg (July 5, 2021) Ghana mulls Africa’s first social bonds with $2 billion sale
Working with the right custodian makes all the difference
Clients are looking to rationalise their operations, especially in complex markets such as Africa. This is because engaging with multiple agent banks in the same region creates challenges for investors and intermediaries, as they will need to oversee a plethora of due diligence processes.
Moreover, clients will also receive information from agent banks in a number of different formats. Notwithstanding the cost implications, these set-ups increase the likelihood of errors and mistakes at the client level. In response, more banks and brokers are looking to simplify their agent bank relationships by consolidating the number of sub-custodians they use and appointing vendors on a regional – as opposed to an individual market – basis.
So what are the advantages of this streamlined approach? By leveraging a global provider operating out of a regional hub, clients only need to perform due diligence on one vendor, instead of visiting multiple agent banks in different markets.
Other benefits to the client include having a simplified settlement instruction process; standardised reporting and consolidated billing – all of which facilitate cost savings, efficiencies and simplicity. Through a more entrenched relationship with a single agent bank, clients will be able to forge closer strategic partnerships thereby supporting growth and encouraging innovation.
African markets show enormous potential as investors increasingly chase ESG opportunities. Despite this, there are challenges. Many frontier markets – including those in Africa – do pose risks (i.e. FX risk) and these need to be taken into account. In order to navigate African markets, it is vital clients rethink how they manage their sub-custody networks. Many are already doing so, evidenced by the tacit shift towards consolidation over the last few years.
This article is based on themes discussed during a panel discussion at The Network Forum Africa Meeting 2022.
Smart regulation for digital assets: How the UAE and Singapore led the way
Smart regulation for digital assets: How the UAE and Singapore led the way
Waqar Chaudry
Executive Director, Innovation and Digital Assets Product, Financing and Securities Services
Digital assets are turning into a litmus test for global financial centres. Regulators are competing to set rules that are effective enough to establish their jurisdictions as responsible hubs for digital finance, but not so onerous that they strangle the market for innovations like cryptocurrencies, stablecoins and non-fungible tokens. Two early cases when it comes to effective regulation are the United Arab Emirates (UAE) and Singapore.
With no central repository of information, blockchain-based assets like cryptocurrencies are hard to regulate at a national level. That makes a global approach important. Singapore and the UAE are great examples of markets ahead in terms of the environment they have created for digital assets. However, they arrived at their destinations via different routes.
Let’s start with the UAE, which has long sought to diversify its economy away from its reliance on energy markets. To this end, it moved as a matter of national strategy into fields like financial services, manufacturing and sustainable enterprises, investing in new technologies and building a skilled workforce for the future. Digital assets, then, are a logical element of this diversification.
When it comes to regulation, the UAE differentiates between onshore and offshore, with the latter referring to companies that are based in the UAE but regulated on an international basis. In the emirate of Abu Dhabi, for example, the Abu Dhabi Global Market (ADGM) launched in 2018 the region’s first comprehensive crypto-asset regulatory framework. This was later updated to cover the term virtual assets1 in line with the guidance issued by the intergovernmental Financial Action Task Force (FATF).
That alignment has allowed Abu Dhabi to attract digital businesses to the emirate, seeding the start of a mutually reinforcing nexus of firms, talent and job openings. In April 2022, for instance, the ADGM licensed Kraken, the first large US-based cryptocurrency platform, to operate in the UAE as a regulated crypto-assets exchange and custodian.2
The emirate of Dubai is also engaged: Dubai Financial Services Authority, regulator of the special economic zone, the Dubai International Financial Centre, has recently consulted on rules related to virtual asset businesses. In February 2022, Dubai established the Virtual Assets Regulatory Authority and legislated to create an onshore industry for virtual assets as well as an offshore one.3 Adding impetus to the UAE’s regulatory roll-out is that it faces mounting regional competition, with Bahrain and Saudi Arabia also seeking to encourage crypto-business.4, 5
The push factor in Singapore
Singapore saw a somewhat different push-pull equation. From 2013 onwards, the city-state began to naturally attract Bitcoin exchanges, brokers and ATMs, a flurry of innovation that left regulators in catch-up mode between 2017-2020. This process is now complete: the Financial Services and Markets Bill, passed in April 2022, bringing Singapore fully in line with FATF standards and establishes a rigorous set of controls.6
In its explanatory note on the legislation, the Monetary Authority of Singapore – the city’s financial regulator – said it considers that all transactions related to digital-token services carry higher inherent money-laundering and terrorist financing (AML/CFT) risks due to their anonymity and speed. These two factors, though, are part of the tokens’ appeal, and while many legitimate traders appreciate them, they inevitably also appeal to criminals seeking to trade illicit materials, launder money or breach international sanctions.
This aspect of cryptocurrencies, however, is no longer a barrier to effective oversight, with the growth of data analytics around cryptocurrency blockchains helping regulators bring the rule of law to the digital frontier. The emergence of firms like Chainalysis, Elliptic and TRM Labs affords greater visibility over which crypto-wallets are associated with bad actors when it comes to the most popular protocols like Bitcoin and Ethereum. The latest analytics tools can reveal the kinds of entities operating on crypto-exchanges, and even detect attempts to obfuscate the source and destination of funds.
These analytics technologies along with robust know-your-customer regulations provide a basis for effective due diligence, AML/CFT controls and sanctions enforcement. Indeed, far from being secretive, cryptocurrencies are now arguably more transparent than the fiat economy, given the transparency innate to distributed ledgers.
Yet herein lies a tension. Regulations must be designed in such a way that mitigate AML/CFT risks, but without eliminating the pseudonymity that is part of the appeal of cryptocurrencies. If analytics reach the point of depriving cryptocurrency users of basic privacy when it comes to payments, the market as a whole could flounder.
The future of the middle ground
Another tension lies between banks and financial centres that see digital assets as an opportunity, and those that see them as a threat. With the advent of Ethereum, which allows for the issuance of an unlimited number of tokens, there is a burgeoning market for securitised coins backed by everything from traditional equities to shares in artworks and physical assets. Some regulators even envision a future of digital securities that do not need intermediaries to trade, further enabled by the advent of official central bank digital currencies (CBDCs).
Although the market for digital securities is relatively small compared to cryptocurrencies – the market capitalisation of which reached nearly US$3 trillion in late 2021 before tumbling in the months afterwards7 – it is likely to grow rapidly.8 Consequently, banks need to adapt if they are to survive the potentially sizeable cost-savings and disintermediation that tokenisation is beginning to offer issuers.
The most adept banks will be able to leverage their understanding of the regulatory and risk environment surrounding digital assets to guide their clients through what is a fast-evolving and volatile market. This is particularly true of jurisdictions like the UAE and Singapore, which act as investment gateways to the wider Middle East and Asia respectively, including to emerging and frontier markets.
Banks that are well-versed in navigating those markets, and are experienced in dealing with complex company and regulatory structures, are ideally positioned to advise clients on maximising the opportunities presented by digital assets while minimising the risks associated with them. In future, these banks may even be able to shoulder the technological burden of managing blockchain infrastructure, alleviating not just the compliance burden but the technological burden on the issuer – though this would require most to staff-up in terms of technical and operational expertise in digital assets.
While Singapore and the UAE took different routes, what unites their emerging regulatory emphasis is a focus on client protection. Protecting issuers and investors in digital assets from market manipulation and abuse, as well as preventing their entanglement in AML/CFT and sanctions-related compliance problems, is fundamental to establishing a digital financial centre that enjoys the confidence of participants.
For their part, banks must align with this goal, because when it comes to digital assets, banks cannot simply be the infrastructure – they must provide protection for their users as well. Only by knitting together the robust institutional focus and appropriate regulatory framework will financial institutions, and financial centres, be able to establish themselves as safe, dynamic hubs for the future where digital-assets will play a central role.
The climate crisis in numbers
The climate crisis in numbers
A look at where sustainable investment is most needed to mitigate the impact of climate change.
The results from Just in Time, our latest report on financing a just transition to net zero, are clear: Emerging markets need to invest an additional USD94.8 trillion1 – a sum higher than annual global GDP2 – to transition to net zero in time to meet long-term global warming targets. The private sector can play an important part here by taking the lead to both introduce innovation and broaden an understanding of the consequences for people and the planet.
India’s reforms building momentum for increased investor interest
India’s reforms building momentum for increased investor interest
Over the last decade, India has implemented a number of positive measures, which have helped open up its vibrant domestic capital markets to foreign portfolio investors (FPIs).
Despite all of the recent turmoil, India’s reform zeal shows no sign of dissipating. Earlier in the year, India became one of the first economies to shorten its trade settlement cycle from T+2 to T+1, while discussions are currently underway on how to further streamline the FPI registration process. So what do these changes mean for global investors in India?
T+1 takes effect for listed domestic equities in India
While the US and Canada have decided to wait until 2024 before adopting T+1 for domestic equities, India is racing ahead with changes to its settlement cycle. Having previously operated a T+2 model, the Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE) have both been incrementally introducing a T+1 settlement cycle for equities listed on their respective venues on a bottom-up basis since February 2022.
Chaitanya Joshi, Head of Financing and Securities Services, India, at Standard Chartered Bank, anticipates that all publicly traded equities in India will eventually settle on T+1 by January 2023. “However, we expect these changes will only impact the securities held by FPIs in September or October 2022,” he adds.
The decision by the Securities and Exchange Board of India (SEBI) to implement T+1 has been driven by a number of risk considerations. A shorter settlement duration will mean that investors incur less market and counterparty risk during the trading lifecycle, enabling them to benefit from reduced margin requirements and collateral optimisation.
With less capital trapped inside Central Counterparty Clearing Houses (CCPs), there will be greater liquidity available in the market.
Aside from unlocking liquidity, T+1 could also help drive efficiencies in post-trade processes, which have historically been heavily intermediated and manually intensive.
A T+1 model will encourage intermediaries including custodians to enhance the existing technologies as well as adopt new ones, in what will help improve automation within the industry.
Chaitanya Joshi
Head of Financing and Securities Services, India
While shorter settlement cycles can facilitate operational synergies, there are risks, which will become increasingly apparent once T+1 is applied to more widely traded securities.
The Exchange & Clearing Corporation announced that the market cut off time for trade confirmations is 1930HRS on day T. Custodians and FPIs have highlighted this could result in challenges around settlement instruction timelines. Under T+2, the number of trade fails is negligible. A T+1 settlement cycle could possibly lead to an increase in fails, and with it penalties.
The T day cut off time also creates FX liquidity issues, which could see investors having to pre-fund their trades.
However, custodians and FPIs are looking for ways to remedy this situation. Industry associations including Association of Global Custodians (AGC) and Asia Securities Industry & Financial Markets Association (ASIFMA) have made representations to the Regulators & Market Infrastructure Intermediaries to consider a T+1 morning trade confirmation. Through a Custodian Group, a proposal has been submitted to the Exchange & Clearing Corporation for a cut-off time of T+1 at 0900HRS. A morning cut off time means clients can avoid pre-funding their trades, while it will also minimise the number of trades getting converted to hand delivery settlement.
Early indications seem to suggest that the Exchange & Clearing Corporation is sympathetic to the idea of permitting trade confirmations to take place on T+1 morning. If this is agreed and implemented, then such a move would also certainly make the settlement process easier for FPIs when trading Indian equities on the Stock Exchanges.
Putting the finishing touches on market access
SEBI has implemented a number of positive changes supporting easier market access for FPIs.
Most recently, SEBI consolidated the number of FPI categories from three to two; eased Know-your-customer (KYC) rules for Category 1 investors (i.e. government institutions, banks, broker-dealers, swap dealers, pension funds, insurance/re-insurance companies, asset managers); and relaxed the broad based criteria that will open up the FPI route to entities that were unable to meet this eligibility criteria.
Despite these marked improvements, there is still more work to be done. SEBI has eased the regulatory framework for FPIs relaxed certain KYC rules for FPIs – especially around things like documentation requirement for KYC. However, the Reserve Bank of India (RBI) is yet to make these changes to its own KYC rules and this has been highlighted to RBI by the industry. Such consistency will help simplify KYC, and reduce the amount of documentation required to enter the local market.
Additionally, there have been temporary provisions in place allowing custodians to accept scanned documents for registration purposes from FPIs operating in markets subject to COVID-19 lockdowns.
Custodians are requesting that SEBI let them continue with the practice of accepting signed scanned documents as part of the FPI registration process while examining similar practices that may exist in other foreign jurisdictions.
A market with a positive future
Having introduced a raft of market reforms, India is becoming an increasingly popular investment destination for FPIs.
Also the increase in limits to invest in local debt markets via the Voluntary Retention Route (VRR) will help sovereign wealth funds, pension funds and global corporates to raise their investments in the Indian fixed income securities. We have emerged as a leading provider for this route used by Foreign Portfolio Investors.
Chaitanya Joshi
Head of Financing and Securities Services, India
If T+1 is deemed to be a success, and the country further simplifies documentation requirements for FPIs, we can expect to see an acceleration of capital inflows to the market.
Innovative financing: a powerful tool to unlock investment as a force for good
Innovative financing: a powerful tool to unlock investment as a force for good
More and more investors and companies are incorporating ESG metrics into their capital allocation decisions, and this trend shows no sign of slowing down. In this podcast, learn why we will continue to see an acceleration of sustainable financing and impact investing trends, with ESG asset classes outperforming the rest. Listen to the podcast here.
Meaningful data products:
Custodians enhance their solutions
Meaningful data products: Custodians enhance their solutions
Ryan Cuthbertson
Global Head, Custody & Funds Products, Financial Markets
Whether they are global investment banks, custodians, broker-dealers, asset managers or institutional investors, clients face unique challenges.
To stand out, many are leveraging data solutions to augment investment returns and obtain operational alpha – namely, extracting value through operational efficiencies.
In this process, it is the sub-custodian banks that facilitate the smooth delivery of meaningful and useful data insights to clients. However, dissemination is not always straightforward.
One consequence of the difficult market environment is growing buy-side compression on the fees paid to global custodians and broker-dealers. Another is that the securities services industry has struggled to grow revenues.
As the sell-side looks to counter margin pressures, many are rationalising operational processes. By working with custodians, some intermediary clients have found innovative uses for data to, for example, reduce the intermediation lag, which brings efficiencies and cost synergies.
Some sub-custodians provide insightful data analytics and extra settlement-related data like transaction statuses, fail updates and counterparty updates. In this way, global custodians and broker-dealers can offer more detailed information to their asset manager and asset-owner client base.
However, while data provision brings tangible rewards, it is not without its challenges.
Gathering data and making use of it
Sub-custodians sit on enormous volumes of data, including settlement data, cash projection and forecasting information, liquidity management details, corporate actions data and operational data for predictive analysis.
Much of this data is unstructured. The first step, then, is to organise data and store it in data lakes. Ideally sub-custodians should then use an omnichannel approach so all clients can access it, irrespective of their technological sophistication or data-strategy maturity. In practice, this means giving access through a mix of online portals, SWIFT, bespoke or standardised application programming interfaces (APIs), XML or via MQ.
This channel-agnostic approach to data-sharing provides a flexible, enhanced end-user experience by reducing operational friction to ensure clients and their customers get information as and when they need it.
Benefit 1: Drive efficiencies and reduce settlement risk
Advances in technology offer sub-custodians a competitive advantage by helping them to harness solutions that add value for clients who increasingly want enhanced settlement data to reduce settlement risk. With technology, data lakes and analytics, sub-custodians can share data in a frictionless, user-friendly fashion instead of via traditional channels like email or telephone.
This also ensures market participants can identify trends around settlement failure, and that firms can then put measures in place to mitigate those risks. This reduces operational and credit risk during the trade lifecycle, optimises collateral management and brings other benefits – including helping them to comply with the EU’s Central Securities Depositories Regulation (CSDR), which legislates significant fines and mandatory buy-ins for trade fails.
Providing bespoke settlement data can also drive efficiencies at clients. Enhanced settlement information – like tailored data which cannot be transmitted using existing methods – can assist custodians and brokers when supplying information to their customers.
One benefit of this approach is fewer client inquiries about settlement status updates – as one of Standard Chartered’s sub-custodians found. After strengthening its core settlement platform to permit the semi-automated capture of enhanced settlement narratives across multiple markets in Africa and Asia, the number of inquiries received dropped 85%.
Benefit 2: Improve synergies in the investment process
The investment process is well known for its inefficiencies, with each intermediary, for instance, having its own books of record and reconciliation processes. However, new technologies like distributed ledger technology (DLT) promise greater data transparency and limit the need for reconciliation, cutting duplication.
Ultimately, DLT could see the establishment of a single book of record, which would dramatically streamline the investment and trade settlement process. Not surprisingly, sub-custodians are actively exploring DLT, although adopting it would require market-wide changes: intermediaries across the settlement and payment chain would need to re-engineer their IT infrastructure, and DLT standards are needed to ensure interoperability.
Away from DLT, sub-custodians are leveraging data solutions to enhance onboarding and improve market entry time for international investors. Account openings are being automated through various data and digitalisation initiatives – including the adoption of APIs – with Standard Chartered advancing here. In 2020 we went live with an internal account opening API which automated manual processes and reduced overall processing time by 79%.
Challenge 1: Avoid data pitfalls
Providing data, however, poses challenges. First, providers must ensure sourced data is accurate and has a legitimate lineage. The risks of breaching data privacy regulations are serious, while circulating inaccurate data could result in inadvertent losses and errors.
A second challenge is cyber-crime, whose scale is evidenced in a study by BAE Systems: it found 74% of financial institutions reported an increase in cyber-attacks during the pandemic.1 As a result, clients are scrutinising whether service providers have adequate cyber-hygiene measures in place.2 The consequences of getting hacked or suffering client data leakage could be severe, so sub-custodians must implement stringent data governance and cyber-security measures.
A third challenge is not to overwhelm clients with information. Sub-custodians must understand clients’ data strategies, capabilities and objectives, and provide a tailored approach.
A fourth, more fundamental, challenge is whether sub-custodians can monetise “Data as a Service”, which can boost core revenues. To date, most have opted not to charge clients, viewing data-provision as a complementary service that reinforces customer relationships.3 But, as data strategies evolve, sub-custodians will eventually need to levy fees.4 Similarly, bespoke communications channels or APIs might warrant charging.
1 The Times (May 10, 2021) Three quarters of finance firms report rise in cyber-attacks.
2 Global Custodian (June 10, 2021) Network managers look to future proof against technological
advancements and cyber-threats.
3 Global Custodian (January 9, 2020) Custodians play the waiting game in monetising data services.
4 Ibid.
Challenge 2: The move towards standards
Data standards are a divisive issue. Proponents like SWIFT hold that standards for data and data communication channels (e.g., APIs) are crucial as these will encourage interoperability and promote common best practices.
This would address the challenge that clients face in receiving data from multiple service providers that is often similar but provided in different formats and structures – an unavoidable consequence of having sub-custodians operating across diverse markets.
However, the heterogenous nature of data and underlying markets complicates the search for solutions. One option is that clients limit the number of sub-custodians they work with to ensure more consistent data across multiple markets. Another is for fintechs to play a role in bridging data inconsistencies.
Alternatively, we could see a shift towards standards for more commoditised data sets as opposed to bespoke insights. As is often the case with innovation, standards tend to develop organically through market consensus in working groups. It is hoped data will follow this path.
Result: The data custodian of the future
Sub-custodians are embracing innovation, especially as it relates to data-sharing, as they look to future-proof their business models and drive client success via an effective end-to-end flow of data.
Ultimately, the success of data solutions will depend on how effectively intermediaries in the investment chain can identify and access the data they need with their own underlying clients.
Consequently, a well-organised data strategy and a willingness to adopt transformative technologies are imperative if sub-custodian providers are to navigate some of the challenges.
An intelligent and thoughtful approach to data management and delivery will benefit global custodians and end-investors by cutting manual intervention and providing value through greater transparency. In return, firms will spend less time seeking information from counterparties, and be free to focus more on revenue-generating and value-accretive activities.
Regardless, sub-custodians must be flexible when pursuing their data strategies and factor in clients’ needs. In this way, they will position themselves strongly to capitalise on some of the market-wide changes underway.
The article upon which this edited version is based was written for the original publisher and copyright holder, The Journal of Securities Operations & Custody of Henry Stewart Publications LLP.
