With custody services segment of financial services facing intense competition and cost pressure, developing innovative asset servicing solutions across the trade lifecycle is key to strengthening the client experience and driving growth. In today’s disruptive business landscape, how are custodians managing scalable operational efficiencies? Hasan Rauf, DTCC Executive Director and Head of Business Development in Asia Pacific, recently spoke with Jacqueline William, Managing Director/Head of Securities Services Sub- ASEAN, Deutsche Bank, to find out more.
Rauf: How do you differentiate the role and value of a global custodian versus a domestic custodian?
William: A global custodian (GC) provides clients with single connectivity across jurisdictions for the settlement and safekeeping of assets held in custody. The GC then contracts with domestic custodian(s) in every market that their client wishes to invest.
As a domestic custodian is a specialist in the local market where it operates, it has deep understanding of market nuances and a strong network of market players to collaborate and leverage. This is the value that a domestic custodian brings to the table.
Rauf: Given that Asia is not a homogenous region with infrastructure development and automation adoption at varying levels, what are the challenges that firms face when navigating the post-trade landscape in the current normal?
William: While levels of automation varied across markets in the past, the gap is closing with shortening of clearing and settlement cycles and the establishment of connectivity with depositories. We are also seeing greater market liberalization in certain markets and easing of cross-border investments to attract foreign investments. Intermediaries and capital market players are putting more focus on automation, digitalization and making real-time data available.
As transactions in intra-Asia investment grow, we need a post-trade settlement and clearing platform that connects markets – to increase efficiencies in settlement, funding, corporate action, and reconciliation processes. Additionally, it can act as a catalyst to address the gap that still exists between markets namely, timing for the finality of assets, pre-trade funding requirements and depository account structures.
Rauf: How do GCs manage local nuances across markets in Asia while conforming to global market practices and standard?
William: Asian regulators recognize that they need to offer a level playing field that meets the requirements of global investors. For example, markets should provide clear and transparent regulations, protect investors’ interests, foster a stable foreign exchange regime, and move to shorter settlement cycles – to mitigate counterparty risks, improve efficiency and speed in the payment platform. There has been a tremendous amount of interest in maintaining market competitiveness – to align with global standards.
Local nuances still exist. Domestic custodians are best positioned to ease the process for GCs, by retrieving flows of information and acting on their behalf, where permitted.
Rauf: What are the criteria that firms use when selecting a domestic custodian or GC bearing in mind the need to mitigate risk and improve operational efficiency?
William: Firms should not compromise on their primary considerations when selecting a custodian. Key considerations include a custodian that has strong processes and policies in place to ensure the safety of assets under custody, backed by a knowledgeable and experienced team with the ability to identify risks and act swiftly. Staying relevant and up to date with technology infrastructure and service standards operating at optimal levels are also important considerations. Market advocacy is another important area as firms depend on their custodian to provide local insights, pre-empting markets changes for example.
"Today, custodians such as Deutsche Bank are transforming digitally, focusing on developing real-time machine learning, artificial intelligence, and client focused real-time dashboards, to reinforce asset safety and investor protection."
Unfortunately, some firms are driven solely by fees in their choice of a custodian. An unprofitable relationship is not sustainable as it compromises the ability to invest further, for the benefit of the client.
Rauf: Based on your experience with mitigating failed settlements, what are your recommendations for firms to ensure that trades flow seamlessly downstream and what are the implications for failing to settle trades on time?
William: The responsibility of ensuring that trades do not fail does not lie solely on the custodian. This is essentially a joint responsibility, every party within the value chain has a part to play. For the firm that is engaging the custody services, it is pivotal that instructions sent to the custodian meet the pre-agreed cut-off times, are accurate with all the relevant information, and more importantly, the information should flow to the custodian via a straight through processing mode – to enable instructions to be processed swiftly, with no further intervention. If trade instructions are mismatched, time is needed to investigate and resolve the issue to avoid a failed trade.
Today, custodians such as Deutsche Bank are transforming digitally, focusing on developing real-time machine learning, artificial intelligence, and client focused real-time dashboards, to reinforce asset safety and investor protection.
Rauf: How well did firms cope with last year’s market volatility in terms of trading volumes and fail activity? What were the main challenges for firms and how did they overcome them?
William: Varying levels of adjustment were required to manage last year’s market volatility. Firms who made investments in strong business continuity plans adjusted quickly to the new norm.
That said, others faced challenges with system access when working remotely, such as weak Wi-Fi connectivity and over-reliance on manual processes. It is worth noting the role played by regulatory bodies in ensuring that market players pay due attention to recovery measures during that time.
Rauf: When you think about the ‘future’ of custody within the context of current market needs, what comes to mind?
William: Staying relevant by bringing value to the client and being nimble immediately comes to mind.
Today, tremendous changes are taking place in the pre-trade environment. Asset classes are changing, sophisticated solutions such as pre-trade data and analytics and machine learning are available to facilitate close to accurate decision making. Similarly, the post-trade value offered by a custodian needs to remain relevant to the value chain. Time continues to be king and as such, trade and asset data, funding, corporate action and reporting need to be in the hands of the investor in the quickest possible time.