Aug 8, 2024

Global Overview of Custody

Increasing Importance of Custodians

The importance of custodians in the financial landscape has been on the rise over the past decade and is expected to continue growing in the coming years. Several key factors contribute to this trend:

1. Growing Participation in Developing Economies: As more investors and institutions in developing economies enter the global financial markets, the need for custodial services to manage and protect their assets increases.

2. Growth of Assets Under Custody (AUC): According to PwC’s July 2023 Global Asset and Wealth Management Survey, global assets under management (AUM) are projected to grow from $115 trillion to over $147.3 trillion by 2027. This substantial increase underscores the critical role of custodians in managing these assets.

3. Shortened Settlement Cycles: To control defaults and enhance market efficiency, settlement cycles across the world are being shortened. This change necessitates robust custodial services to ensure timely and accurate settlement of transactions.

4. Enhanced Regulatory Frameworks: Countries are implementing stricter regulatory frameworks, increasing the need for custodians to navigate and comply with these regulations to safeguard assets while maintaining market integrity.

The Evolving Role of Custodians

Clive Bellows, Head of Global Fund Services EMEA at Northern Trust, highlights the future of custodianship, stating, “The custodian of the future – Custodian 3.0 – cannot be all things to all people. Clients will expect access to the best technology at any given point of time – enabling them to take advantage of new platforms and strategies to help maximize returns and minimize risk. While these custodians should provide services through technology, they shouldn’t attempt to reinvent themselves and transition into a pure technology company. Rather, they must continue to focus on maintaining the core principles of protecting assets and supporting clients’ investment strategies.”

Core Responsibilities of Global Custodians

Global custodians, typically large banks or financial institutions, perform several critical functions:

Safekeeping of Assets: This includes maintaining accurate records of ownership, valuation, accounting, and reporting of assets throughout the trade lifecycle.

Trade Processing: Custodians track, settle, and reconcile assets acquired and disposed of by investors, either directly or through delegated authority with asset managers.

Asset Servicing: This involves maintaining economic benefits of ownership, such as income collection, corporate actions, and proxy voting. In essence, a global custodian administers investment-related activities like clearing and trade settlement, income collection, proxy processing, corporate actions, and cash movement on a global scale. They ensure that assets are held securely and transactions are executed efficiently and accurately.

The Role of Agent Banks

To facilitate access to securities markets worldwide, global custodians collaborate with agent banks (sub-custodians) to handle tasks in foreign markets, including safekeeping of assets, settlement, record-keeping, market access, and advocacy. These agent banks provide direct market access and expertise, ensuring compliance with local regulations.

Evolving Relationships in Custody Services

In today’s dynamic custody landscape, global custodians are forming proactive partnerships with agent banks. These partnerships focus not only on asset safety but also on long-term strategies to develop mutually beneficial products and services. This shift transforms the relationship from a purely transactional one to a collaborative partnership based on the agent bank’s ability to invest in new technologies and integrate existing services.

Selection Criteria for Custodians

When selecting custodians, clients consider several factors:

Resilience and Track Record: Evidence of asset safeguarding.

Transparency: Clients need to know the status of their requests and inquiries.

Immediacy: Access to new markets, improved straight-through processing, and settlement statistics.

Responsiveness: Effective support when needed.

Insight: Access to market experts who can advocate on behalf of clients.

Local Expertise: On-the-ground knowledge and experience.

Categories of Custodians and Their Challenges

Custodians can be categorized into three types, each facing unique challenges:

1. Pure Global Custodians:

• Asset quality management.
• Selection of local and regional custodians.
• Managing different settlement cycles and client liquidity.

2. Global Custodians with Presence in Growing Markets:

• Use of regional products and varying settlement cycles. Country-specific regulatory reporting.
• Client-specific billing and tariffs demands

3. Agent Banks or Local Custodians:

• Regulatory reporting.
• Catering to diverse client categories.
• Cost vs. revenue analysis.

Addressing Custodial Challenges with eMACH.ai Architecture

To address these challenges, Intellect offers its eMACH.ai Custody Platform for custodians, featuring:

Composable Architecture: The platform’s composable architecture allows for seamless integration and customization, enabling custodians to adapt quickly to market changes and regulatory requirements.

Generative AI Capabilities: Leveraging the power of generative AI, the platform offers cognitive capabilities that enhance decision-making, streamline operations, and improve service delivery.

Regulatory Compliance: Our Custody platform is designed to cater over 100+ functionalities aligned with country-specific regulations and global standards, ensuring comprehensive compliance.

Cloud-Native and API-Led: Built on the iTurmeric cloud-native platform, the platform offers robust scalability and agility, with 136 APIs enabling seamless connectivity and enhanced customer experiences.

Market Leadership: By adopting the eMACH.ai Custody, custodians can capitalize on their existing technology investments, transform their operations, and position themselves as market leaders in the era of cognitive enterprise.

With the microservices-based architecture, the platform provides flexibility to global custodians to take the progressive modernization route. It enables custodians to pick and choose specific components to integrate with their existing solutions and provide better servicing capabilities.

IntellectAI is dedicated to streamlining Custody operations, harnessing the power of eMACH.ai’s innovative architecture to drive excellence in the financial industry. The deployment of this architecture will empower custodians to excel in the face of dynamic financial industry challenges.