[ I N - D E P T H
custodians have not remained static,
but actually increased. “Asset managers
are demanding their custodians provide
them with more data and reporting,”
adds Van Verre. “This is having a signif-
icant impact on custodians’ operating
models. The industry is reacting and has
rationalised its platforms and increased
efficiencies. This has been done through
streamlining IT systems, offshoring
operational processes to lower cost loca-
tions, and identifying new products and
innovations.”
Some asset managers have told their
global custodians to set up hot contin-
gency networks in their markets, where-
by two sub-custodians provide cover-
age at the same time. However, such
operations are not cheap for custodians,
particularly in jurisdictions which adopt
segregated account structures. Asset
managers are frequently reticent about
paying for such services and custodians
have little choice but to oblige, as fund
managers have made it no secret they
will switch providers if pricing is not
competitive.
Fortunately for custodian banks, a reve-
nue stream that had once been extremely
lucrative and subsequently fell off a cliff,
has made a reappearance. Securities
on loan, according to DataLend, sur-
passed the $2 trillion mark, and saw a
$180 billion year-on-year increase. This
is the biggest increase since DataLend
began tracking the marke t in 2013. The
return of securities lending is a pos-
itive development for the custodians
and it has been driven by regulation of
the over-the-counter (OTC) deriva-
tives market. The Commodity Futures
Trading Commission’s (CFTC) – as part
of its Dodd-Frank mandate – phased in
clearing for OTC instruments in 2013.
Markets across Asia-Pacific (APAC) and
Europe – through the European Market
Infrastructure Regulation (EMIR) – have
also introduced centralised clearing.
New revenue generator
Clearing under EMIR has been appli-
cable to Category one and Category
two clearers since 2016, and it will be
introduced throughout 2017 and 2018
for the remaining categories. In order to
clear OTC products in a central coun-
terparty clearing house (CCP), users
need to post initial and variation margin,
which must be best in class collateral.
Un-cleared or bilateral OTCs will com-
prise of instruments that are very niche
or risky, and will not be allowed to pass
through CCPs. However, bilateral OTC
transactions will be subject to firmer
collateral rules as the Basel Committee
on Banking Supervision (BCBS) and the
International Organisation of Securities
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C U S T O D Y
F E E S ]
Commissions (IOSCO) have told national
competent authorities to implement
margining requirements on such trades.
Counterparties to bilateral OTC trades
will have to post initial and variation
margin, although as with centralised
clearing, its introduction will be imple-
mented in stages. Trading in any type of
OTC instrument henceforth will have to
be guaranteed with collateral. Financial
institutions which are long cash or high
quality bond instruments will find com-
pliance with these rules fairly straight-
forward provided they have a coherent
collateral management plan. For entities
which do not have such assets at their
disposal, it is much harder. These or-
ganisations need to identify cash or AAA
government bond rich institutions to
borrow from, in order to meet their OTC
margining requirements.
Many custodians are therefore looking
to lend out securities in exchange for a
fee to institutions for their margining
needs. Collateral is a lucrative revenue
generator as it is scarce. Quantitative
Easing (QE) has eliminated a lot of the
supply while banks and broker-dealers
are being forced to sit on high quality
liquid assets (HQLAs) for regulatory
purposes. As such, this type of lending
activity by banks could be a massive
commercial windfall. “We have seen a
huge demand for high quality collateral
because CCP collateral eligibility criteria
“Asset managers are
demanding their custodians
provide them with more data
and reporting.”
JOHN VAN VERRE, HEAD OF GLOBAL
CUSTODY, HSBC SECURITIES SERVICES
Summer 2017
globalcustodian.com
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