Just a few weeks after Lehman Brothers Holdings collapsed into bankruptcy, in September 2008, the U.S. Congress passed a $700 billion economic stabilization program designed to shore up the nation’s faltering financial system. Similar programs (read: bailouts) were approved in the weeks that followed, but it would not be until July of this year that legislators finally enacted financial reforms designed to avert future crises.
Institutional investors, charged with safeguarding their clients’ assets, have not been content to wait for governmental action and instead have been demanding greater transparency, disclosure and guidance from the custodial banks that service their accounts — and custodians have been only too eager to oblige.
BNY Mellon Asset Servicing, for instance, stress-tests portfolios under various economic scenarios and assesses factors such as risk concentration among the multiple third-party managers.
“At this point it’s well beyond traditional risk-and-return models — clients want this supplemented with multiple academic and other approaches,” explains Vincent Sands, Pittsburgh-based executive vice president of BNY Mellon Asset Servicing–Americas. Bank of New York Mellon Corp. is the world’s No. 1 bank in terms of custodied assets: $21.8 trillion, up from $20.7 trillion last year, according to Institutional Investor’s exclusive annual ranking of the World’s Largest Custodians.
Total custody assets for the top 15 firms surged 10.3 percent over the past year, from $85.5 trillion to $94.3 trillion.
In these postcrisis times it’s all about the three Rs: “regulatory requirements, reducing operating expenses, and returns,” observes Mark Kelley, global head of the asset-gatherers segment at J.P. Morgan Worldwide Securities Services in New York. J.P. Morgan repeats in second place, with $14.9 trillion in custodied assets, compared with $13.7 trillion in 2009.
“Reducing operating expenses is a necessity to deal with new regulatory requirements,” Kelley says. Some portfolio managers, for example, are dealing with investors that want increased transparency, such as a breakdown of bundled defined contribution fees. “Until the crisis people were comfortable with their 401(k)s,” he notes. “Now that they’re not making money, clients want to know more about their fees.”
Demand for additional services is prompting many firms to add staff. No. 3–ranked State Street Corp. — with $14 trillion in custodied assets this year, $1.7 trillion more than in 2009 — has been hiring Ph.D.s in mathematics, physics and computer science to write programs to help clients evaluate portfolios in terms of standard deviation, Value at Risk — even fat-tail risk.
“That is a big change,” says John Klinck, head of the Boston-based firm’s corporate development and global relationship management groups. “People may go back to the old ways of chasing investment returns, but these new operational practices are not going away.”
