Pick ‘n’ mix
The great revival of risk management has benefited custodians. Andrew Turner, Asia-Pacific director with State Street Investment Analytics, says investors’ focus on risk and demand for transparency on assets and counterparty relationships has intensified since Lehman Brothers collapsed. They want more information, and they want it faster. “The people who previously asked for monthly reporting are now asking for weekly reporting, and the people who wanted weekly reports now get them daily,” he says. The securities lending scares of the past two years, which involved many managers (among them State Street Global Advisors), have motivated the analytics unit to establish regional collateral management in Sydney later this year. It will focus on keeping track of assets in bilateral relationships.
JP Morgan WSS has already imported its collateral management service into Sydney from Asia. The custodian has also fielded demand for its private equity and real estate administration service, which the Future Fund draws on outside of its custody relationship with Northern Trust. The custodian is also drawing on its global derivatives service to provide further transparency about over-the-counter (OTC) derivatives to clients. The bank’s derivatives team is headquartered in London and tracks the instruments through their life cycles. It is beginning to station people in other markets, and will arrive in Australia towards the end of the year and will be supported by a domestic team. “One of the things we recognised a few months ago – and JP Morgan is one of the biggest OTC derivatives operators in the world – is that it made sense to take some of these people and create a unit for trading purposes and administrative purposes for our clients,” Gray says.
He admits that taking on OTC derivative valuation means the custodian is exposing itself to further liabilities. But the capability gets a nod from Mercer Sentinel: David says risk reporting on OTC derivatives should have become available a long time ago. O’Sullivan at State Street predicts that in the future, super funds and other multi-managers will pick and choose among the specialised services run by custodians and not rely on one provider for a complete, bundled service. The Future Fund’s decision to appoint a private equity administrator outside its main custodian is a clear example. “Our risk analytics group has lots of clients that aren’t State Street custody clients,” Turner adds.