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Benefits and Pensions Monitor15 Years of Change: A Brief History Of The Canadian Custody IndustryBy: Tom MacMillan In the early 1990s in Canada, there were 14 custody providers made up of trust companies and the securities departments of major banks. By 1999, however, there were but four. What happened in those intervening years to drive such wide-scale consolidation? Larger global custodians from the U.S. entered the market with their worldclass technology and, as global markets became more accessible, plan sponsors demanded more services. To many custodians, it became apparent that the hundreds of millions of dollars it took to keep up with the technology investment was far greater than the returns the Canadian market could ever provide – and so they exited the business. As the stronger players bought out the smaller ones – and some of them were, in turn, bought – many plan sponsors found themselves faced with changing circumstances; a change they did not ask for. The turn of the millennium was an unsettling time for plan sponsors – and they made their concerns known. With fewer custodians, would there be less competition and, therefore, less choice? Service levels were changing and in some cases dropping. Was it going to get worse? Would fees increase? While some plan sponsors viewed this as an opportunity to test the market and find a new supplier, most stayed the course, giving their newly-formed relationships a chance to prove themselves. Fewer Custodians, More Services Today, there are just three major players left in the game. One is the Canadian operation of a U.S.-based global custodian. The other two are joint ventures of Canadian banks, each partnering with major global custodians (one European and the other American). The three major players standing have each found a sustainable economic and business model and each is committed to making considerable investments in technology to meet the growing needs of plan sponsors. The products and services are now far more advanced compared to anything previously available. They include:
Each of these is routine, turning a multitude of data into meaningful information. Meanwhile, economies of scale have brought capabilities and information previously only available to the most sophisticated and largest of funds to a broader base of pension plans. Beyond The Basics Custodians have become very good at managing the huge amounts of warehoused data within their custody, accounting, and recordkeeping systems. Services such as portfolio analytics, governance support, fund oversight, and risk management are available to any plan sponsor right from their desktop. The need to extract quality from the vast quantity of information means that custodians now provide an even higher level of service by performing an important role in helping plan sponsors meet their fund objectives. Technology has also eliminated borders for multi-national companies. Local custodial services from centres of excellence around the world encourage country-specific knowledge and support with consolidated head-office oversight and management. Multi-currency real-time accounting systems with access and analysis anywhere, anytime allow for cross-border pooling of pension investments and effi ciencies never before possible. Custodians are also using technology to benefit the broader market by increasing the efficiencies and reducing the risks inherent in the trade settlement process. As part of the initiative to improve straightthrough processing (STP) rates for trade settlements, and by identifying processing breaks that act as barriers, custodians are working with investment managers and plan sponsors to streamline the settlement process. Canadian custodians are lobbying securities regulators to mandate trade-date matching. Same-day confirmation of trades is viewed by many people around the world as the building block for STP efficiency. The end result will be a more attractive Canadian market. What’s Next? Growth in the complexity of investment products and continued global diversification will put continued pressure on custodians to develop ways to accommodate new investment vehicles, more efficient processes, and improved reporting for plan sponsors. This will benefit the custodian market by requiring that custodians remain competitive and continue to give plan sponsors the service they demand – ultimately strengthening the partnership between custodians and their valued clients.
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Tom MacMillan is president and chief executive officer of CIBC Mellon.