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Экономика
ПЕРСПЕКТИВЫ РАЗВИТИЯ ДЕПОЗИТАРНЫХ БАНКОВ
УДК 336.71
Татьяна Юрьевна Хроменкова
Аспирантка кафедры биржевого дела и
ценных бумаг
РЭУ им. ГВ. Плеханова
Тел.: +7 906 789 54 79
Эл. почта: [email protected]
Депозитарные банки являются одним из ключевых звеньев инфраструктуры финансового рынка и имеют важное экономическое значение. В течение последних двадцати лет инфраструктура финансовых услуг не успевала развиваться вслед за бурным ростом масштабов финансового бизнеса и появлением новых инновационных решений. В качестве основы финансовой инфраструктуры депозитарные банки обладают всей полнотой компетенций и ресурсов для преодоления возникающих сложностей при стремит ель-ном росте масштабов бизнеса в финансовой сфере.
Ключевые слова: фондовый рынок, ценные бумаги, депозитарные банки, взаимные фонды, СЧА (Стоимость Чистых Активов).
Tatiana Yu. Khromenkova
Post-graduate student, the Department of Stock-Exchange Industry and Securities Plekhanov Russian University of Economics Tel.: +7 906 789 54 79, E-mail: [email protected]
THE DEVELOPMENT PROSPECTS OF CUSTODIAN BANKS
Custodian banks are one of the key elements of financial market infrastructure and they have a significant economic value. The financial services industry has expanded and innovated rapidly over the past twenty years and the market infrastructure has not caught up. Custodians play a key role in this infrastructure with the core competencies and resources to deliver solutions to the gaps that have appeared.
Keywords: stock market, securities, custodian banks, mutual funds, NAV (Net Assets Value).
1. Introduction
Custody has traditionally been a stable transactional business, where size matters and consistent, if unspectacular, revenues keep the machine moving. While custodians were not immune from the volatility that hit the market in the wake of the financial crisis, they have, on balance, survived better than most. Falling asset values and reduced securities lending activity limited revenues last two years, but with the return to more normal market conditions custodians have been looking at opportunities to expand their businesses and operations. Decisions taken now will shape the asset servicing market and decide the winners and losers over the next ten-twenty years.
A custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm's or individual's financial assets and is not likely to engage in traditional commercial or retail banking such as mortgage or personal lending, branch banking, personal accounts, ATMs and so forth.
The role of a custodian in such a case would be to:
- hold in safekeeping assets or securities such as stocks, bonds or commodities -precious metals and domestic and foreign currency;
- arrange settlement of any purchases and sales of such securities and currency;
- collect information on and income from such assets (dividends in the case of stocks and coupons - interest payments, in the case of bonds) and administer related tax withholding documents and foreign tax reclamation;
- administer voluntary and involuntary corporate actions on securities held such as stock dividends, splits, business combinations (mergers), tender offers, bond calls, etc.;
- provide information on the securities and their issuers such as annual general meetings and related proxies;
- maintain currency and cash bank accounts, effect deposits and withdrawals and manage other cash transactions;
- perform foreign exchange transactions;
- often perform additional services for particular clients such as mutual funds such as fund accounting, administration, legal, compliance and tax support services;
- provide regular and special reporting on any or all their activities to their clients or authorized third parties such as MAIC (Mergers and Acquisitions International Clearing House) Trust Account services for mergers and acquisitions payments.
Custodian banks are often referred to as global custodians if they safekeep assets for their clients in multiple jurisdictions around the world, using their own local branches or other local custodian banks with which they contract to be in their global network in each market to hold accounts for their respective clients. Assets held in such a manner are typically owned by larger institutional firms with a considerable amount of investments such as MAIC Trust services and Qualified Intermediary services banks, insurance companies, mutual funds, hedge funds and pension funds.
2. Local Custodian Bank and Mutual Fund Custodian
In relation to ADRs (American Depositary Receipts), a local custodian bank, also known as a sub-custodian or agent bank, is a bank in a country outside the United States that holds the corresponding amount of shares of stock trading on the home stock market represented by an ADR trading in the United States, with each multiple representing some multiple of the underlying foreign share. This multiple allows the ADRs to possess a price per share conventional for the United States market (typically between $20 and $50 per share) even if the price of the foreign share is unconventional when converted to United States dollars directly. This bank acts as custodian bank for the company that issues the ADRs in the United States stock.
The following companies offer custodian bank services: JPMorgan Chase, Bank of America, Credit Suisse, Citibank, Goldman Sachs, ICICI Bank, Standard Chartered Bank, Bank of New York Mellon, BNP Paribas Securities Services, HSB C, Wells Fargo Bank, Deutsche Bank, UBS and etc.
Not to be confused with securities safekeeping custodians, in the United States, various retirement plan investment accounts require custodians which have only a notion of safekeeping or possession in the concrete sense that securities or assets are custodied, but, rather, this arrangement is more about recordkeeping and administration than holding of invested assets. True, a custodian bank could also happen to be
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a retirement account administrator, though a commercial bank could also be such a custodian and not be a custodian bank. Such financial institutions specialize in the administration and custody of individual or self-directed retirement plan such as Individual Retirement Accounts. Such institutions provide required legal custody services for the assets associated with self-directed retirement plans and administrative services such as investment execution, recordkeeping, accounting, and tax authority and client reporting, while the actual account investments are held or custodied in MAIC accounts elsewhere.
A Mutual Fund Custodian refers typically to a custodian bank or trust company (a special type of financial institution regulated like a bank), or similar financial institution responsible for holding and safeguarding the securities owned by a mutual fund. A mutual fund's custodian may also act as one or more service agents for the mutual fund such as being the fund accountant, administrator and/or transfer agent which maintains shareholder records and disburses periodic dividends or capital gains, if any, distributed by the fund. The vast majority of funds use a third party MAIC custodian as required by Securities and Exchange Commission regulation to avoid complex rules and requirements about self-custody.
A mutual fund retirement account custodian, however, refers to the plan administrator and record keeper such as noted above, which may not necessarily be the same institution providing custody services to the investments of the overall fund.
A custodian bank acts as a third party watchdog responsible for protecting investors's assets from any illegal activities of the fund manager. Custodian banks were setup under the Investment Company Act of 1940 which was passed by Congress to protect investors. This legislation required investment companies to register with the Securities and Exchange Commission and to meet strict listing requirements.
Custodian banks are the backbone of the financial community. Greed is one of the biggest emotions triggered from active trading. This mental weakness is exponentially worst when dealing with billions of dollars. In order to prevent fund managers from dipping into their funds holdings, the physical assets of mutual funds are held and monitored by custodian banks. This simple protection makes
the following possible:
- Prevents the investors from losing their money if the mutual fund goes bankrupt.
- Does not allow the fund to include investor's monies with other company assets.
- If the fund is dissolved the custodian bank is responsible for returning funds to investors.
3. Custodian Banks and NAV (Net Asset Value)
Custodian banks have a number of responsibilities, including sending dividends, capital gains, and providing general communications to shareholders. While these are important tasks one of the largest responsibilities is to calculate the NAV of the fund on a daily basis. The NAV is the price per share value of the fund and is the simplest measure of the fund's value. Without the custodian bank, the investor would be relying on the fund manager's team to not only trade their money, but also report the results. So, without custodian banks there would be a conflict of interest in the financial world that would cripple the middle class from creating long-term wealth.
Net asset value is a term used to describe the value of an entity's assets less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual funds because shares of such funds registered with the United States Securities and Exchange Commission are redeemed at their net asset value. However, the term may also be used as a synonym for book value or the equity value of a business. Net asset value may represent the value of the total equity, or it may be divided by the number of shares outstanding held by investors and, thereby, represent the net asset value per share [1].
Net asset values and other accounting and recordkeeping activities are the result of the process of fund accounting, sometimes called securities accounting, investment accounting and/or portfolio accounting. Fund accounting systems are sophisticated computerized systems used to account for investor capital flows in and out of a fund, purchases and sales of investments and related investment income, gains, losses and operating expenses of the fund. The fund's investments and other assets are valued on a regular schedule such as daily, weekly or monthly, depending on the fund and associated regulatory or sponsor requirements. There is no universal method or basis of valu-
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ing assets and liabilities for the purposes of calculating net asset value used throughout the world, and the criteria used for the valuation will depend upon the circumstances, the purposes of the valuation and any regulatory and/or accounting principles that may apply. For example, for the United States registered open-ended funds, investments are commonly valued each day the New York Stock Exchange is open, using closing prices meant to represent fair value, typically 4:00 PM Eastern Time [2]. For the United States registered money market funds, investments are often carried or valued at amortized cost as opposed to market value for expedience and other purposes, provided various requirements are continually met [3].
At the completion of the valuation process and once all other appropriate accounting entries are posted, the accounting books are closed enabling a variety of information to be calculated and produced including the net asset value per share.
4. Development prospects of custodian banks in next five years
In general, the volatility that marked the financial crisis provided a positive boost for the custodians' business model. Limited proprietary risk-taking and healthy balance sheets meant that they were regarded as a safe harbour in the storm. Also, the risk of insolvency among the broker dealers resulted in a number of funds moving their custodial relationships to direct relationships with the larger players. As a result, the custodians have been extremely busy with new accounts, large amounts of liquidity and new assets to manage. This all sounds positive, but revenues were adversely affected by:
- The value of assets decreasing rapidly.
- A reduction in active trading and securities lending.
- A large volume of redemptions by investors as they seek safer assets during the downturn.
The custodian business model is heavily dependent on safekeeping fees as a percentage of AUC (Assets Under Custody) and also transaction fees on asset movements and settlements. In 2009 this resulted in a reduction in revenues during a period of increased internal activity to support the funds through recovery of the markets in the latter half of the year. During 2010 it has had a positive impact on revenues [4]. This serves to illustrate the fact that a business reliant on providing traditional custody services is
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far from being master of its own destiny. In addition, the end customers - the funds - are having their own fees challenged by investors as performance falls, which will in turn impact on their own focus on the costs of their service providers - the custodians.
Given the business dynamics of the custody industry, a focus on sustainable revenues and managing the cost base is vital for success. Indeed it is no surprise that almost 60% of the global assets under custody are managed by just four service providers and their lead over the competition is so significant that they are unlikely to be challenged in the short to medium-term. In an industry where services offered in the major markets are highly commoditised and margins are thin, scale is of vital importance. The largest custodians have sought to cement their positions in these markets through acquisition. For example, we have seen BNYM buy PNC Global Investment Services, and BHF Asset Services and State Street buy Intesa Sanpaolo Securities Services. Their challenge will now be to exploit these acquisitions to the full to make the most of synergy benefits and take advantage of increased scale.
The lack of due diligence on funds combined with ongoing concerns about the quality of disclosure of information to investors will inevitably result in new regulatory requirements. A key tenet of recent regulation is market disclosure as a mechanism for allowing the market to self-regulate (Basel Pillar III). While there are question marks over whether the market is able to self-regulate, the discovery of Ponzi schemes at Madoff investments and Stanford Investments is heightening the focus in this area. Following this through the value chain of securities industry service providers, the custodians have seen increased demand from customers for improved information. The fund management and hedge fund communities continue to demand timelier, more accurate and higher quality data, to assist them in executing their investment strategies. As a result, custodians are entering a world where regulators and customers will demand that they are more than trans-actional factories, but can also deliver as an information business. The demand for increased transparency extends to the need for custodians to demonstrate their operational effectiveness and provide proof that operational risks are being controlled, all of which is likely to require custodians to provide Statement on Audit-
ing Standards (SAS 70) reports.
The changes in the market have thrown open a vast number of opportunities for custodians but are also placing a lot of pressure on investment and resources, particularly where significant postacquisition integration projects are concerned. The business and operating models are also facing pressure in terms of customer and regulatory-driven demands for improved information and service flexibility. So what are the opportunities open to custodians at this junction in the crossroads and where the investment should be focused. The four potential strategic options are set out for custodians to be: the consolidator, the service provider, the product innovator and the market builder.
Despite consolidation to date, there are continued opportunities to build scale and add more transaction volume to the factory to reduce unit costs. This can take the form of a reinvigoration of the "lift out" product for fund back offices or buying custodians in existing markets to create savings through synergies. Alternatively, there are "fill in" opportunities where custodians can see opportunities to acquire or build in profitable parts of the network where they are currently using other providers, which will meet the demand from global investors for a global custody service provider. This consolidation strategy essentially focuses on cost and so is likely to be accompanied by a continuing focus on the efficiency of the operating model, increasing the manufacturing capability to reduce unit costs and taking advantage of opportunities to source functions from a variety of lower cost locations.
During the liquidity crisis funds have turned to the custodians as a port in the storm. However, there is a window of opportunity to maintain and grow these direct relationships if they can meet the service levels that are required. Feedback from the market suggests that this is unlikely, with continued question marks over servicing capability, lack of innovation and flexibility. The question remains over whether a large transactional business built on reducing costs and standardisation can realistically make this change to its core culture. While feedback to date suggests service and innovation is not an option in the short-term, the fact that this is not perceived as a strength in the industry suggests there is an opportunity here, given demands from customers, investors and regulators.
5. Conclusion
The financial services industry has expanded and innovated rapidly over the past twenty years and the market infrastructure has not caught up. Custodians play a key role in this infrastructure with the core competencies and resources to deliver solutions to the gaps that have appeared: from derivatives to data. Some derivatives markets are extremely large and the underlying products are widely used by traditional fund managers as well as the hedge fund industry. With the impending changes in regulation governing clearing for OTC (over-the-counter) derivative products this presents a significant opportunity to build third-party clearing services for these markets. That said, however, this promises to be a hugely competitive marketplace with many banks looking at providing similar services.
The BRIC economies (Brazil, Russia, India and China) and the petro-economies of OPEC (Organization of the Petroleum Exporting Countries) were impacted by the global recession like all countries, though now show signs of having recovered. The inevitable trend from the mature economies of the West to new economies with limited and unsophisticated infrastructure is clear. Custodians have specialised in building core transactional infrastructures, founded on connectivity and messaging that are both robust and always available. Given these core competencies, there are opportunities in a number of markets to work with local governments and service providers on developing their infrastructures. The benefits lie beyond the project-based fees, and in the longer term relationships as well as the ability to gain some form of role and ownership in all or key parts of the value chain. Outside the BRIC economies, markets generally remain underdeveloped, and hence partnering with a local organisation familiar with local regulation, tax rules, exchange controls and settlement requirements is likely to be necessary.
Custodians are facing tougher client demands but also have an opportunity to build on the new relationships forged during the financial crisis. Smart firms are already taking a fresh look at where they are now, where they want to be and how they are going to get there.
References
1. Richard Brealey, Stewart Myers Principles of Corporate Finance - M.: OlympBusiness, 2008.
2. American Institute of CPA Audit and Accounting Guide: Investment Compa-
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40504 (reference date: 19.07.2011). G
nies - N.Y.: AICPA, May 2011.
3. Investment Company Institute Guide To Understanding Mutual Funds -N.Y.: ICI, June 2011.
4. Global Custodians Report Substantial Hikes in Assets Under Custody - Access Mode: http:// home.globalcustodian.com/news/Global-Custody/Global-Custodians-Report-Sub-stantial-Hikes-in-Assets-Under-Custody/
Литература
1. Ричард Брейли, Стюарт Майерс Принципы корпоративных финансов -М.: Олимп-Бизнес, 2008.
2. American Institute of CPA Audit and Accounting Guide: Investment Companies - N.Y: AICPA, May 2011.
3. Investment Company Institute
To Understanding Mutual Funds -N.Y.: ICI, June 2011.
4. Global Custodians Report Substantial Hikes in Assets Under Custody - Режим доступа: http:// home.globalcustodian.com/news/Global-Custody/Global-Custodians-Report-Substantial-Hikes-in-Assets-Under-Custody/40504 (дата обращения: 19.07.2011).
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