Custodians Mine the Data Seam

Over the last two decades the portfolio of the average institutional investor has increased greatly in geographical reach and complexity. At the same time, the outsourcing by asset managers of many middle and back office functions to specialist service providers has resulted in a new challenge: maintaining a holistic view of markets and exposures.

Can custodian banks, the repositories of most large investors’ holdings and accounting information, help redress the balance via new data and analytics services?

“We hold many hundreds of data entries on hundreds of thousands of securities, including the terms and conditions of derivatives contracts and other types of complex information. That gives us a tremendous foundation to enrich data for specific client purposes,” says an employee of one leading custodian.

In practice, however, says Ian Castledine, global head of investment risk, performance, compliance and private equity at Northern Trust, many investors make a move into a new asset class or type of investment vehicle without considering the implications for portfolio reporting.

“All too often we see asset owners making a push into a particular asset class or market without thinking how they’re going to account for the new exposures on an aggregate basis with existing holdings,” says Castledine.

While investing institutions using a single custodian can still expect to receive a holistic report of their positions, clients with multiple custodians or other service providers face a big challenge--aggregating portfolio exposures.

“All the big custodial banks are looking into data aggregation, whether they focus on single services, such as transfer agency or fund accounting, or creating a whole new book of record,” says Castledine.

Investors themselves appear aware of the data challenge: according to a March 2015 survey conducted by State Street, 81% of institutional investors said they viewed investment data and analytics as either their top strategic priority or as a high priority.

Investors told State Street that this prioritisation was driven by a number of factors: expansion into new asset classes and regions, the growing volume of trading data, more stringent risk management standards, competitive pressure and increased demand from clients.

According to Northern Trust’s Castledine, an integrated view of positions is necessary for important investment risk monitoring functions.

 “For example, a CIO might want to know his firm’s total exposure to Google across all accounts, segregated, pooled and via derivatives. He could then ask to have the past credit history of Google displayed and to receive an alert if the exposure exceeded a predetermined threshold,” says Castledine.

However, investors shouldn’t underestimate the work involved in teaming up with a custodian to achieve such an integrated view, says Frances Barney, managing director at BNY Mellon Asset Servicing Performance and Risk Analytics.

“The trickiest part is the commitment a firm needs for us to partner with them to develop a middle office outsourcing or data management relationship,” says Barney.

“It requires a lot of coordination across different functions at the client firm. We look to make sure we have a similar approach to implementation and process management.”

If custodians can help knit together disparate pieces of portfolio information for an investor’s benefit, they are undoubtedly performing a valuable role. A question arises, though—who owns the output of this joint effort? 

According to BNY Mellon’s Barney, an increasing number of investors wish to have ultimate ownership of data, even if they delegate specific duties to the custodian.

“We work towards a goal where the client can own their own data,” says Barney. “Many clients are deploying a dedicated data warehouse which they can own longer-term. They can outsource a lot of the technology and operational functions of the data warehouse to us. This is a relatively growing trend, especially for the larger, more complex investors.”

The growing involvement of custodians in providing data and analytics to investors reflects the shrinking post-crisis capabilities of investment banks, argues JR Lowry, European head of State Street Global Exchange, the custodial bank’s data and investment analytics arm.

“Institutional investing is increasingly about data and custodians are one of the key data aggregators for investors,” Lowry points out. “That role is likely to sharpen over time, particularly as regulation tightens on what the sell-side can do for the buy-side. Buy-side firms will look to other entities to do data work for them.”

And the data challenge suggests that traditional views of the custody business need to be re-examined, argues Lowry.

“The custody industry can be thought of as consisting of two layers: transactions and data. Historically, much of the focus has been on the transaction layer, but data is now receiving a lot more attention,” Lowry says.