(Pictured: Peter Baker)
The amounts of money securities servicing firms – mainly divisions of big banks – spend on technology is mindboggling. BNP Paribas Securities Services, for instance, spent A$150 million in Australia alone in the past three years. So, what do clients get for this?
According to Peter Baker, the Australia and NZ head of securities services for BNP, custody has evolved to the point that, from the clients’ perspective, it is all about the data. Safekeeping and traditional services are now a given, commoditized service. Custodians differentiate themselves on the provision of information, which should be both bottomless and easily accessible. It should also be able to be cut whatever way the client wants, he says.
Speaking at a wide-ranging briefing organized by BNP in Sydney last week, Baker said: “The data warehouse and consistency of data represent the way of the future.” This is where the money goes.
He said: “BNP Paribas comes into its own when funds are investing offshore. They get the same data, as much as they want, and they can cut it whatever way they want.”
It’s good to see custodians competing on their capabilities rather than price, which is in the interests of clients as well as service providers. Baker observes that there have been one or two deals between custodians and super funds in the past two years which are questionable in terms of the long-term viability of the services being offered.
“It’s akin to the situation for superannuation administration,” he says. “The administrators have struggled to differentiate themselves and have therefore come down to competing on price. Prices have been driven down to the point that the administrators struggle to reinvest in their technology and systems. It’s seen as a ‘vanilla’ business … My view is that the custody industry needs to show it is providing value.”
The results of a survey by BNP and KPMG of pension funds and managers last year show that “data consolidation” and “data quality” were ranked the top two operational challenges faced by 27 asset owners in the APAC region. More than half indicated that management reporting and analytics represented the biggest challenge to be solved.
A report from the survey says: “Not only is the breadth of reporting vital, but management teams are also looking for more detailed breakdowns of data. As a result, risk and analytics teams are producing many ad-hoc customized reports, which are complicated by the fact that a large number of respondents are still relying on spreadsheets and emails to track and manage reporting.”
The ‘look-through’ regulation coming into force next year (but requiring information to be gathered this year) which will require funds to publish all their holdings down to the stock level, and other regulatory changes are key drivers of the concerns by asset owners.
The report says: “One local respondent pointed out that the focus on risk analytics has increased predominantly due to a greater emphasis by management. Management themselves are facing pressure from regulators, requiring more granular insights into the exposures and risks of their strategies and how the institution is implementing an optimal risk management framework. While performance analytics are still important, the role of risk in the investment decision-making process is rising and a key driving force.”
The prospect of increased cross-border activity, mainly for retail investors, due to the various “fund passport” schemes being negotiated is attracting increasing attention, at least in the media.
Baker said his personal view was that the schemes were doomed to fail from Australia’s perspective unless the Government moved to equalize the tax treatment for Asian inbound investment. “An Asian investor [into Australia] will have to make up a lot of ground to cover the capital gains tax differential,” he said.
Ian Perkins, BNP’s head of sales and marketing who established the Morse Consulting business in Asia prior to joining BNP last year, said that Australian asset managers could already set up UCITs funds in Asia if they wanted to expand in the region.
“It will get more and more easy to do cross-border business in the region because the momentum’s there,” he said. “But it’s not that hard to do it now.”
(The issue of enhanced performance and risk measurement is to be discussed in detail at the inaugural Fund Operations Summit in Melbourne on May 1. Madyu Gayer, the head of investment reporting and performance for BNP Paribas in APAC, who is considered one of the foremost experts on the topic, will take part in a session chaired by Siva Navaratnam of Deloitte, which includes Kyle Ringrose from QSuper and Hayden King from BT Investment Management.