|
© Copyright 2000 Rogers Media. The following article first appeared in the February 2000 edition of
BENEFITS CANADA magazine.
6th Annual Special Report on Custodial Services
Clear of Y2K, custodians are gearing up for the next big technology investment--t+1 transaction
processing. it could mean even more consolidation globally.
By Kevin Press
Just a few weeks into the new year, it is entirely too easy to forget what an extraordinary threat the year
2000 computer bug posed to providers of custodial services. Just because the turn over was so uneventful in
the end doesn't mean the danger wasn't real.
Like so many industries that rely to such an extent on computer technology, custodians based here and
around the world know the remarkable investment of both money and time that went into making sure things
went smoothly. They also know that their business was changed forever by the competitive pressures brought
to bear by Y2K.
THE MOVE TO T+1
So what's next? As it happens, there is another significant challenge on the horizon for custodians. As we
reported last month, next-day transaction completion (T+1) is expected to be a reality by early 2002. This
of course has huge ramifications for custodians.
David Toyne, managing director of State Street Trust Company Canada in Toronto says T+1 is just now hitting
plan sponsors' radar screens.
"Clients are on a rapid learning curve in understanding the significance of T+1," he says. "They're eager
to learn more."
That's important for two reasons. First, next-day transaction completion is a major step forward for the
Canadian pension industry. Second, it will require a significant investment on the part of custodians.
"There is a very large budget as we build up for T+1," says Tom MacMillan, chief executive officer of CIBC
Mellon Global Securities Services Company in Toronto. "T+1 is going to force a whole lot of improvements in
technology. . . [It means] you have to have straight through processing, so we'll be spending a lot of
money on that, and a lot of time. And we're not alone."
Not by a long shot. Over at Royal Trust Global Securities Services in Toronto, senior vice-president David
Dunlop says that, in fact, T+1 ought to be seen in its broader context.
"We've had two or three years of institutional spending, as I would call it 'stay-in-business investment.'
First of all there was the European Monetary Union, which should not be underestimated as a significant
expense for global custodians. Secondly, of course, was Y2K," says Dunlop. "We've had two major
investment-spend areas which have, to some extent, reduced our ability to spend on client technology and on
productivity technology at the level we would have liked."
Dunlop does believe the industry is in a position to spend more on what he calls client and productivity
technology, but he does say T+1 requires "a further major investment-spend over the next two to three
years."
FURTHER CONSOLIDATION
Will this put so much pressure on custodians that we can expect to see still more consolidation?
"T+1 is going to be the next consolidator on a global basis," predicts Toyne.
That said, don't expect any blockbuster deals in Canada this year. Far too much of the industry here has
become concentrated in too few hands.
"The rate of consolidation has been quite exceptional," says Dunlop. "The way I see it [now], there is no
room for any really significant moves."
Dunlop says to watch for the anticipated increase in the maximum ownership limit in Canadian banks.
Industry watchers expect it to be doubled to 20%. That could open the door to some movement.
In the meantime, Dunlop says to keep an eye on the smaller players. "There could be a change amongst those.
But that would not be a significant further consolidation in the market."
PENSION ASSETS
In terms of pension assets under custody, the top three firms (Royal Trust, CIBC Mellon and State Street)
represent 86.4% of the business (see "Pension Assets Under Custody," page 30).
Pension assets under custody among the big five--including all pension, group registered retirement savings
plan and other capital accumulation plan assets--total $625.8 billion as of Sept. 30, 1999. That compares
to $615.5 billion as at the same date one year earlier.
There was little change in the industry's top five rankings. Royal Trust Corporation of Canada, CIBC
Mellon, State Street Trust Co. Canada and Desjardins Trust all held their positions from last year. General
Trust of Canada replaces Bank of Montreal, which sold its custody buiness to CIBC Mellon last year, in the
No. 5 spot.
Royal Trust's pension asset business is up $24.3 billion, or 9.9%, to $269 billion. CIBC Mellon saw a $10.8
billion drop in its pension assets under custody. That's a 6.5% decrease, to $154.5 billion. It's still
good enough though to hold second spot.
State Street gained the most ground in 1999. The firm is reporting $118.3 billion in pension assets, up
$21.7 billion or 22.5%. That's the largest percentage increase in pension assets under custody during the
year.
Desjardins Trust held on to its fourth ranking in 1999. The firm is reporting $80.7 billion in pension
assets under custody. That represents a $7.8 billion or 10.7% increase over the previous year.
Rounding out the top five is General Trust. Pension assets under custody there mirrored the wider industry
numbers--the organization has $3.3 billion under custody this year, the same figure as in 1998.
GROWTH AREAS
A more global approach is emerging in the business, in which Canada's custodians are going after both
Canadian and international assets, invested both in Canada and around the world.
Custodians serving the Canadian market enjoyed strong growth in global assets during the year ended Sept.
30, 1999. The business is up 18.2% to $18.8 trillion.
The remarkable mutual/pooled fund numbers posted in 1998 were not matched this year. Last year's report
charted 54% growth in mutual and pooled fund assets under custody--$389.1 billion as of Sept. 30, 1998.
Custodians are reporting $70.9 billion more this year, $460 billion. That's an 18% jump.
Royal Trust held on to its top spot in mutual/pooled fund assets under custody--outpacing all others with
$196 billion. That figure represents a $54.2 billion (38.2%) jump.
State Street grew its business by a remarkable $71.8 billion, or 77.2%, in 1999. That maintains the
organization's second position in the industry, with $164.8 billion.
CIBC Mellon moves up into third position, which had been held by Bank of Montreal last year. The firm has
$92 billion under custody, up $34 billion or 58.6% in 1999.
Rounding out the top five are Desjardins Trust, with $4 billion under custody, and General Trust with $2.5
billion.
NEW BUSINESS
There was some talk in 1999 that Canadian plan sponsors would hold off on their custodian reviews until
after Y2K had passed. In fact, the reverse was true. The year saw considerable movement.
Predictions for 2000 are more conservative. There will be plenty of requests for proposals (RFPs) of
course, but the majority will be RFPs that were scheduled for this year anyway. Certainly business will not
change hands at the rate some anticipated post-Y2K.
The point leads to an important question. Do these moves suggest Canadian plan sponsors are not getting an
appropriate level of customer service from their custodians? It is the kind of complaint you hear, on
occasion, around the industry. That view is not necessarily shared by custodians though.
"I think historically the value of the custodian hasn't been appreciated," says MacMillan. "I think what
people are starting to see is that there is a real potential that the custodian is more than just the
provider of the monthly statement. . . [Clients are starting to ask]: 'How can the custodian make my
operation more efficient? How can they give me more information? How can they allow us to do our analysis
better?' As a result, people are going to be asking more of their custodian."
There's no question plan sponsors are going to be asking for more. They've seen custodians investing
heavily in technology, and of course they're aware of the considerable efficiencies made possible by the
Internet. We may be in the early days of an exciting new era for pension plan sponsors and their custodians
in Canada. The next couple of years will prove important.
"The future is about customer service," says Toyne. "And that's not just about how many times the phone
rings before you pick it up."
*** ***
AT A GLANCE
Number of custody clients reported by this year's survey respondents: 6,849
Of those, the number of pension trust clients: 3,588
Number of account supervisors in the custody industry, as reported by survey respondents: 171
|
News
News
