© Copyright 2000 Rogers Media. The following article first appeared in the February 2001 edition of BENEFITS CANADA magazine.

7th Annual Special Report on Custodial Services

The global countdown to T+1 is on. Canadian custodians have to be ready by 2004 or risk losing their competitive edge.

By Andrea Davis

Canadian custodians have had much to deal with over the past few years. After several years of consolidation in Canada, the industry has gone from 13 players six years ago to seven today. And while Y2K is of course firmly behind them, Canadian custodians are now focusing on another big expense--the move to next-day transaction (T+1) processing. benefits canada's seventh annual Special Report on Custodial Services reveals an industry gearing up for T+1 and the globalization it will inevitably further along.

Custodians say that, for the most part, plan sponsors are becoming more aware of T+1. "One of the challenges T+1 advocates have had in Canada is that historically, there was a bit of a sense that it was strictly a custodial issue and not a plan sponsor or investment management issue. But it's an everybody issue. The good news is that there's a growing awareness of that," says David Toyne, managing director with State Street in Toronto.

The creation last year of the Canadian Capital Markets Association (CCMA)--an association representing Canada's banks, brokers, dealers, investment funds, fund managers, securities clearing and settlement organizations, stock exchanges and regulators--has done much to foster co-operation among custodians, money managers and other industry players. The Canadian capital markets industry is working towards implementing T+1 in 2004, concurrent with the securities industry in the U.S.

Leading the T+1 effort on a global scale is the Global Straight-Through Processing Association, comprised of global custodians, broker/dealers and investment managers. Its mandate is to standardize practices within the global investment community so custodians and other parties will be able to meet the shorter settlement cycle.

"I haven't been getting any calls yet saying 'how's it going?' because the horizon is 2004. But we're making clients aware of it," says Tom MacMillan, president and chief executive officer with CIBC Mellon in Toronto. "We're starting with the first appropriate step and that is to make plan sponsors aware that they need to get their straight-through processing rates up because that's the first thing one has to do to get to T+1."

Are Canadian custodians ready for T+1? Some say there's room for improvement. "I do think we're a little bit behind the curve," says Toyne. "I think there's still room for the Canadian industry to get a little more urgency to identify all that needs to be done to get there." While he says 2004 seems far enough away that the Canadian securities industry will likely have enough time to do what's needed, the real question is the appetite of all the players to get it done.

"The results of a CCMA study found that if Canada does not go to T+1 coincident with the U.S., we could be not as competitive as the U.S. market because of liquidity and efficiency reasons," he says. "So there are compelling reasons for us to do that."

Whether T+1 drives further consolidation in the custody business on a global scale remains to be seen.

"I don't expect consolidation to be influenced by an inability to meet the requirements of T+1, at least not among major global custodians," says José Placido, senior vice-president, Global Securities Services, Royal Trust in Toronto. "Most, if not all, firms are geared up to meet those T+1 deadlines."

The fact that two of the biggest custodians in Canada--State Street and CIBC Mellon--are Canadian offices of U.S. companies points to the global nature of the custody industry. Royal Trust, a homegrown firm, is also looking to actively grow its business outside of Canada.

THE BIG PICTURE

To provide a global snapshot of Canadian custody players, once again this year we tallied the global assets of the custodians in the Canadian market. The total is $19.2 trillion, up 2.1% over last year's total of $18.8 trillion. But the real story for Canadian pension plan sponsors lies in what's happening right here at home.

Overall pension custody assets, which include all pension, group registered retirement savings plan (RRSP) and other defined contribution plan assets under custody, ring in at $729.7 billion, representing a healthy 16.4% increase over last year (see "Pension assets under custody," right).

Little changed over last year among the top five players in the pension assets under custody category. Royal Trust tops the list again this year, reporting $300 billion in pension assets under custody as of Oct. 31, 2000, up 11.5% over last year. CIBC Mellon and State Street round out the top three, reporting pension assets under custody of $166.3 billion and $147 billion respectively. The top three firms represent 84.1% of the business.

State Street gained the most ground for the second year running in pension assets under custody. The firm reports a 24.3%, or $28.7 billion, jump over last year.

Desjardins Trust comes in at No. 4, with $94.4 billion in pension assets under custody, representing a respectable 17% increase. Rounding out the top five is Northern Trust, with $16.8 billion in pension assets under custody. Northern Trust knocks out General Trust from the top five, with $3.9 billion in pension assets under custody.

The area of mutual/pooled fund assets under custody saw steady growth in 2000. The industry total comes in at $537.2 billion in 2000, up from $459.3 billion last year, which represents growth of 17% (see "Mutual/pooled fund assets under custody," right). The top three custodians in this area corner 97% of the market.

Royal Trust maintains its top spot in the mutual/pooled fund assets under custody category for the seventh year running. The firm reports $289 billion in mutual/pooled fund assets under custody in 2000, up from $196 billion last year. This represents a 47.4% increase over 1999. CIBC Mellon, meanwhile, nabs the second spot, with $120.9 billion in mutual/pooled fund assets under custody, up from $92 billion last year for a 31.4% increase.

State Street reports a decrease in mutual/pooled fund assets under custody this year. As of Sept. 30, 2000, the firm reports $111 billion in mutual/pooled fund assets under custody, down from the $164.8 billion reported a year earlier. State Street's 32.6% drop is still good enough for third place.

Rounding out the top five are Northern Trust, with $7.6 billion in mutual/pooled fund assets under custody. Coming in at No. 5 is Desjardins Trust, which last year held the No. 4 spot. This year, Desjardins Trust records $4.4 billion in mutual/pooled fund assets under custody, up from $4 billion a year ago.

BEHIND THE NUMBERS

The story behind this year's numbers proves most interesting. Client service, technology and T+1 were the key areas that kept Canadian custodians on their toes last year. Custodians are reluctant to say that clients are becoming more demanding, but it's safe to say that the rise of Internet-based technologies has fostered a demand for more data, more quickly.

"You can't deliver client service today without really sophisticated technology because of the volume and the complexities of the investment practices and the data requirements of the client," says Tim Houlahan, vice-president, director, marketing and strategic planning with State Street in Toronto. "At a minimum, you've got to get it right each and every day, you have to have the ability to get information very quickly and you have to have sound and sophisticated systems to do that. I think client service is evolving from 'do I like how my client service individual deals with me?' to much more than that."

CIBC Mellon's MacMillan argues that industry expenses--such as Y2K, the European Monetary Union and T+1--have improved customer service to a large extent. "We upgraded a lot of our systems [for Y2K], which had a very positive client impact in my view," he says. "T+1 will have a resulting improvement in service. The trick is to not skimp on employee levels so you can fund the other projects. You have to do both."

Royal Trust's Placido agrees. "I think Y2K and the Euro forced us to think in global terms and in industry terms," he says. "In the long run, these investments pay off with greater efficiencies."

WHAT PLAN SPONSORS WANT

The need for speed is certainly a driver for custodians. "Clients want faster period-end reporting and they want it reconciled," says Toyne. "Whether that period is a day, week, month or year-end, it doesn't matter. They want it faster. So if we had 12 business days to report to a pension client on their year-end asset statements, we now have five. And soon we'll have three. And soon it'll be the next day."

And while technology is a huge enabler in the acceleration of the reporting process, it's not a panacea. "Every client is a different situation and every client requires a degree of customization and flexibility that doesn't come from technology alone," notes Toyne.

In addition to speed, custodians say clients are looking for value-added services such as investment monitoring, Internet delivery of statements, risk management tools and performance measurement.

And while T+1 will undoubtedly occupy the minds and pocketbooks of custodians over the next few years, many say their biggest challenge will be anticipating the needs of plan sponsors.

"It's a clear challenge to remain focused on a three- to five-year time frame," says Toyne. "[We need] to continually re-engineer the way we operate to ensure we're ahead of the curve with our customers."

Staying ahead of the curve with plan sponsors that are becoming more technologically savvy, demanding more information more quickly and asking for improved client service is no easy feat. The next three years leading up to T+1 will tell us a lot about whether Canada's custodians are up to the challenge.

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Pension assets under custody

There's next to no change among the top five pension asset custodians in Canada. Northern Trust moves into the top five, bumping out General Trust.

SOURCE: BENEFITS CANADA's 7th Annual Report on Custodial Services.

1 Includes assets of pensions, group RRSPs and other defined contribution plans of Canadian operation's clients invested in Canada, the U.S. and non-North American markets.

2 Pension assets under custody as of Oct. 31, 2000.

Mutual/pooled fund assets under custody

Growth in mutual and pooled fund assets under custody came in at 17% in 2000. Royal Trust holds on to the No. 1 spot for the seventh year running.

SOURCE: BENEFITS CANADA's 7th Annual Report on Custodial Services.

1 Includes mutual/pooled fund assets of Canadian operation's clients invested in Canada, the U.S. and non-North American markets.

2 Mutual/pooled fund assets under custody as of Oct. 31, 2000.

Custody by numbers

Total number of custody clients reported by this year's survey respondents: 6,173

Of those, the number of pension trust clients: 2,935

Total number of account supervisors in the custody industry, as reported by survey respondents: 51

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