Custody business is possibly the most unattractive part of a bank. Throw settlement and Blockchain in the mix, you are talking the next big thing and suddenly you see all experts forecasting extinction of custodians.
You have seen the advent of digital banks, Robo-advisers, payment platforms, wealth-fintech fever – I could go on – but never, never have you seen the kind of press and expert coverage that you can see on instant settlement. Custody business is all about settlement. Really? No, not really.
The 5 biggest custodian banks (BNY Mellon, State Street, JP Morgan, Citi, BNP) between them have close to US $90 trillion in assets under custody. These assets are managed and owned by several Sovereign Wealth Funds, Pension Funds, Asset Managers, Central Banks, Insurance, and Endowments. Custodian banks provide safekeeping, settlement, income and dividend payments, tax support, foreign exchange, cash management, account administration and in addition, if a client requires any additional services the custodial bank also provides very intense and demanding services such as fund administration, securities lending and clearing services.
Fintech can disrupt via innovation. Just as we moved from physical securities to de-materialised one line of stock on the system would we stop at just automating settlements or would it be more than that?. Banks investing in Blockchain is a sign that they understand a solution needs to be developed. Blockchain-distributed ledger has a role to play, how will that take shape in my mind is the important question.
Johann Palychata of BNP Paribas has some interesting thoughts on post trade infrastructure. He proposes two scenarios. First is a decentralised securities depository and second whereby distributed ledger uses custodian infrastructure but it is to the participants of the infrastructure. A third scenario might have just emerged with ASX investing in Digital Assets Holding. The combination of Stock exchanges-Clearing houses-Central securities depository with the right technology attribution could digitize asset servicing to settlements.
There are two levels of custody. Domestic markets i.e. the country itself, where you have one-to-many relationships and Global Custodians, where it is a one-to-one relationship. The future may look like one-to-technology relationship. Two possible questions will need to be pondered on – liquidity ramifications and nature of asset servicing – implications and the path ahead.
This is an interesting space as the custody business comes to terms with upgrading technology and finding a communication layer with Blockchain technology, startups, exchanges and a discovery of new product offering.
I will endeavour to shed some light on different initiatives but also keen to find value in Fintech startups that are venturing in this space with a view to automate and are broad enough to consider the value chain and not just settlements.
Featured photo is from https://stocksnap.io