Transparency will be key to transition management service providers gaining business following the exit of two competitors.
The announcement last month that J.P. Morgan Chase & Co. and Credit Suisse were shuttering some or all of their transition management operations opens the door for their remaining rivals — mainly those who can offer other services like custody and asset servicing. But what will set those remaining firms apart for selection will be how open they are with clients.
“There's increased scrutiny in the industry for transparency in pricing,” said Laurie Berke, principal, TABB Group, New York. “One issue is foreign-exchange pricing and fees. Transition management and custody have been historically linked. ... Absolute transparency into the workings of a trade is increasingly important, as is a manager's reputational risk.”
Providers of global custody and transition management, including State Street Corp. and Bank of New York Mellon, have faced growing scrutiny in recent years with regard to the standing order portion of their foreign-exchange businesses, which often involves smaller trades or transactions involving less widely used currencies.
“Transparency is absolutely required,” said Nicholas Bonn, executive vice president and head of securities finance and portfolio solutions at State Street, Boston. “It's necessary not only because of the complexity of the trades, but also the nature of what's happened in the business.” Neither he nor other State Street executives would comment on scrutiny the firm has faced over pricing concerns.
Clients want transition managers to provide extensive data about the transactions so it can be scrutinized by a third-party analyst, Mark Keleher, CEO of BNY Mellon Beta & Transition Management, San Francisco. “They are also increasingly asking for full revenue attestation,” he said.
Pension fund executives “are themselves fiduciaries, charged with preserving the assets to which they've been entrusted. They need to be aware not only of the potential risks during the transition, but the magnitude. Transparency aids them in making smart decisions about those assets, understanding both the cost and the risk,” Mr. Keleher said in an e-mailed response to questions.
“There are highly complex trades in these investments, and they require a high degree of support and client service,” said Ms. Berke. “Clearly there's sector risk, volatility risk, the risk of getting out of balance. Even simple trades can be complex.”
Custodians and asset managers that already perform transition management internally should be well placed to perform those services for clients. “If you're going to be a good custodian and a good asset manager, you have to be a good transition manager,” Mr. Bonn said, adding he was “curious” as to why firms with both asset management and custody capabilities choose the leave the transition management business.
Transparency is also a crucial issue to investment consultants assigned to find transition managers for clients.
Callan Associates Inc., for one, recommends its clients have a “bench” of transition managers so “you're able to at least get a glimpse of how transparent the bids are,” said Virgilio “Bo” Abesamis III, executive vice president at Callan, San Francisco.
“We look at transparency as equivalent to all other components — it is that important,” said Mr. Abesamis. He said Callan holds transition managers to the same “four Ps of investment managers” - people, process, price, and product. “You measure transparency through the 4 Ps. You look into the people, the process, the product and the price, and there must be transparency in all four.”
TABB's Ms. Berke stressed client service was the most important attribute needed for transition managers to succeed, saying pension fund chief investment officers and trustees want “hand-holding.” “CIOs and trustees are on the hook for these trades. They lose sleep over these trades. Those trades are big, ugly and complicated.”
Ben Jenkins, practice leader for transition management at Northern Trust Corp., Chicago, agreed the complexity of the services has increased the need for detailed reporting. “There's increased hand-holding (with clients), definitely — we call that project management. All these events that are crucial to transition management can happen at the same time, so we do project management from pre-trade to execution to post-trade.”
“Transparency is a key element of the fiduciary model for transition management,” Mr. Jenkins said, adding that Northern Trust provides time-stamped execution reporting and disclosure of counterparties and execution venues upon request.