Custodians make inroads in risk analytics arena

Three large custodians with risk analytics and management subsidiaries are building their client base for those nascent businesses, with two of them freely tapping clients of their parents.

All three businesses — BNY Mellon Global Risk Solutions, State Street Global Exchange and Citi Investor Service's Network 3.0 — have been operating for two years or less. BNY Mellon and SSGX are building their businesses mostly through existing clients of their parent companies, Bank of New York Mellon Corp. and State Street Corp. Citi's Network 3.0 is adding asset owners who are current Citi clients as well as new to the parent. But long-term risk-management providers BlackRockSCI Barra and BlackRock Solutions still set the bar in the industry.

“MSCI is the 600-pound gorilla in the room, and BlackRock is the 1,000-pound gorilla,” said Virgilio “Bo” Abesamis, executive vice presCallanat Callan Associates Inc., San Francisco. The two firms “are holding their own because of their experience and the tie-in they have with sophisticated investors going back a long way. They're relatively secure.”

But all providers are seeing interest among asset owners in using and maintaining third-party risk management services. Among the most recent actions:

• The $42.8 billion Illinois Teachers' Retirement System, Springfield, in December hired BlackRock Solutions as risk-management provideBlackRockngfield, in December hired BlackRock Solutions as risk-management provider;
• The $27.1 billion Connecticut Retirement Plans & Trust Funds, Hartford, in May announced it hired BNY Mellon for risk-management as well as overall custodial services; and
• The $57 billion Massachusetts Pension Reserves Investment Management Board, Boston, will review proposals for a risk-management provider. The deadline for responses to the RFP was April 11, and a selection is expected June 17. Current risk-management provider MSCI Inc., whose contract expires this year, can rebid.

Mr. Abesamis said risk-management business at large custodians “is in the gestational period. They've been doing heavy marketing and selling of these services. They would want to get clients” of MSCI and BlackRock.

Although asset owner interest in risk stems from the 2008-2009 financial crisis, custodians “were probably only able to roll this out just recently,” said William C. Stone, CEO and chairman of custodial software and service provider SS&C Technologies Holdings Inc., Windsor, Conn. “It takes a long time to roll this out; there's a lot of data to coordinate. It's a very big deal to do this. It doesn't happen overnight. It takes a lot of planning and a lot of work.”

State Street is generally targeting existing custodial clients in response to what those clients have said they want, said Jeff Conway, executive vice president and head of State Street Global Exchange, Boston. “But we also are catering more to non-custody customers,” he said. “The level of engagement with a range of customers has been very good. But it's still early. It's not easy; it's hard work to turn (data) into mainstream solutions.”

Added Debra Baker, managing director and head of BNY Mellon Global Risk Solutions, New York: “We focus on organic growth (with clients of other BNY Mellon businesses). Most of what we try to do is in a bundled relationship. That matters most to us. ... We used to sell some of these tools as an unbundled product, but there weren't a lot of economies of scale in that ... Our future focus would be to provide more open architecture; provide the best tool for a client. Now, we think clients want an integrated solution.”

At Citi, response to Network 3.0 from asset owners new to Citigroup “has been very positive,” said Kevin Lui, New York-based managing director, global custody and product management. “We've won more new mandates, and we've certainly increased our client share with some of our largest clients.”

None of the risk-management executives would say how many new hires their businesses have had in the past year.

Freeman Wood, Chicago-based principal at Mercer Sentinel Group, said the added interest in risk-based businesses parallels the increase in pension funds hiring chief risk officers in the past few years. “Endowments and foundations mostly have risk officers already, but you're seeing more chief risk officers at pension funds,” Mr. Wood said. “Those providers give the information; you still need someone who knows what to do with it.”

For asset owners, the need for such services is simple: get as much risk-related data as possible and make it understandable and actionable.

“When dealing with a board of directors, it's as much educating on risk as reporting,” Walter J. Knox, enterprise chief risk officer at the $73.2 billion Ohio Public Employees Retirement System, Columbus, said April 8 at a BNY Mellon presentation on risk management in Chicago. “Just getting more information can sometimes hinder the process.”

Mr. Knox said OPERS hired BNY Mellon as risk-management provider because of its previous relationship with the firm as record keeper of its $815 million defined contribution plan.

Lee Ann Palladino, chief investment officer for the Connecticut funds, said when an RFP for custodial services was issued last year, the risk-management service portion was “segregated” from the RFP. BNY Mellon was chosen because “it has the best risk-management program,” Ms. Palladino said. State Street was its previous custodian.

California Public Employees' Retirement System, Sacramento, has State Street as its custodian, but it has used MSCI Barra's risk-factor platform for 10 years, said Matt J. Flynn, senior portfolio manager at the $287.7 billion pension fund.

Wylie Tolette, CalPERS' chief operating investment officer, said it is a “smart move” for custodians to move into risk management and analytics since “they already have the data you need.” Callan's Mr. Abesamis agreed, saying custodians' risk businesses can eventually compete with BlackRock and MSCI for new clients. “Right now, I wouldn't count custodians out of the equation,” he said.

Bring it on, say MSCI and BlackRock. “There are many players growing in our space, and we encourage that,” said Roveen Bhansali, managing director and head of risk-management analytics at MSCI, Berkeley, Calif. “We've been doing this for 20 years, spending our time evangelizing risk.”

Ryan Stork, managing director and head of BlackRock's Aladdin Risk unit, New York, said competition from custodians “really doesn't change anything we do. We do already have an increased element of partnership with pension fund professionals, portfolio managers and boards.” BlackRock has been providing risk-management services since the mid-1990s.