New tools expected to help interpret oceans of data

Custodian banks will have a new focus in 2018, as the raft of regulation that has preoccupied them for the past few years shifts down the agenda.

Sources said 2018 will be about digitization of custody and asset services, as the low-yield environment forces clients to look for more granular data, better flexibility in accessing data and more frequent reporting of this data.

Custodians contacted by Pensions & Investments are preparing a suite of enhancements to help institutions interpret real-time data.

Daron Pearce, CEO of global financial institutions at BNY Mellon Asset Servicing in London, said: "The tsunami of regulation which we faced in recent years has peaked ... which means that we can now spend more time on developing new capabilities and new infrastructure to help our clients get better access to data." BNY Mellon has $30 trillion in assets under custody.

Chris Rowland, global head of custody at J.P. Morgan Chase & Co. in London, said: "Clients already look at their custodians to aggregate information coming from multiple sources — scrub, structure and validate it. Increased digitization will boost the ability to streamline, enhance and enrich the flow of information, to generate deeper insight for clients." J.P. Morgan has $20.5 trillion in assets under custody.

To provide the enhanced data, custodial banks are making upgrades aimed at more powerful and faster trade execution capabilities, in addition to introducing tools that will help asset owners brace for reporting next year under a number of new rules, such as the Markets in Financial Instruments Directive II, and certain other pieces of regulation.

Penelope Biggs, head of strategy for corporate and institutional services at Northern Trust Corp. in London, said: "Enhancing our data and digital architecture and the client experience will be our top priority."

She added: "Our partnership with BEx LLC to deliver a foreign exchange algorithmic trading capability ... will help clients access enhanced liquidity and enables (Northern Trust) to drive more transparency in the foreign exchange market."

MiFID II, which has preoccupied much of financial firms' time in 2017, is also giving custodians the chance to compete when it comes to making life a little easier for their clients. The European directive requires sell-side firms to separate the cost of trade execution and research so buy-side firms can make explicit payments for research.

Jeff Conway, CEO, Europe, Middle East and Africa at State Street Corp. in London, said his firm is providing tools that combine machine-learning and human intelligence, allowing institutions to access research in one place. State Street has $28 trillion under custody.

In addition to new tools aimed at tackling traditional asset classes, the custody of digital assets emerged as a theme for global custodians and quickly took center stage.

John van Verre, global head of custody at HSBC Securities Services in London, listed the development of digital applications like programming interfaces and the custody of digital assets among key priorities for HSBC, which has $6.3 trillion in assets under custody, in 2018.

"We recently sponsored an investigation into the potential for using distributed ledger technology to enable proxy voting solutions for our custody business," Mr. van Verre said. "These have the potential to deliver benefits such as secure simultaneous voting by all parties, visibility of votes in progress and of course an accelerated process with the elimination of massive amounts of paper."

Increasing digitization of the custody business will become a key differentiator for custodians when it comes to winning or losing business, said sources. That means custodians need to make significant investments in their infrastructure.

According to Ms. Biggs, Northern Trust's planned investment into technology for 2016-2018 averages $2.5 billion for core architecture, infrastructure and capability development, but she said this figure does not include significant dollars invested annually in tech innovation, IT partnerships and strategic investments.

While sources said access to vast stores of data through new technology will generate valuable insights to support investment decisions, a few pieces of regulation still will have to be faced by institutional investors in 2018, including the ramifications of variation margin requirements or money market fund reform.

And global custodians are gearing up to provide tools that will help asset owners cope in the new year.

The EU money market reform coming into effect during 2018 prompted some custodians to offer technology that provides net asset value oversight.

Mr. Conway said State Street's "digitization initiative provides NAV oversight, benchmarks NAV to identify divergences; and generates NAVs in real-time."

Others focused on variation margin requirements. "Going further into 2018, HSBC will deliver multiple products in areas including variation margin and collateral management services, configured data extracts, China Bond Connect (products) and research payment account solutions," Mr. Van Verre said.

But preparation for the most significant piece of regulation this year, the Global Data Protection Regulation, which comes into force in May, remains uncertain.

Wendy Phillis, head of governance and regulatory solutions, Europe and APAC at RBC Investor & Treasury Services in London, said: "Clients subject to GDPR will need to have controls and processes in place around collection and maintenance of EU citizen personal data, including obtaining explicit consent to collect and use personal data."

"Arguably one of the more challenging aspects of GDPR is the 'right to be forgotten' which gives the individual the right to demand that a firm delete all data related to that individual. Personal data will likely exist in many different systems so developing systems and processes to remove it may prove difficult. We've implemented a change program, with representation from key stakeholders across the business, to ensure the requirements of GDPR and the evolving privacy expectations of our clients are met."