The Niagara Falls Rapids, located in Canada, consists of huge volumes of water rushing from the falls, which eventually create the Whirlpool Rapids, the rushing waters can reach impressive speeds as fast as 30 miles per hour. This rapid pace of movement is similarly reflected in Canada’s asset servicing industry, which has changed at lightning speed in recent years.
These changes can be seen around the increasing demand for alternatives, which is becoming one of the fastest growing asset classes. Further changes encompass evolving investor expectations, new regulations, and impressive technologies such as artificial intelligence (AI) and machine learning (ML), which can put pressure on performance, pricing and cost structures.
Keeping up with the swift pace of change can present its difficulties, and asset servicing providers have to ensure that they keep up to date and adapt with their clients.
Despite currents of challenges there are emerging opportunities that are steering the ship towards efficiency and transparency, which can help improve the market. As such, Canada continues to boast a robust and mature market with high levels of transparency and stability, including one of the few remaining triple-A ratings for sovereign debt, industry experts say.
As we head deeper into 2020, Canada’s asset servicing industry, in line with global trends, will have to work to keep afloat in the big water of the finance world. Industry experts from CIBC Mellon, RBC I&TS and Broadridge discuss the challenges and opportunities downriver, as well as trends that we can expect to see as we dive further into the year.
CIBC Mellon’s vice president, head of pension and custody services, Abdul Sheikh says that providers are moving towards a model that “focuses on standardising customisation in order to meet the varying needs of an array of clients individually and at scale”.
Sheikh suggested that asset servicing providers are introducing new services and capabilities as existing products mature and become commoditised. However, he explains that today’s challenges “are on another order of magnitude, and custody can no longer simply evolve but must see significant upgrades to remain relevant to nature and genres of investments presently and over the long term”.
Keeping afloat
Canada’s asset servicing industry has to work hard to keep abreast of changes to regulation and technology, as well as the evolving expectations from investors.
According to David Linds, managing director and head of asset servicing, Canada, global client coverage, at RBC I&TS, there are four key players in Canada, including RBC I&TS.
The primary focus of these players is to support asset managers and owners in managing regulatory change, mitigating operational risk, improving efficiency and supporting domestic and global distribution.
In terms of technology changes, institutional investors are having to revisit their operational models to ensure they are placed in good stead for the future, and conversations tend to focus on technology and how to approach the market in this evolving landscape, industry experts highlight.
As an example, Linds notes that clients are asking for help in the alternative space, and there is no one standard of accounting for these assets.
He says: “The pressure to keep pace with the technology on the street and provide the best value to our clients is tremendous. We have responded by deploying tools such as data analytics and robotic technology in order to meet these demands.”
Looking at technologies such as AI, Lisa Howes, managing director at Broadridge, Canada, maintains that this has unearthed new opportunities in government and corporate sponsored initiatives.
Howes comments: “While many believe that AI puts jobs at risk, it facilitates a systemic shift in skills from lower level manual work to scalable technical work. We believe that technology will continue to transform the asset servicing industry in Canada allowing firms to create more efficiencies.”
Outside of private placements, CIBC Mellon’s Sheikh notes that “issuers have moved away from physical certificate settlements and onto electronic settlement via the Canadian Depository of Securities (CDS)”.
“As an alternative to physical certificates, many issuers have moved to Direct Registration System or ‘DRS’ statements, which electronically reflect a position and carry significantly less risk in case of loss, compared to a traditional issuer physical certificate,” Sheikh states.
Meanwhile the Toronto Stock Exchange implemented the Special Purpose Acquisition Corporation programme to offer companies flexibility in accessing capital.
Every year, SWIFT, the global provider of secure financial messaging services, collects the changes requested by its users, prepares and evaluates them with the technical and business consultants, and then publishes them in their SWIFT Standards Release Guide.
Sheikh explains that the changes documented in the SWIFT Standards Release Guide are mandatory for all financial institutions.
“Since these changes will be active in the SWIFT Alliance from the second week of November every year, all participating bank systems need to be aligned with these changes”, he says.
The ripple effect
Despite its challenges in keeping up with the pace of change, Canada has lots of strengths and much to celebrate. One such strength is that Canada’s talent pool is growing within the asset servicing industry.
In Canada, asset services are well-placed among large institutional banks as well as niche providers, according to Howes.
Broadridge’s Howes says: “The majority of these firms are only serving Canada and tend not to be global in nature. But through strong talent pools with tenure and expertise in the space, Canadian asset servicing firms are able to create a superior experience.”
In addition to the amount of talent present in both services and technology, Howes argues that Canadian firms are set apart by their employees’ tenure, which “tends to be much more established than in the US or EU markets”.
Reinforcing this, Sheikh says: “A stable financial sector, effective regulatory environment, and an experienced workforce support Canada’s future – with more than 60 percent of the population between the ages of 25 to 34 having a tertiary level education, the second-highest level among the Organisation for Economic Cooperation and Development (OECD) nations.”
Meanwhile, Linds observes that one of Canada’s greatest strengths is that clients are well-served by serious providers who offer strong credentials. He says: “We are seeing high satisfaction levels.”
Rocky river ahead
Looking out onto Canada’s asset servicing horizon for 2020, there is a rocky ride ahead, particularly within the regulatory space, but flowing alongside this, opportunities are expected to emerge.
Sheikh outlines that Canada remains “well-regarded globally for the strength of our financial and regulatory environment – in particular around the open dialogue with which various regulatory bodies engage with the industry around policy and procedure updates – yet areas of challenge and complexity remain”.
Data is one such area of challenge; companies complying with Canada’s data privacy laws, the Personal Information Protection and Electronic Documents Act (PIPEDA) are partly complying with the General Data Protection Regulation (GDPR).
According to Sheikh, PIPEDA has enabled Canada to be one of the 12 countries recognised by the EU for maintaining ‘adequate’ privacy laws relative to GDPR.
“Complying with the GDPR will require the Canadian financial services industry to strengthen its user data management and document all processes involving how it collects and manages the user data of EU citizens. In effect, companies must proactively design a GDPR-compliant privacy strategy accounting for all risks and requirements outlined by the EU,” Sheikh highlights.
Also emphasising this challenge around data, SimCorp’s survey in January last year found that some 79 percent of North American buy-side heads of operations stated their top strategic priority for 2019 was to decrease operating cost and improve operating leverage.
Discussing this, Sheikh says that clients want to leverage data and analytics to improve investment and earnings outcomes.
He explains that this requires access to timely data in the manner they want to receive it.
“Finding efficiencies and reducing costs are significant factors, though clients are also looking for ways to improve their operating models that add value and are sustainable,” he notes.
Also reflecting on this survey and whether this was indeed prioritised in 2019, RBC I&TS’s Linds, observes that Canada has finally caught up to other regions around the world with the middle office trend.
He continues: “We already service global clients in Canada, and we have just imported a robust middle office capability to assist our asset managers and large pension plan clients. It’s being driven by the volumes of data these clients have to process, the cost of managing that data and of managing counterparty risk.”
“We’re now equipped to improve asset managers’ middle and back office efficiencies, transform their front office decisions through data transparency and mitigate the risks of regulatory breaches. This will be a large focus for us in 2020,” Linds adds.
Elsewhere on the horizon, Broadridge’s Howes, muses: “We believe that AI will play a significant role to assist in the journey to improve asset servicing while reducing the expense.”
Howes concludes: “We will also see a move towards more ethical investing and more alternative asset classes. Lastly, the current regulatory landscape in Canada will continue to evolve and become more complex. 2020 will see increased steps to harmonise regulators and increase collaboration.”
