A new reign
11 Dec 2024
Hearing from three industry leaders at a panel discussion at CorpActions 2024, Clelia Frondaroli delves into the complex world of asset servicing and corporate actions
Image: stewart_marsden/stock.adobe.com
Known as a key component of post-trade activity, asset servicing has historically been orientated around, and within, corporate actions. However, in recent years the industry has seen the demands of issuers evolve and move away from corporate actions as the volume of assets, data, and technological innovations has grown.
So is asset servicing still merely an extension of corporate actions, destined to continue living in the shadow of an old giant, or is it its own entity entirely, one in which issuers seek out a new set of innovations and solutions?
A chip off the old block
“We’re at a tipping point.”
Michael Collier, executive director of product management at JP Morgan, speaks in a clear and confident manner, addressing the room at CorpActions 2024, where he is the first to discuss the changing face of asset servicing. Expanding his view, he continues: “SRDII, ESG, class actions, corporate governance, that’s now under the asset servicing umbrella, where traditionally it wasn’t before.”
He believes “there’s definitely been a shift” from issuers seeking traditional corporate actions to asset servicing, where the volume of custody, class action, and proxy voting products on offer has increased but also evolved, transforming in a manner where the “process is more about servicing the asset” rather than corporate actions. With this, Collier poses a question: “What’s interesting is, where these areas haven’t been touched or considered before, how do we treat them in the same way as corporate actions?”
The answer may not be quite so straightforward. After all, when push comes to shove, the ever-increasing volume of asset solutions might prove to be the final nail in the coffin for traditional corporate actions. With a touch of nostalgia, Collier summarises: “The traditional ways, I think, are probably gone now, or [we are] definitely moving away from that.”
A question of time and money
From the past to the present, the demands of financial institutions within asset servicing have also shifted and changed.
Leading the conversation, Martin Lawrence, chief customer officer at ValueExchange, acknowledges: “There is a demand for [corporations] to seek out asset servicing solutions to combine with what they’re getting today from their global custodians. [There are] drivers which are forcing people to start hunting for asset servicing solutions.”
Of these major drivers, Lawrence highlights three: asset growth, cost, and time. He begins: “We have seen, what our research has told us, is that firms today are managing approximately 20 per cent more assets year-on-year. That’s a really big uptick in the volume of assets that everybody is managing.”
“The problem with all those additional assets,” he emphasises, “is that we’re trying to put that into an inefficient model.”
This leads to the second big issue within asset servicing — cost. Having divvied up the numbers and made the calculations, Lawrence estimates that “it costs the average investment manager around US$14 million per year to have an asset servicing team, and that’s just direct [costs]”. Adding indirect costs, such as safekeeping fees from the sub-custodian, depository, and the exchange into the equation, he does little to downplay the extent of the expense: “The end cost to beneficial investors is just huge.”
Attributing a large part of these expenses to staffing costs, he continues: “There are 63 staff for any kind of local market asset servicing team, and staff costs are not coming down. So when we talk about scale, you often think the price is going to come down but because of staffing costs, it’s really not.”
This, Lawrence highlights, is a key obstacle to scale in asset servicing as more complex securities are brought into the investment horizon.
As for the final driver for issuers to seek out asset servicing solutions?
Lawrence points out: “If you look at it from an issuer’s perspective, they all want more time. They want more time to understand who their investors are. They want more time to make their election.”
He recalls a study that ValueExchange conducted around a five-day corporate event, where they found that only one-and-a-half days were given to the investor to make an election.
Realising that time has been lost to “intermediaries in the middle,” he says that now “we’re having to find solutions that allow that time and remove that friction in the market, to give it back to the issuer, back to the investor”.
Dawn of the digital
Perhaps then, one solution to time, cost, and volume of assets to manage may be the implementation of new technologies and artificial intelligence (AI).
Yet, has the dawn of digital transformation arrived in the world of asset servicing? Naren Patel, head of broker-dealer and investment bank (sell side) business development at FIS, thinks so.
“We’ve seen a demand and change from a digital transformation perspective, the core processes which were error-prone, manual in many cases, are now being replaced by automation,” he says confidently, strong in his conviction of the benefits that automation has brought.
He continues: “By allowing automation to take place, firms are now able to scale, create efficiencies, reduce the cost base, and actually handle the growing volumes that’s been placed in the marketplace today.”
Patel also brings in a new perspective, in which he says clients are at the forefront of what is driving the digitisation of core processes.
By calling for faster infrastructure, better access to online portals, and real-time data, he says that clients have transformed asset servicing to where “it is no longer a process that is in the back office. It’s become a solution. It’s become a need [where it’s] really important that [clients] get information at their fingertips, in time, and always accurately”.
AI, Patel maintains, will play a critical role in this, and as a result “the industry as a whole is getting more integrated, more digitised”.
Coming clean
Yet, for some, AI has already lost its rose-tinted sheen. Collier counters Patel’s enthusiasm for artificial intelligence with the idea that “AI is expensive. AI needs data and data storage — that comes at a cost. The challenge comes back to scrubbing of data. Why are we scrubbing? We need data up front, clean, and correct to allow that flow from issuer to customer.”
This scrubbing of data has become a point of contention in the industry, believes Collier, where in order for data to be usable and useful for the end issuer, it needs to undergo the expensive and time-consuming process of scrubbing.
However, this has become increasingly difficult to uphold in an environment where the quantity of data has increased, and the time in which consumers want information has decreased.
Speaking frankly over the perceived futility of the process, Collier fights hard to keep the incredulity from his voice: “I think it’s almost outrageous, because the point is that it’s necessary, but it shouldn’t be necessary.”
On that note, Lawrence agrees: “Actually the main thing for AI is good quality data. AI is only as good as data, so it is the biggest thing that we can ever do.”
As asset servicing continues to thrive in the wake of digitisation, automation, and asset growth, it has become essential for industry leaders then, that the demands of issuers are heard and heeded. After all, where would the industry be without them?
So is asset servicing still merely an extension of corporate actions, destined to continue living in the shadow of an old giant, or is it its own entity entirely, one in which issuers seek out a new set of innovations and solutions?
A chip off the old block
“We’re at a tipping point.”
Michael Collier, executive director of product management at JP Morgan, speaks in a clear and confident manner, addressing the room at CorpActions 2024, where he is the first to discuss the changing face of asset servicing. Expanding his view, he continues: “SRDII, ESG, class actions, corporate governance, that’s now under the asset servicing umbrella, where traditionally it wasn’t before.”
He believes “there’s definitely been a shift” from issuers seeking traditional corporate actions to asset servicing, where the volume of custody, class action, and proxy voting products on offer has increased but also evolved, transforming in a manner where the “process is more about servicing the asset” rather than corporate actions. With this, Collier poses a question: “What’s interesting is, where these areas haven’t been touched or considered before, how do we treat them in the same way as corporate actions?”
The answer may not be quite so straightforward. After all, when push comes to shove, the ever-increasing volume of asset solutions might prove to be the final nail in the coffin for traditional corporate actions. With a touch of nostalgia, Collier summarises: “The traditional ways, I think, are probably gone now, or [we are] definitely moving away from that.”
A question of time and money
From the past to the present, the demands of financial institutions within asset servicing have also shifted and changed.
Leading the conversation, Martin Lawrence, chief customer officer at ValueExchange, acknowledges: “There is a demand for [corporations] to seek out asset servicing solutions to combine with what they’re getting today from their global custodians. [There are] drivers which are forcing people to start hunting for asset servicing solutions.”
Of these major drivers, Lawrence highlights three: asset growth, cost, and time. He begins: “We have seen, what our research has told us, is that firms today are managing approximately 20 per cent more assets year-on-year. That’s a really big uptick in the volume of assets that everybody is managing.”
“The problem with all those additional assets,” he emphasises, “is that we’re trying to put that into an inefficient model.”
This leads to the second big issue within asset servicing — cost. Having divvied up the numbers and made the calculations, Lawrence estimates that “it costs the average investment manager around US$14 million per year to have an asset servicing team, and that’s just direct [costs]”. Adding indirect costs, such as safekeeping fees from the sub-custodian, depository, and the exchange into the equation, he does little to downplay the extent of the expense: “The end cost to beneficial investors is just huge.”
Attributing a large part of these expenses to staffing costs, he continues: “There are 63 staff for any kind of local market asset servicing team, and staff costs are not coming down. So when we talk about scale, you often think the price is going to come down but because of staffing costs, it’s really not.”
This, Lawrence highlights, is a key obstacle to scale in asset servicing as more complex securities are brought into the investment horizon.
As for the final driver for issuers to seek out asset servicing solutions?
Lawrence points out: “If you look at it from an issuer’s perspective, they all want more time. They want more time to understand who their investors are. They want more time to make their election.”
He recalls a study that ValueExchange conducted around a five-day corporate event, where they found that only one-and-a-half days were given to the investor to make an election.
Realising that time has been lost to “intermediaries in the middle,” he says that now “we’re having to find solutions that allow that time and remove that friction in the market, to give it back to the issuer, back to the investor”.
Dawn of the digital
Perhaps then, one solution to time, cost, and volume of assets to manage may be the implementation of new technologies and artificial intelligence (AI).
Yet, has the dawn of digital transformation arrived in the world of asset servicing? Naren Patel, head of broker-dealer and investment bank (sell side) business development at FIS, thinks so.
“We’ve seen a demand and change from a digital transformation perspective, the core processes which were error-prone, manual in many cases, are now being replaced by automation,” he says confidently, strong in his conviction of the benefits that automation has brought.
He continues: “By allowing automation to take place, firms are now able to scale, create efficiencies, reduce the cost base, and actually handle the growing volumes that’s been placed in the marketplace today.”
Patel also brings in a new perspective, in which he says clients are at the forefront of what is driving the digitisation of core processes.
By calling for faster infrastructure, better access to online portals, and real-time data, he says that clients have transformed asset servicing to where “it is no longer a process that is in the back office. It’s become a solution. It’s become a need [where it’s] really important that [clients] get information at their fingertips, in time, and always accurately”.
AI, Patel maintains, will play a critical role in this, and as a result “the industry as a whole is getting more integrated, more digitised”.
Coming clean
Yet, for some, AI has already lost its rose-tinted sheen. Collier counters Patel’s enthusiasm for artificial intelligence with the idea that “AI is expensive. AI needs data and data storage — that comes at a cost. The challenge comes back to scrubbing of data. Why are we scrubbing? We need data up front, clean, and correct to allow that flow from issuer to customer.”
This scrubbing of data has become a point of contention in the industry, believes Collier, where in order for data to be usable and useful for the end issuer, it needs to undergo the expensive and time-consuming process of scrubbing.
However, this has become increasingly difficult to uphold in an environment where the quantity of data has increased, and the time in which consumers want information has decreased.
Speaking frankly over the perceived futility of the process, Collier fights hard to keep the incredulity from his voice: “I think it’s almost outrageous, because the point is that it’s necessary, but it shouldn’t be necessary.”
On that note, Lawrence agrees: “Actually the main thing for AI is good quality data. AI is only as good as data, so it is the biggest thing that we can ever do.”
As asset servicing continues to thrive in the wake of digitisation, automation, and asset growth, it has become essential for industry leaders then, that the demands of issuers are heard and heeded. After all, where would the industry be without them?
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