It used to be that asset servicing, or “custody” as it was better known before, consisted of a team of geeks with thick eyeglasses working with spreadsheets and calculators at the basement of a bank, hidden away from all the exciting activities that come with banking.

 But in recent years the asset servicing industry has been reconfiguring itself in response to changing market conditions, client requirements, and the greater use of technology. Although this journey has been taking place gradually for some time, it became more evident in 2016.

Nowadays, asset servicing is still a team of geeks, but this time they’re working in a high-tech environment with state-of-the-art computers, monitors and every type of gadget there is. And it’s not only on the hardware side of technology, it’s also on the software side too.

To say that the industry is being transformed by “big data”, one of the biggest trends in the financial world today, is not an understatement.

Simply, big data analytics is the process of examining large and varied data sets, known as big data, to seek out information such as correlations, market trends, customer preferences and other useful information that can help the asset service providers and their clients make investment decisions.

But how is the use of big data analytics transforming asset servicing?

It is basically changing the way asset service providers have traditionally configured their businesses, resulting in a new business model that is very different from what it used to be.

However, it is not only big data that is forcing the asset service providers to enhance their business models. The current low-yield environment is putting pressure on providers to enhance efficiency, cut costs, and focus on risk management.

The long-existing business model is a two-layered structure where the institutional client entrusts the custody of their assets to their global custodian, who uses subcustodians to safekeep the same assets in various markets. The global custodians have access to the assets while the subcustodians have access to the markets.

Global custodians operating in Asia are basically the big US-based banks, namely BNY Mellon, Northern Trust, Citi, State Street and BBH.

The subcustodians are global banks with extensive networks in Asian markets, namely Citi, Deutsche Bank, HSBC and Standard Chartered. Both Citi and HSBC have global custody businesses but in Asia they also operate as subcustodians.

Because of changing market conditions since the global financial crisis, the two-layered business model may no longer be as responsive as it had been due to new market realities.

In response, the two-layered business model is morphing into a single-layered integrated platform that is designed to be more responsive to market realities and the changing requirements of their institutional clients.

 

• Greater interest in emerging markets from institutional investors. It used to be that assets flowed mainly from the developed markets, principally the US, to developed markets in Asia such as Japan, Korea and Australia. In recent years there has been increasing interest in emerging markets such as China, India and Southeast Asia.

• Increased interest in intra-Asian investments. Global custodians also service Asian institutional clients who invest outside of their home markets, mainly the US. In recent years, these clients have shown increased interest in investing in other Asian markets too.

• The search for yield in the current low-yield environment. Institutional investor clients have been putting more pressure on their asset service providers to find ways of enhancing yield.

• Increased demand for risk management and cost-savings. Both asset service providers and their institutional investor clients are under pressure to reduce cost and enhance risk management.

 

The good news is that recent advancements in technology, particularly big data analytics, have now made it possible for the asset service providers to implement changes to their existing operational structures that are more suitable to the single-layered integrated platform.

The way the two-layered structure works, for example, is that a US-based institutional client who has assets invested in Hong Kong through their global custodian would have to go to through their global custodian to get an update on their Hong Kong investments since the client has no direct access to the subcustodian who is handling the Hong Kong investments.

Operationally, this means that the global custodian uses at least two sets of custody platforms: one for global custody and another for subcustody. The two sets of platforms essentially mean there is some element of inefficiency in the provision of information.

For example, the global custodian traditionally had their own platform while the subcustodian had theirs. And these two platforms are not necessarily compatible nor do they communicate with each other.

Under the integrated asset servicing model, which uses big data analytics, the objective is to have a single integrated platform, servicing the client both for global custody and subcustody.

To illustrate, the client would have direct access to their Hong Kong investments without having to go through the two-layered structure.

The benefits of an integrated platform are numerous: it allows for faster and more efficient decision-making and implementation; it generates cost-savings for both the client and the asset service provider; it allows for greater market coverage both geographically and in terms of asset classes; and enhances risk management, among others.

As of this writing, HSBC, Citi and Standard Chartered are in various stages of implementing their integrated asset servicing platforms.

“This is the process we’re going through now. We are evolving from three global custody platforms to one. And we are evolving from our global custody, subcustody into an integrated custody,” according to the head of securities services for a major asset service provider who does not wish to be quoted. This asset service provider has an extensive network in Asia which services clients investing into Asia as well as Asian clients investing in global markets.

Another service provider is one step ahead having recently completed transitioning the bulk of their institutional clients into their own integrated custody model.

In Asia, Citi appears to the first among the asset service providers to implement its integrated custody platform powered by big data analytics in all the markets it covers in the region.

The platform known as “Citi Velocity Clarity” is a data and analytics platform using big data technology delivered through an integrated suite of advanced online functionalities.

The platform consolidates and analyzes data across multiple Citi Custody and Fund Services (CFS) products and will be expanded to include the broader investor services content in the future. CFS and Investors Services are the asset servicing units of Citi.

The platform leverages Citi’s private, cloud-based, big data on-demand infrastructure to enable fast and efficient consumption of information drawn from multiple sources.

 “Clarity was designed as a turnkey capability, which allows clients to navigate through investment data in a seamless manner without the expense and timeframe usually required to implement a full data warehouse. The feedback from early adopters has been very positive with clients praising the design, ease of navigation, speed and overall user experience,” says Sanjiv Sawhney, global head of Custody and Fund Services.

As service providers push ahead with the integrated model and clients are onboarded the new approach is set to create new opportunities and reshape the competitive landscape.