BFS DOMAIN — CUSTODY SERVICE — INDUSTRY LEVEL CHANGES

It has been considered [actually, took it for granted!] that Banking and Financial Services [BFS] domain security services industry — CUSTODY — is a non-dynamic entity and de-glamorous one. Everyone who is linked with this industry knows that these people offer services like holding, valuing and transferring securities; receiving interest and dividends; and providing notice of corporate actions, etc. This industry is entirely depending up on financial markets growth meaning, if they fall, this industry falls and vice-versa. On an average, based on its overall performance so far, one can safely assume that the growth factor of this industry is quite low though it has been growing slowly [at a snail’s pace!] all these years. However, one point that has to be noted sincerely is that this industry had provided almost seamless and scandal-free services all these years. Maybe, this is one of the reasons what made this business well-nigh invisible so far!
Security services’ Custody business can be considered as a sticky one; once you get a client, very rarely it may happen that the client leaves you for another custodian. However, the recently happened Blackrock deal made all this ‘history’. As per Economist.com, “…on January 25th Blackrock, a gargantuan asset manager, announced that it was moving custody assets worth $1trn from State Street to JPMorgan Chase. State Street’s shares dropped by 7%, or roughly double the percentage of assets lost. “[source: https://www.economist.com/finance-and-economics/2017/02/02/the-custodian-bank-business]
What is the reason behind jumping from one custodian to another? Maybe ‘breadth of business’! It is known to the people in the custody industry that JPMorgan Chase has more breadth of business than State Street. Besides, JP Morgan Chase is one of those designated “systemically important institutions”- that means, it is absolutely essential that their systems work.
Custodians are like utilities, providing critical infrastructure. Here, investments in infrastructure matter a lot! Do you know that State Street spent over $1.1bn on hardware in 2016? Yet, it could not stop Blackrock to move away from it!
In summary, custody business is more attached to its infrastructure. Now, due to sweeping changes that are happening across the industries due to modern technologies, custody’s infrastructure too is facing ‘moderate to huge’ impact. In the next coming blogs, we will be discussing about them.
Until then, good bye!
