Custodian role not threatened by depositories, says official

Are central depositories increasingly encroaching the turf of custodians'? A senior official from the Philippines Central Depository (PSD) today has allayed a common fear among custodian banks that their safekeeping and custodial roles could eventually be replaced by depositories around the world.

Jerome Arcangel, vice president of the PSD's external affairs division, told delegates at a custody and settlement conference in Kuala Lumpur that the authority has no plans to replace custodians entirely.

"I don't think depositories are encroaching the custodians' territory," Arcangel said. "Custodians do things that a depository does not do. I look at ourselves as a parking space for assets handled by custodians for and on behalf of their clients. Beyond that we stop."

Soothing words. But as trading technologies progress, different trading platforms are being integrated, allowing brokers to deal directly with central depositories, bypassing the crucial safekeeping role played by custodians. Once the exclusive clubs for banks, depositories nowadays are reaching out for more members. In PSD's case, there are more than 300 direct participants to the depository, many of them brokers. The big ones are already using the depository for custody.

Artit Srinkapaibulaya, vice president of ABN AMRO's global transaction services in Asia, believes depositories do not go as far in performing other custodian functions such as client reporting, accounting and fund performance evaluation, but he admits depositories and custodians are essentially performing the same role of holding assets in custody.

"If you look at some other markets where brokers self-clear, meaning they're direct participants with a central depository, then the brokers do not need a custodian in the local market and brokers are one of our target client groups. If I approach a broker in the Philippines and ask them whether they would like to use our custodian service, they would say 'No', because they are a direct participant with the central depository," Srinkapaibulaya says.

"Depositories already do custody for brokers. And for brokers who self-clear, they do their own clearing. Custody and clearing are the main businesses of custodians. Then what's in it for custodians? Nothing else."

But Srinkapaibulaya believes custodians will not be made redundant as some sophisticated institutional investors still prefer to have a custodian as a third party safekeeper of assets despite their brokers are able to deal with depositories directly.

PCD's Arcangel says the authority has been supportive of custodians since it was established in 1997. But he believes depositories also are service providers in the industry, providing "parking space" as one of the products that has been proven to be for the "benefits for everyone".

But Arcangel's words may do little to alter Srinkapaibulaya's motto in business - to remain in the custody business, one actually has to move away from it.