Low interest-rate climate hitting asset servicers
Despite regulatory changes worldwide that are supportive of asset servicers’ business models, the headwind of low interest-rates is hampering top-line revenue growth, notes Northern Trust.
The US firm’s second-quarter financial results show its fees from investment management grew by just 3% globally year-on-year to $71.8 million. That is partly due to the fact that persistently low short-term interest rates have led to fees being waived for money-market mutual funds.
Given the US central bank has stated its Fed funds rate will remain near-zero until 2015, money-market fund managers are waiving charges to prevent negative yields for investors. Some industry estimates pointed to $4.5 billion in fees being waived in 2010.
And yet this was supposed to be an environment where asset servicers were to thrive amid a swathe of regulatory changes with onerous cost implications for asset houses globally.
Steve Fradkin, US-based president of Northern Trust’s corporate and institutional services business, describes this year as “a tale of two cities” as far as business is concerned.
He likens a trust bank to an information repository that clients find useful in light of new regulations, including Dodd Frank and Fatca, coming into force over the next two years.
The financial crisis of 2007-08 forced market players to become more cautious about the investment risks they take on, the counterparties they work with, and the need to be mindful of performance and risk analytics around their investments, Fradkin notes.
On the one hand he argues clients have come to appreciate what servicers provide post-crisis in terms safe-keeping of assets, trade settlement and valuation services. But on the other he notes that monetary easing by central banks has made for a challenging operating environment.
“As the amount of new regulation builds up to a certain level globally, it may drive behaviour that can benefit asset service providers,” he notes. “Our new business pipeline is strong, notwithstanding the headwinds [we face].”
One area of business that has become increasingly competitive is collateral management services, with trust banks and investment banks’ securities servicing arms fighting for clients.
Under Dodd Frank as well as commitments on over-the-counter derivatives made by the Group of 20 nations in Pittsburgh in 2009, financial institutions increasingly need to post collateral on derivative trades they do with swap counterparties.
Further, the Alternative Investment Fund Managers Directive (AIFMD) is set to tighten requirements around regular reporting, registration and risk monitoring for hedge funds and private equity managers.
Regulators are also looking at better segregation of client assets in countries such as the UK, where investment houses may in future be required to set up multiple client asset pools to guard against protracted legal wrangles such as those after the collapses of MF Global and Lehman Brothers.
Many custodians are responding by offering independent asset segregation services to hedge fund managers.
Northern Trust acquired Omnium, the hedge fund administration arm of Citadel, in July last year in a move to expand its servicing capability for hedge funds.
Post-acquisition, Fradkin says business at its hedge fund services unit has doubled over the past year in number of clients and assets under administration, without providing specifics.
He says the key to winning more mandates today lies in forging closer partnerships with clients. He notes that while managers are using more complex strategies in pursuit of portfolio returns – including multi-asset and sophisticated derivatives rather than traditional investments – at the same time they are showing a preference to work with fewer service providers.
Northern Trust has $4.56 trillion in assets under custody globally and $704.3 billion in AUM.