Custodial Services What is it?

Transcription

1 MovingBeyond Custody - The Changing Role of the South African Custodian Adam Bateman, Director of Business Development The Standard Bank of South Africa, Investor Services

2 Agenda What is Custody? A brief History of custody in South Africa Moving beyond Custody into Investment Administration Services that are now typically provided by local Custodians to South African Pension Funds Questions

3 Custodial Services What is it? Core Services Trade settlement Safekeeping of assets (Cash and Securities) Corporate event processing Income Collection Cash Management

4 South African Custody - Pre STRATE Operating Environment Physical certificates Tuesday settlements On average 40% failure rate Trades O/S for days Lots of paper and lots of reconciliation nightmares Significant staffing requirements Trends of the Day Common for pension funds to let the custodian decision default to the asset manager, which meant that Funds would often have two or maybe three different custodians Some cases of self Custody All of the investment reporting was sourced from fund managers Difficult for a pension fund to get a consolidated view of assets

5 South African Custody - Post STRATE Operating Environment 6 Central Securities Depository Participants (CSDP) Dematerialised environment Irrevocable settlement on T + 5 Trade fails became non existent Significant technology spends Enhanced efficiencies led to greater scalability Trends of the Day Appointing a Single Custodianprovided economies of scale, and clarity around ownership Alliances with Global Custodians transformed the local custodian industry from the perspective of market coverage (access to over 100 global markets), skills development and product innovation

6 With the introduction of STRATE, for the first time ever South African Custodians were in a position to expand their product offerings to develop service solutions for Pension Funds. These new solutions moved the South African custodians well beyond the traditional roles of settlement and safekeeping.

7 Investment Administration is Born South African Custodians leveraged technology and the unique role they occupied in the investment process to provide consolidated and independent, reporting and monitoring of the Pension Fund s investment portfolios Investment Accounting General ledger Accounting Compliance Monitoring Performance Reporting Attribution Analysis Unitisation Transaction Cost Reporting Consistent with trends in corporate governance The term Investment Administration is interchangeable Master Custody

8 Investment Administration Where does it Fit? Pension Fund Client Manager 1 Manager 2 Manager 3 Manager 4 Custodian Investment Administration Investment Accounting Performance Reporting Unitisation Compliance Monitoring

9 Investment Administration How does this differ from Custody? Custody Reporting Settlement date driven Transactional reporting Posting on a Cash basis Investment Administration Trade date, Accrual basis driven Double entry accounting, tracking book costs NAV, Valuations and Gain/ Loss reporting Reporting on Not in Bank assets (e.g. property, pooled investments, OTC derivatives, etc) Portfolio and Fund level reports Integration of domestic and global assets Other value adds

10 Investment Administration Key Drivers Local trends towards an increased fiduciary responsibility and accountability of Fund Trustees has led to more focus on issues of independence, transparency and corporate governance Technology and knowledge investment required to keep up with the increasing complexity of investments The ever increasing requirements for the Fund to focus in house resources on the servicing of its membership (communications, benefits, etc.) Fund requirement to address inherent conflicts of interest Requirements for consistent information across all portfolios Ever changing Global Accounting Standards

11 Why Turn to a Custodian for these Services? The custodian is well positioned to provide Investment Administration to the Pension Funds due to the following: Majority of the trade data is already resident in the custody systems (automation, reconciliation, etc) Independent to the pension fund s investment management process Integrated custody and accounting technology platforms Balance Sheet and the ability to continuously re-invest in people and technology Economies of scale

12 Investment Administration Global Parallels United States 1974: Passage of the Employee Retirement Income Security Act (ERISA) Overhauled Federal Pension Law in the United States, created demand for an independent Master Trustee and amongst other things established independent investment accounting reporting requirements United Kingdom and Europe As the global custodians expanded into the UK and Europe, independent reporting became part of the established operating model for retirement funds

13 Typical South African Custodian Pension Fund Service Offering Generating Incremental Returns Securities Lending Cash Management Monitoring the Investment Portfolio Performance Measurement Compliance Transaction Cost Analysis Risk Reporting Pension Fund Servicing the Investment Portfolio Safekeeping of Assets Corporate Events Income Collection Investment Accounting General Ledger Reporting Unitisation Executing the Investment Decision Trade Settlement Foreign Exchange Cash Transfers

14 Key Points The role of the South African Custodian has changed significantly post the introduction of STRATE and dematerialisation of the markets In addition to providing the core service of safeguarding assets and settling trades, South African Custodians are now well positioned to act as the Pension Fund s accounting book of record and monitor the investment process from a compliance and performance reporting perspective. These services are provided at a consolidated fund level, are independent from the investment management process and are consistent with trends in good corporate governance

15 Questions?