RBC Investor Services’ Chief Executive Officer, Claire Johnson, provides her perspectives on the Canadian custody business as part of a virtual discussion with the Pension Investment Association of Canada (PIAC), published in the Fall 2024 edition of Communiqué, the PIAC member newsletter.
How has the custody business evolved over the past couple of decades?
Today’s asset owners and managers face a world in which technology and data reign supreme. Settlement timeframes have contracted, placing increased demands on our clients’ operations teams. Not only are they dealing with shorter settlement windows and a dramatically changed physical environment, but cyber security and emerging technologies such as artificial intelligence are continuing to change the landscape.
Custodians have transformed their business models by automating and streamlining repetitive processes
In step with this renaissance, custodians have transformed their business models by automating and streamlining repetitive processes. This has taken place as owners and managers alike confront a long list of challenges, including rising costs, changing regulatory requirements and more stringent governance considerations, combined with ongoing market volatility and political tensions. Pension plans, in particular, are grappling with demographic shifts that put significant pressure on workers to fund a bulging group of retirees.
Asset servicers have traditionally focused on basic custody services such as safekeeping, settlement, corporate actions and the like. However, clients are assessing today’s providers not only on core services but also on the ability to understand client needs and get things done in an agile fashion. Custodians are being evaluated on their ability to improve efficiency and mitigate risk, while maintaining a razor focus on client service and delivering a range of complementary solutions, including securities lending, foreign exchange and cash management. And it is necessary for this to take place within a resilient and scalable digital operating model.
Investors are putting pressure on their custodians to extend services beyond the “back office” to the “middle office”
Investors are also putting pressure on their custodians to extend services beyond the “back office” to the “middle office” as part of an outsourcing trend to increase the operational efficiency of asset owners and managers—and boost their performance. As a result, custodians are assuming responsibility for functions such as collateral management, trade management, corporate actions management, Investment Book of Records and Accounting Book of Records, as well as various analytics services.
Additionally, custodians are being called on to facilitate the rising globalization of investments. As investors look to diversify their portfolios and enhance performance, asset servicers are designing products that align with new types of assets like private capital, digital assets, and environmental, social and governance (ESG) investing. More and more, custodians are responding to a world of cyber security, generative artificial intelligence, cloud computing and blockchain. In this environment of evolving investment strategies and increasingly complex asset classes, many pension plans are introducing an independent investment arm to manage their assets. Others are delegating investment management to an outsourced chief investment officer (OCIO) model. Regardless of the path taken, data is at the forefront and a key component of today’s operating model.
Data is at the forefront and a key component of today’s operating model
As data takes its place as the “new gold,” asset owners and managers are looking to their custodians—the guardians of this valuable asset—to provide timely (generally real time) access to a consolidated view of their data that often resides across disparate platforms. They expect this data to be curated, validated and available via the channel of their choice. This is necessitating asset servicers to make significant investments in emerging technologies to meet the growing demands of their clients.
The continued transformation of custodians within today’s chaotic world is essential to the future success of investors. Advanced technology and data are central to the new order. However, the safety and security of client assets remain the principal focus of asset servicers—even in today’s digital world. A combination of strength, stability and getting the basics right is key to the custodial role.
STORY CONTINUES BELOW
What technological advances have you seen in the custody business?
Asset servicers, as the guardians of highly valuable client data, are investing in emerging technology solutions to build operating models that deliver data quality, integrity and security. It’s all about looking at portfolios through a data lens—part of the data transformation journey, including modern platforms that are being integrated with core operational systems.
Asset servicers are investing in advanced technology to provide clients with quality data via their channel of choice
This technology investment is designed to provide clients with access to structured, intelligent data via the channel of their choice, including traditional core reports with scheduled delivery; self-serve access to raw data; automated delivery of raw data through tools such as Application Programming Interfaces (APIs) and Secure File Transfer Protocols (SFTPs); and self-serve access to pre-canned reports with built in insights.
The result is more informed decision-making, improved oversight and enhanced performance of pension plans. For example, pensions are finding it easier to meet stringent requirements around Board reporting and risk management. As larger plans establish offices in various locations across the globe, the need for timely, easy access to reliable data becomes increasingly vital. Improved access is particularly important to the more sophisticated pension plans and OCIOs, who interact with multiple custodians and are no longer willing to log onto a portal to access their data.
A vast pool of RBC employees is focusing on emerging technologies such as AI, blockchain and cloud computing
A vast pool of RBC employees is focusing on emerging technologies, including generative artificial intelligence (AI), blockchain and cloud computing. We consider this to be a core competency. In our view, AI is one of the most transformative technologies impacting the world today with the potential to make things better for our clients. RBC’s focus on AI technology has led to our ranking first in Canada and third among global peers in the Evident AI Index in 2023.
Part Two of the discussion will be published in early 2025.