Custody banks are leveraging their expertise in risk management, best execution and collaboration in their approach to transition management, at a time when several high-profile sell-side banks, such as J.P. Morgan and Credit Suisse, are exiting the transition management business.
“This is a complex area, and transition management may not be a core business for a traditional broker-dealer,” said Mark Keleher, CEO of BNY Mellon Beta & Transition Management. “Whereas it is definitely is a core business for BNY Mellon, which is the world’s largest custodian. As a custodian, we are involved in transferring ownership of assets, especially if the investment manager of record is changing, so this is a natural extension of our core custody business.”
Buy side institutions, when issuing RFPs (requests for proposals) for custody, always ask whether the provider of custody also provides transition management, Keleher said.
“A broker-dealer’s primary job is buying and selling securities or underwriting securities, so they don’t necessarily have to specialize in transition management,” he said. “This became evident during the financial crisis, when a number of dealers exited the business and then re-entered when times got better.”
Transition management assists pension plans and other financial institutions move assets from one asset manager to another, or change the allocation of different types of assets in an investment portfolio, while aiming to reduce costs, risks and operational burdens.
Custody banks have become increasingly reliant on revenues from secondary services such as securities lending, collateral and cash management and transition management.
The U.K.’s Financial Conduct Authority noted in its 2013/14 Business Plan, that it will “assess the secondary services of custody banks to measure the impact of current practices on their business models, on direct clients and, where possible, on the indirect end-consumer.”
“There is evidence that the level of transparency and market conduct among transition management participants is not to the standard we require,” the FCA said. “In 2013/14 we will undertake a project to review practices across the main transition management industry participants to assess whether customers are being treated fairly.”
At Northern Trust, transition management leverages the trading and operations expertise of its global team to implement client asset restructures across developed and emerging markets.
"We continue to improve our transparent and client-focused approach with customized pre-trade and post-trade reports, and early risk identification and resolution throughout the transition process," said Ben Jenkins, practice lead, transition management at Northern Trust.
An example is the use of crossing networks. The underlying assumption is that trades executed outside of the open market, or “crossed,” are less expensive than those executed in the open market, and the cost savings ultimately improve performance.
Northern Trust’s approach is to build execution strategies that minimize the risk that an overemphasis on crossing networks could expose a transition to increased opportunity costs by ignoring the open market. It then identifies the opportunities in which crossing is most appropriate and cost effective.
BNY Mellon works directly with clients to map out transition strategies and identify potential areas for cost savings.
“We provide timestamps and employ sophisticated algorithms to ensure we are getting best execution for our clients, subject to constraints related to size, liquidity, etc.,” said Keleher. “We have best execution committees at both the brank and broker-dealer levels.”
BNY Mellon has formed a registered investment advisor so it can provide its comprehensive suite of services to the large investment management firms, such as insurance companies, that manage registered ‘40 Act Funds.
"These complexes increasingly are recognizing the potential benefits of new ways to minimize transaction costs and manage the investment and operational risks associated with overseeing such programs," said Keleher. “As an RIA, we will be in a position to act as a fiduciary for ’40 Act funds.”