MY views on unbundling in custody and securities lending, and a response to recent press and blog articles

Much has been made about a January 2012 Finadium report that had one and a quarter pages out of 47 on the topic of whether the US plan sponsors we spoke with were separating their RFPs in custody and securities lending and what they might choose to go forward. While this to me was by far not the most interesting part of the report, it appears to have generated a stir that I want to respond to. (Note: reading this article does not require registration to Securities Finance Monitor.)

To start with, here’s what the report actually said: over the last four years we saw sharp increases in the percent of US plan sponsors that we spoke with who told us they planned to separate their RFPs between custody and securities lending. They wanted price transparency. They wanted best in breed service providers. Between 2008 and 2010, the percent of US plan sponsors planning to separate the RFP went from 48% to 70%, a pretty big jump. This year we found that the figure leveled off to 61%, reflecting what we heard as a desire by some US plan sponsors to preserve their current custodial relationships and not take on a new vendor in the current market environment. This was a reversal of a trend as we saw it.

Is this the be-all end-all of data points in the US plan sponsor market or internationally? Of course not. But unfortunately, this is what the press picked up and they ran with it. The intention of Finadium surveys is not to provide the final word or data point, although we strive to be as accurate as possible. More, our goal is to talk in person or on the phone with a large enough group of people in a market to get a sense of what the crowd is thinking in a candid way. We preserve carefully the anonymity of the people who speak with us as an encouragement for a frank conversation. Reading the end report should be like having a beer with a good and informed friend and walking out with a solid sense of market trends.

Following publication of the report I heard from a third party agent lender who was certain that I was dead wrong and that every RFP coming out was unbundled. I also heard from two agents at custodians who told me that they were seeing what the report said. Who is right and who is wrong? I can’t tell you, but I can tell you that while unbundling the RFP is still popular, there are well-publicized US plan sponsor RFPs of the last year who went both ways in their decisions. Again, all of these RFPs want price transparency. However, that doesn’t mean that they want to separate the actual service providers.

To me, the question of bundling or unbundling the RFP, while important, was far from the most important parts of the study. I personally liked the attention being paid to alternative repo products for cash collateral, the growth of non-cash collateral and the emerging focus on the securities lending activities of commingled investments. This last point provides a whole new business opportunity for agent lenders.

As a final word, we operate in a market with questionable data on many fronts. We at Finadium try to be focused in our surveys (US plan sponsors, the largest global asset managers, or other narrowly defined groups) in order to come away with a snapshot of that market. Our latest report was not a global survey as some commentators made it out to be. It was also not meant or expected to be a huge sample size. If the industry would like broader services from us we would be happy to talk funding and get the studies going. In the meanwhile, we will continue to do what we think we do best: gather data and commentary from a wide variety of sources and work to make sense of the information to form a coherent picture of the world today and looking out into the next year. We hope that our studies will be accepted in that light, and we welcome feedback on how to make them better.

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