Why custodians are spawning new business models in Asia

In Asia, custodian banks are starting to realize that change is inevitable. To enhance efficiency and maximize cost, they are breaking away from the traditional way of doing business and embracing new ideas.

For years, the region has been leading global growth. Asia’s strong fundamentals and robust economies have given rise to institutional investors – that include sovereign wealth funds and central banks – with huge pools of money to invest. 

“These Asian institutions have got immense pools of money. They want to have good market access and they want to have a deep understanding of what’s happening in those countries,” says a head of a custodian bank operating in Asia.

The low-yield environment and a need for diversification have pushed this new class of investors to seek new markets for their money.

Unlike a decade ago, Asian institutions prefer investing in US-dollar-denominated assets. But the search for yield has driven them to seek markets beyond the US. They are investing in Asia and other markets including Latin America, South Africa and the Middle East.

That has challenged the traditional custodian business model, which remain split between global custodians and subcustodians. The rise of the cash-rich Asian investors blurred the lines between the roles of global custodians and subcustodians in Asia. 

Global custodians – represented by US banks namely, BNY Mellon, Citi, J.P. Morgan and State Street – provide in-bound access to Asian investments mainly for their US institutional investors and clients. The subcustodians are HSBC, Deutsche Bank, BNP Paribas and Standard Chartered Bank that engage with investors on the ground in Asia and are tapped by global custodians when making inbound investments into Asia.

New market realities, however, are driving subcustodians to do more than that. They have recently started not only servicing the investment requirements of Asian institutions within Asian markets, but also in markets outside the region.

This new business model known as ‘international custody’, seeks to combine on-the-ground capabilities of subcustodians and the global reach of global custodians. The objective is to effectively address the new investment requirements of Asian financial institutions.

“There are new business models that allow clients to invest directly in specific markets without going through the global-custody-subcustody model. These business models are basically a combination of features from the regional and global custody propositions and that’s turning out to be more efficient than the classic model where you choose the global custodian and he is actually working with 60, 70, 80, or even 100 subcustodians,” says a former head of an Asian subcustodian bank.

“What’s happening now is that there are other propositions, which allow clients to invest differently. Their (investors') asset profiles, and where they’re investing are also changing dramatically. Their level of attention around emerging markets is definitely rising wherever they are in the world, whether they’re in Asia or not,” he adds.