Accelerating the evolution of custody

Accelerating the evolution of custody

Following several years of significant growth in its global custody franchise, HSBC Securities Services recently decided to implement a new structure and operating model to align itself more closely with its clients.

“We have historically been regional-centric with a mix of geographic, functional, product and client-based teams,” explains Alexis Meissner, Global Head of Banks and Broker Dealers for HSBC Securities Services. “The regional business model remains relevant, but our new structure will simplify the way we operate with a real emphasis on our clients.”

Specialist sector-based teams have been created to work with the key sectors of banks and broker dealers; asset owners and asset managers; and issuers. This organisational model is designed to fulfil the vision of ensuring that clients are at the centre of everything HSBC does, providing a conduit directly from clients down through the organisation and its operational structures to ensure it is highly responsive to what is happening with clients, be they asset owners or banks and broker dealers.

Meissner describes HSBC’s broker outsourcing capabilities as falling squarely within the banks and brokerdealers client segment as part of a broader trend towards outsourcing of capabilities. “The reason we have such conviction around this strategy is that there is a clear growth trend around outsourcing in the clearing and custody space for broker dealers, particularly in relation to account operator and third party clearing. This phenomenon ties nicely into our end-to-end broker outsourcing proposition, which ultimately gives our clients a full post trade proposition in equities and fixed income, coupled with clearing opportunities.”

“We have just finished implementing a new post-trade cash equities platform and capability across 54 markets in Asia, Europe and the US for our global markets equities business under an outsourcing arrangement,” she says.

This project involved the complete replacement of a 20 year old settlements and finance infrastructure, removing nine internal platforms and implementing three new strategic lines.

“This move was critical for us in establishing credibility,” adds Meissner. “If a prospective client asked us what we do with our own broker infrastructure and we couldn’t say we provide middle and back office asset servicing and clearing provision to those businesses, it would undermine the credibility of the service.”

Based on extensive conversations with clients, Jane Karczewski, Head of Global Custody observes that while increasing profitability and reducing risk are key objectives, there has also been a major change in understanding of how custody – and all the products along the chain such as middle office, collateral management, collateral optimisation and fund accounting – adds value to the front end of the business.

“This can be significant for asset owners and asset managers. Creating transparency via client centric dialogue coupled with a better understanding of client risk and investment profiles, allows us to really fine tune the data analytics we provide. This is turn allows for potentially better profitability for our clients as they are able to make better execution decisions she explains.

“This is also relevant to the banks and broker dealer sector, as they are mandated on their execution and settlement capabilities. What we are looking to achieve via our system enhancements is key for them.”

Efficient execution based on tighter settlement process and automation will increase liquidity across the market, adds Karczewski. “Liquidity (cash liquidity, but also market liquidity for example in the specific illiquid asset classes such as credit and high yield assets) and risk management are at the top of the agenda for all clients. A custodian has valuable data that can assist in defining the depth of market in certain illiquid securities and the network reach to facilitate market entry.”

In addition to reshaping the investment value chain, the change in operational focus should also have a significant impact on individual custodians’ technology, client management and business models.

“Because of the way we have evolved as an organisation, we have a large number of internal systems, so we have to look at consolidation,” continues Karczewski.

To achieve this objective, HSBC is focusing on the development of a new centralised system, which will accumulate transactions across all direct custody and clearing hubs into a single portal. This will potentially allow clients to have one book of records, the potential benefits of which include shorter settlement cycles; cost reduction; full straight-through processing; the removal of reconciliation processes; and fewer settlement failures.

“This sounds attractive as a must have, but there is a bigger potential upside,” says Karczewski. “The entire matching process can take place within this closed community, turning settlements into an internal book transfer. This will support a shortening of the settlement cycle to T+1 or even T+0, which in turn would require a change in the funding of foreign currency and the FX model if it is needed to buy a security.”

Data harmonisiation also has a dedicated focus at HSBC. Digital integration will give clients live access to their data at any time, in a manner that allows for integration with their internal core processes. To this end a specific Data and Digital team has been created within Securities Services working in partnership with HSBC’s group approach. A key focus will clearly be data security.

Karczewski suggests that custodians will continue to play a role in protecting client information from cyber threats and that asset safety will no longer just be about safekeeping, but will also include data protection against cybercrime.

“The rise of big data analytics plays to our strengths as a global custodian,” she says. “Understanding investment patterns, foreign exchange fluctuations and liquidity based on an aggregated data set across a broad set of market participants is valuable to investment making decisions for our clients.”

This should enable HSBC to help asset managers mine correlations and spot investment trends, moving it further up the value chain and closer to its clients’ decisionmaking processes.

HSBC is already using APIs and robotics (there are a number of robots processing trades in its operational infrastructure) and will be increasing its use of these technologies over the next 12 months. It is also working on initiatives around credit liquidity providing data into a liquidity analytics platform.

In future, there is an expectation that digital workflow tools combined with robotics and self- learning technology (artificial intelligence) will be the basis for client service. Approximately two thirds of client queries are simple information requests and digital solutions will allow most of these requests to be handled instantly. “Clients will be self- serving,” says Karczewski. “However, for queries that cannot be handled automatically they will expect direct access to local staff with ready access to the required information.”

Both Meissner and Karczewski are confident that over the next five years, HSBC Securities Services’ investment plan will transform the custody operating model. “Bringing our clients as close to the local market as possible is one of our primary objectives,” says Meissner. “We are already known for our thought leadership as a global custodian – this is about fine tuning our position and finding more efficient mechanisms to deliver this insight to our clients.”

One of Meissner’s primary objectives as the sector head for banks and brokers is making sure that its global client base and their clients have the same experience with HSBC in every market.

“We have established a new client management team within the sector to deliver this high level service across the globe,” she explains. “Being able to filter out noise for our clients is hugely important – we want to understand what our clients need to know right now and give them this insight at a global level. There are very few financial institutions that have a comparable breadth and depth of footprint and capability.”

Designing an organisation around the client experience is an innovative approach and it is HSBC’s network that affords it this opportunity. The balance sheet and capital requirements to run a large markets transactional business are significant, but there is an appreciation that the HSBC Securities Services platform has considerable potential for growth.

The new structure ensures that HSBC Securities Services is informing the way it constructs products and provides services from a client-centric angle. “It is also a significant building block towards the ‘one custody’ concept,” concludes Meissner.

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