Comment and analysis
Observations and considerations related to custody banks
achieving scale in the business, either internally or through alliances, is necessary to spread the cost of the investments in people and technology over a larger base. The high fixed costs and perceived ‘non-differentiated’ nature of basic custody services requires the banks to continuously evaluate how they can achieve cost savings and increase productivity to respond to client fee pressures. Consolidation in the industry has further played a significant role in achieving these objectives;
the sale of value-added services in addition to basic custody/safe- keeping offerings is necessary for custody banks to maintain or grow profit margins. Significant value added services include foreign exchange trading, cash management and securities lending. Co-ordination and collaboration across various business
Custody banks are specialized banks primarily engaged in the provision of transaction support services to institutional investors including hedge funds, mutual funds, insurance companies and pension funds as well as asset managers. With the increased focus on transparency and cost containment, custodians are expected to receive a boost from companies outsourcing their transaction processing. Suddenly the business of settling trades and safekeeping assets has taken on a newfound importance.
In contrast to the general focus of wholesale or commercial banks (lending) or investment banks/banking arms (M&A and trading), custody banks are engaged in the provision of a wide-array of complementary services including:
custody and sub-custody services;
foreign exchange services;
securities lending services;
cash management; and
investment operations back-office
Business and value drivers
Growth and profitability in the custody business is dependent on the following key drivers:
How does a chosen transfer pricing approach account for differences in margins and cost structures between the core custody services versus the value added services?
How does management evaluate success - in terms of service lines, clients and markets?
units to sell a bundled offering of services to custody clients is critical for custody banks to capture a larger (and potentially more profitable) share of their clients’ fees; and
Are the above value drivers geographically/jurisdictionally isolated or integrated?
Emma Purdy - firstname.lastname@example.org
the implementation of a central relationship management structure allows custody banks to provide a ‘one stop shop’ for its global client base as it expands into new markets.
Specific transfer pricing issues
A global service model integrated across various business units combined with local expertise (either local market or specialized product knowledge) inherently leads to transfer pricing considerations. The key business drivers discussed above provide the direction for identifying how and where value is created in the business as the starting point for addressing which intra-group transactions need to be understood and priced. With relevance to transfer pricing support, some key questions to consider include the following:
What are the key implementation issues to consider in the selection of any model, including financial data availability, third- party transactional comparables, etc.?
Overall, answers to the above questions may lead to various alternative transfer pricing models for different custody banks. Further, tax authority views and preferences for certain models (see following article) may require a balancing act between what the economics dictates versus what can be easily defended in any particular jurisdiction.
For more information please contact:
Krishnan Chandrasekhar - email@example.com