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Q&A: Rohan Singh, Managing Director of Northern Trust, Australia and New Zealand

Posted: 22 Feb 2012

Rohan Singh is the recently named managing director for Northern Trusts Australia and New Zealand operations. Here, he discusses the firms strategic goals, the opportunities that are presented in the market and the concept of the custodian as counterparty.

RA: What are your observations of the Australia/NZ markets since your arrival in the position?

RS: Some of the observations I have made specifically in relation to our industry is that the custody industry has become increasingly sophisticated and has firmly established itself as a key component of the investment process.

The selection of custodians is recognised by clients as a key consideration alongside investment policy setting and asset manager selection.

This has meant that there is a lot more oversight at the clients board level. Thats not that unusual when you look globally as well. If you take into account the post -GFC environment, what we have seen is a focus on risk management right across the spectrum from counterparty risk, credit risk, market liquidity risk and active manager risk. The custodian is part of that in terms of being the data repository and central record keeper.

This means the custodian is in a position to help clients upgrade their internal risk structure. I stress that [in the concept of] custodians as the counterparty as well. You could say that we are almost an asset class, given that we hold a large chunk of a clients portfolio, which means that clients are not only looking at their active risks but also looking over a custodian as well, in terms of our financial strength, our business model, our credit rating. These issues are ones that have come to the fore in the past few years.

I would also like to say that the custodian has a seat at the table next to alpha. Its the evolution of our business, and the evolution is a function of changes in investment governance and portfolio oversight globally, including Australia.

RA: In terms of the issue of the custodian as counterparty. What sorts of questions are clients asking, and how are you responding?

RS: Just to put into context, [to define] what it means to be a counterparty, I think its important to make a distinction between cash and securities. I dont want to be too overtly legal or technical on this point, but there are differences in the ways liabilities present themselves. But in both cases, the concept of the custodian as the last man standing is easier for clients to understand. How do I recover my assets in the event of any stresses on the custodian, and therefore how does a client assess that? Increasingly, its about the stability of earnings. Northern Trust has benefitted from a flight to safety. We are considered an asset safe haven.

Clients also want to know increasingly about significant events that might impact our business significant events could be areas such as acquisitions, for example. All the way up to the board level, we see a heightened interest, which again is something we welcome. Transparency is the name of the game.

RA: How does this concept play out with operational risks? While there is no specific regulation around operational risk reserves, there is clearly a stronger focus on superannuation funds operational risk considerations.

RS: Operational risk is one of the streams in Stronger Super. [The Australian Prudential Regulation Authority] APRA has guidelines around superannuation and, as well, Basel III looks at operational risk as well as one of the data points. I expect to see more discussion around that. I think more importantly is the data governance and controls that custodians have at an enterprise level, and we would expect to see more engagement with our clients around that. I think that loss reserve provisioning will play out over time.

RA: What are Northern Trusts priorities for 2012 in terms of business services and service provision?

RS: Strategically for us its about controlled, organic growth. We have a number of commitments at a firm where excellence in execution is core to our strategy. We have had a number of new wins, which is a testament to our operating model and technology platform. Superannuation funds and investment managers outsourcing is key to our growth strategy.

If you look at the fact that weve gone from zero to 5% of market share in the space of four years just on AU$100bn, its not inconceivable that if we execute well and meet client commitments, we could in the next two or three years double our market share. But at the heart of that, controlled organic growth is the key.

RA: Where do you expect to see more growth master custody or outsourcing of back and middle office functions?

RS: I think the total industry is going to grow. Proposed increases in superannuation contributions from the current [rate of] of 9 to 12% will almost certainly come in. There is also increased investment manager outsourcing which can be custodian-agnostic. So you have twin forces driving the growth in the industry.

If you look at investment manager outsourcing, its quite a broad term. Middle office can mean different things. Where does it begin, post trade, where does it end? Its also new concept pure middle office provider/administrator/custodian, whatever you want to call it -- that is still in its early days.

Weve been fortunate to have a major, landmark transaction in Australia with QIC, and across Asia with RCM Allianz. I think the important thing here is, is the model provides the benefits or strategic objectives that the investment managers set out to achieve. Those objectives for investment managers increasingly are around strategic capabilities as opposed to pure cost, to allow their time to market, speed to market, and to support the asset mix that is extending across multiple asset classes.

RA: Do you see areas where efficiency gains can be made in administration?

RS: The way that our technology architecture is aligned globally and the way we assemble data for our clients, we believe we can drive efficiency through increased portfolios oversight. Thats underpinning a large part of our strategic thrust.

Australia has a well organised custody business. In saying that, there are areas where we can drive further efficiencies, particularly in the private market space unlisted unit trusts, private equity processing. There is still a fair amount of paper-based process flows.

RA: What global trends do you see impacting on the Australia/NZ markets in the year ahead?

RS: In terms of global themes, regulation is key. It comes in now from a cross border perspective through FATCA. FATCA still needs to play itself out. But clearly as a foreign financial institution, there will be an obligation to investigate AND report data on US persons. Is it in the KYC [know your client] processes, is it in account origination? Yes, it is a cost challenge, a systems challenge, but it will be important to be FATCA compliant if youre going to do business with FACTA compliant institutions.

There is also Dodd-Frank, which also looks at the OTC space, clearing and counterparty risk. Thats potentially another area to watch. It hasnt received as much attention in Australia as FATCA because of the cross-border issues, but its important.

RA: Will Northern Trust provide clearing agent services?

RS: I think well watch it play out a bit more. At this stage, our strategy is to help clients connect to clearing systems as opposed to being a central clearer ourselves, but well see.

Theres also the whole European alternative management directive which will see a greater degree of custodian liability. We havent seen that those regulations have a cross border effect or a contagion effect. In fact, the Singapore/Hong Kong investment regulators did not include that level of liability in their latest communications. There is also that extension to UCITS, but Australia has its own unit trust industry. The UCITS solvency guidelines, etc., dont find their way into that.

RA: Speaking of UCITS, is Northern Trust looking at Pan-Asian passport funds?

RS: I personally would like to see Australia integrate further into the Asian markets. It has A very sophisticated investment management market, and is well governed and hopefully the Asian passport fund is something that will come to fruition. It has political challenges more than product challenges, I would think.

Its heartening to see Australia take a leadership role. If you look at the countries that have major mutual fund/unit trust industries, its Singapore, Hong Kong, Korea, Australia and JAPAN. Those are natural countries for the distribution of cross-border investment vehicles.

We have a good footprint across Asia. We have been in Asia since the early 90s. We have a good history with clients and regulators, and we are in a good position to support a pan-Asian model.

RA: What services are clients asking/enquiring about?

RS: Clients are showing interest in global capabilities around different asset classes, especially alternatives. The other thing is the intensity of interest I see around our technology architecture. Can it handle the demands at a high level? How many systems sit beside your core system? Clients are obviously trying to have a look-see into accuracy of data, and the unravelling of that technology

The other key area of note is strategic partnerships. I dont mean working together to create commercial products, but ensuring that the clients culture and value set, and the custodians culture and value set and the custodians strategic skill set reconcile. Thats easier said than done. It requires a lot of time spent together, and thats becoming more and more important in searches.

RA: Does that concept of strategic partnership get reflected in terms of staffing increases in 2012 in areas like client relationships?

RS: Its not just about relationship management. Strategic partnership goes way beyond client servicing. It goes down to how we as a firm allocate capital, for example, and what are our priorities are in the next three years. In saying that, our Australian business has grown from zero to around 60 staff in the space of 4 years. Were still collecting the right sort of talent to fit our culture. Were going to need new office space. The theme from Northern Trust this year is new clients, new staff and new global capabilities which will continue to provide customer value.

Additionally, Singh predicted to GC Australia that Northern Trust could double its Australian market share.

“If you look at the fact that we’ve gone from zero to 5% of market share in the space of four years and now have just on AU$100bn [in assets under custody], it’s not inconceivable that if we execute well and meet client commitments, we could in the next two or three years double our market share,” Singh said. “But at the heart of that, controlled organic growth is the key.”

According to the most recent available figures from the Australian Custodial Services Association (ACSA), Northern Trust’s assets under custody at 31 December 2011 were AU$91.5bn, giving them a 5% share of the AU$1.8tr custody market. That makes Northern Trust the seventh largest custodian in the market. NAB Asset Servicing dominates the Australian custody market, with AU$539.8bn in assets under custody as at the end of December 2011, according to the ACSA figures.

Northern Trust provides master custody for the AU$73bn Future Fund and the AU$24bn Commonwealth Superannuation Corporation, and has a middle office outsourcing agreement with institutional investment manager QIC.

“We have a number of commitments at a firm where excellence in execution is core to our strategy,” Singh said. “We have had a number of new wins, which is a testament to our operating model and technology platform. Superannuation funds and investment managers are outsourcing is key to our growth strategy.”

(RA)

If you have any comments about this story or news tips, contact Christopher Gohlke in New York at cgohlke@globalcustodian.com or Janet Du Chenne in London at jduchenne@globalcustodian.com.