Among many other lessons, the present crisis has highlighted that a critical service provider is only as good as its Business Continuity Plan (BCP). Through its ongoing monitoring and consultancy projects, the Advisory & Analytics team at Thomas Murray has been uniquely well-placed to observe the Global Custody industry’s challenges during this crisis. Huge spikes in market activity, accompanied by unprecedented operational challenges, conspired to test banks’ BCPs to their limits. The custodians, Bea Hughes-Morgan writes, have been remarkably resilient – demonstrating the capabilities of their middle- and back-office teams.
At the peak of COVID-19 disruption in March, Thomas Murray recorded a 327% increase in market newsflashes issued to its clients – meaning that capital market events, disruptions and outages were at more than four times’ pre-COVID levels. Markets have since normalised, as our post-trade activity map reflects, but the peak of the disruption presented very real risks to custodians and infrastructures trying to safeguard and service assets.
An impressive 90-95% of the Global Custody industry appear to be working from home.
The tracking of global custody KPIs by Thomas Murray’s Advisory & Analytics team has revealed interesting statistics surrounding market activity, with Q1 seeing an 84% increase in trading volumes and a 43% increase in failed trade rates across the industry. In April, State Street and BNY Mellon reported a minimum 50% increase in middle-office transactions for March against January-February of this year, whilst at the peak of market volatility, State Street reported a staggering increase of valuation checks for NAV calculations from 70,000 to c.1,000,000, due to significant asset price moves (ref. Global Custodian).
Interestingly, the timeliness of trade instructions received has remained reasonably static against previous quarters, suggesting that, though volumes have increased, investment managers were still able to send timely instructions.
BCP Enactment: Response and Resolve
Against this backdrop of unprecedented market activity, banks and infrastructures have faced extraordinary challenges of their own – closing offices, often very suddenly, and instigating full working-from-home (WFH) strategies, adapting to remote communication and implementing (in some cases untested) virtual procedures. Sustaining productivity to meet agreed service levels and ensure client satisfaction was a significant challenge across the industry, from which there are undoubtedly lessons to be learnt.
Custodian banks with operational staff located all over the world were pushed to the very limits of their tested BCP arrangements, having to transfer thousands of employees to WFH in a matter of days. Those with operations centres in India in particular saw significant disruption when the Indian government instigated a zero-notice lockdown in March, but for most banks any disruption was short-lived before normal services resumed.
The evolution of many global banks’ BCP and WFH policies over the past 3-5 years meant that some banks were better prepared than others. In lieu of transferring activities to large offshore centres, establishing secure means by which employees can work safely and proactively in their own homes has become an accepted, and even preferred, alternative. Some banks have presciently overhauled their WFH policies to protect employees, Euroclear citing the spate of terrorist attacks over the past five years as a motivation behind its WFH strategy. As the COVID-19 pandemic took hold, however, there was an inevitable flurry of activity. March saw Northern Trust sourcing hundreds of new laptops for staff, State Street administering Pandemic Response Teams, and BNP Paribas tightening its approach to IT and data protection. HSBC stepped in to acquire thousands of laptops for employees, just as China was shutting down production.
Lessons to Learn, Looking Ahead
Much of the feedback we’ve received indicates that the industry-wide adjustment ran as smoothly as was reasonably possible. Business continuity planning – which has always been a feature of banks’ custodian monitoring, oversight and evaluation processes – will certainly form a larger part of most agendas moving forward. Banks have undoubtedly demonstrated the capabilities of their middle and back-office teams, adjusting to dramatic spikes caused by market volatility and migrating swiftly, and largely uninterruptedly, to effective WFH.
By our estimation, an impressive 90-95% of staff across the global custody industry appear to be successfully working from home. Combined with the ‘follow-the-sun’ approach adopted by most, custodians have generally ensured a smooth continuation of service across the globe. However, the period has undoubtedly posed challenges: the demand for information on market developments, trading and settlement extensions; decisions on whether to delay AGMs or move them online; and the implementation of bans on short selling etc., have all placed a sustained burden on network management executives.
In the custodian sphere, some banks are attempting alternative and original ways to reach out to their clients and maintain communication. Since April, BNY Mellon’s asset servicing management team has hosted bi-weekly client update calls, encouraging a dialogue between client and expert, and giving an insight into the current workings of the bank. Northern Trust’s ‘virtual hospitality’ initiative sees senior executives enjoying a home-delivered afternoon tea service at the comfort of their own desks – swapping the Roundtable at NT’s Bank Street offices for a virtual event, complete with scones and jam.
The COVID-19 pandemic has seen the unprecedented realised. For many in the financial industry, the uncertainty as we headed into Q2 cast a shadow on the remainder of 2020. In the face of crisis however, global custodians have remained steady, pushed to re-assess their BCP strategies before implementing them with immediate effect. COVID has presented firms with a plethora of new challenges, and it remains to be seen how banks will interpret the ‘new normal’ as staff return to offices, but the rapid response and resilience evidenced throughout the custody industry has been a testament to those who work within it.
To find out more about Thomas Murray's Advisory Services, please contact:
Director, Head of Advisory and Analytics
+44 (0) 20 8600 2315