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CAPITAL MARKETS

Custody converges with prime brokerage

Custodians have become one of the few safe havens of the financial markets. If they can manage securities lending without putting assets at risk, their power and influence among clients is set to grow. Helen Avery reports.

IN THE NEW back-to-basics, low-risk-tolerance environment where cash is king, custody has become the surprising darling of financial services. Custodians, having for the most part avoided embarrassing investor losses, with no big blow-ups, have emerged, says Michael Spellacy of Boston Consulting Group "as an independent and trusted man of last resort. Their historical position as an unassailable castle on a hill has been strengthened through this market crisis, and will likely be a net beneficiary of major movements around liquidity and regulation."

Cash flooded into custodians from hedge funds, sovereign wealth funds, pension funds and institutional investors in the summer of last year as clients rushed to put their money somewhere it could not be touched and that had no exposure to investments that might result in nasty surprises down the line. The conservative custodian, often regarded as an expendable commodity, is now seen as an absolute necessity.

Although custodians are perceived as safe havens, clients are taking no risks with their assets. And which custodian to choose is now regarded as a question as important as which fund manager to choose.

Tim Theriault, president of corporate and institutional services at Northern Trust, says strength of balance sheet, rating and capitalization are key concerns of clients looking for a custodian.