Custodians must increasingly realise their role as information providers in order to survive in todays market, according to David Bailey, senior relationship manager of Bank of Bermuda Luxembourg speaking at a recent global custody conference in London.

In an extremely tumultuous period, several major players, including Nat-West and Morgan Stanley, have dropp-ed out of the industry, and profit margins are being squeezed across the board. Bailey argued that the continued demands on custodians to continue installing 'state-of-the-art' technology and to keep up with persistent growth both in the scale of cross-border investment and the variety of investment vehicles, has led to a situation where a custodian's internal efficiency and competitiveness are crucial to its survival.

He noted that investors are becoming more and more sophisticated and ex-pect a level of service from their custodian which not only empathises entirely with their own needs, but is in effect a seamless part of their own resources.

He also stated his belief that what in the past had been referred to as value-added services such as custody reporting, performance attribution, investment accounting and tax reclamation, are increasingly being seen as part of the core service which a custodian had to offer to remain in the market at all. He argued that in the future the range of these services would continue to in-crease and many custodians would be regarded by their clients as sources not only of essential securities administration services but also increasingly as sources of crucial information.

Looking at the industry as a whole, he observed that even some large financial institutions no longer feel that custody is a profitable business for them to pursue, noting that the costs and the risks are frequently perceived as too high and that not everybody wants to play. He foresees a situation whereby the global custody industry could consist of only a handful of major international players with the remaining participants being domestic custodians who have strictly a niche interest in the industry.

This trend is already manifesting itself," he said. "Even though bigger is usually better as far as custody is concerned, there's no denying that many domestic custodians can offer a better service in particular markets than the big boys. This is why there is increasing polarisation around the huge international players and the smaller domestic suppliers.

"I tend to think that this polarisation is good for investors as it means they can use the large players as their lead custodians and be confident that their particular niche requirements will be well handled by the domestic players." James Essinger"

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