Global custodian of the year: BNY Mellon

BNY Mellon has implemented a major upgrade in the digitalisation of its services that has allowed the US institution to improve its services and develop new products for the 35 central banks and 29 sovereign wealth funds it serves as custodian worldwide. BNY Mellon has also fostered stronger ties with the official institutions sector by providing training for both junior and senior staff at central banks, and creating forums to facilitate peer-to-peer discussions.

Digital revolution

BNY Mellon started to digitise its internal operations four years ago with the aim of extracting valuable information from its large pools of data and develop new value-added services from it.

In 2017, the bank had $32.7 trillion under custody, and hundreds of thousands of transactions related to these assets flow through BNY Mellon’s technology platform every day. However, its was hard to always use that information, prompting efforts to improve its technological environment.      

“These systems are great at what they do. But they are not particularly agile, and in their historic form, they were not easy to pull data from or to connect into,” Daron Pearce, chief executive for Europe, the Middle East and Africa asset servicing at BNY Mellon, tells Central Banking. “So we set about digitising that environment, creating a digital wrapper, so that we could better understand what was going on in our systems.”

Technological innovation

The first step was the creation of a tool to analyse the flow of data. This system allows the institution to track the transactions its technology handles and find out where bottlenecks are formed, to better understand why certain operations do not take place as quickly as they could or should.

Based on this information, Pearce says, “we started to think how to actually use this data in different ways because we wanted to give our clients insights into what is going on in  their portfolios”.

The second change was the harmonisation of systems to facilitate the access and exchange of data between the bank and its clients. “If you go back just two years, we had something like 18 different ways in which you could take information from BNY Mellon,” says Pearce. The next development was to create unified access into the institution, to provide full services in a consistent way.

The final innovation was the development of an app store, where the bank hosts third-party apps in which its clients are interested. The attractiveness of the service resides in the fact that BNY Mellon possesses the adequate infrastructure and cyber security to protect this information. This technology allows the bank to create the connectivity between the app and the client’s data that it holds.

“We actually have clients who say: ‘We really want to look into this app, and we would like to run it against our data. But we want you to host it because you have the technical architecture. You create that cyber security and robust environment around it, and build the connectivity for us into that underlying vendor,’” says Pearce.

This technology offers the flexibility needed to respond to new requirements, such as regulations. For example, one of BNY Mellon’s European official institution clients is now required by national authorities to report the carbon footprint of its investment portfolio. This institution helps them monitor the emissions footprint of their investments.

The combination of the scale of the assets under custody, the expertise in the field developed over decades and these technological innovations comprise an attractive mix for central banks.

“BNY Mellon is providing us with a service that is above average in terms of quality,” the head of reserves at a central bank with over $100 billion in reserves tells Central Banking. “It would be hard to find any weakness – and especially for the last a couple of years, during which we increased reserves by 400%, the stability of the services was crucial.”

Only settler of US government securities

Another factor underpinning perceptions about the reliability of BNY Mellon’s operations is that it became the only institution settling US repurchase agreement trades linked to government securities. After BNY Mellon reached a dominant position in the market, JP Morgan – the only other big player – said in 2016 that it intended to pull out by the end of 2017.

The tri-party repo market is an important source of short-term credit for financial institutions that offer US sovereign debt and other securities as collateral to finance their operations. Pearce believes the increased scrutiny BNY Mellon is now under by the Federal Reserve Bank of New York is seen as “very positive” by official institutions that view security and liquidity as a top priority: “What they demanded of us was an even more robust technical recovery infrastructure, and this is actually quite an exciting development in the custody space.”

The bank has created a real-time immutable record of positions for US government debt. The innovation is based on the principles of blockchain. It functions like a distributed ledger, but BNY Mellon is the only creator and list reader.

Training and dialogue

Despite its size, BNY Mellon caters services to smaller official institutions as well as larger ones. The firm is close to agreeing a custody deal with a small European central bank, and a deal it signed with the National Bank of Cambodia, which holds around $11 billion of foreign exchange reserves, highlights its breadth of coverage.

The system is very good, meaning we can produce all kinds of risk and accounting reports. BNY Mellon’s communication is clear, and they are quick to solve a problem

Kimty Kormoly, National Bank of Cambodia

“The system is very good, meaning we can produce all kinds of risk and accounting reports. Their communication is clear, and they are quick to solve a problem,” says Kimty Kormoly head of reserve management team at National Bank of Cambodia. “Most of all, we enjoy a good training programme for our staff members.”

Other central bankers, particularly in Europe, have noted the improvements in BNY Mellon’s training offering in recent years.

The bank runs a training academy twice a year for its central bank and sovereign wealth clients. One module is an introduction to financial services for junior staff in London or New York, while the senior module analyses industry trends and regulations that might affect their businesses.

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Iris Yeung, Joel Clark and Tristan Carlyle