Last year, major industry consolidations heightened market competition. The survival instinct to retain clients was a major force driving custody fees downward. In the current business environment, the industry remains highly competitive, with industry consolidations expected to continue. [Ed. Note. In early December, Morgan Stanley acquired portions of Barclays global custody business. Again in early January '97, industry rumors about Bank of New York and State Street flurried about.]

The general consensus of the custodians is that fees are trending downward - but - at a slower than the frenetic pace of one to two years ago. A number of custodians reported that as industry consolidation slows, fee rates are beginning to stabilize given fewer providers. For the longer term outlook - custody fees were viewed with a mixed and wide-range of opinions.

One custodian says, "Over the next couple of years, we expect fees to stabilize as the larger providers attempt to improve profitability after the recent aggressive asset accumulation phase." Fees for ancillary services were reported to be under significant downward pressure.

Another custodian offers a bleaker outlook "... the [downward] trend will be fueled by efficiencies gained from technological and re-engineering initiatives ... and the reduction in operational risks in world capital markets."

A more favorable view of fees by another custodian, "For the past several years, custody fees have declined as result of intense market competition." This custodian views competition on the basis of value-added services and not purely price. Prices have recently stabilized and "..prices are expected to rise moderately over next two to five years."

Several custodians expressed concerns about fees for custody spiraling too low. "A current downward trend makes custodian's investment in future difficult," laments one custodian. Indeed, custodians with staying power need to invest heavily in new technology and world-wide infrastructure developments. Another custodian expressed concern about the introduction of CREST causing a downward trend on custody fees in the UK equity market.

The custody business in Canada is also a slugfest. Recent consolidations include CIBC Mellon custody alliance, Canada Trust's purchase of National Trust's institutional custody business and Royal Trust's acquisition of Toronto-Dominion Bank's institutional business. David Dunlop, Senior Vice President of Royal Trust Global Securities Services says, " There are too many Canadian banks fighting for too few dollars. At best, there will be two or three Canadian players remaining in the market."

Industry consolidations generally stir market competition; one predictable result is a reduction in fees. To maintain profitability, most custodians invest heavily in new technology developments. Global custodians continue to place great importance on the use of technology to gain processing efficiencies and to provide value-added services. A frequently mentioned on-going development is straight through processing (STP) - the seamless integration of the investor's trade in any global market through the clearance and settlement process. [STP developments are covered in another section of this report.] Other value-added services mentioned were risk management, performance reporting, cash management, and retirement services. A significant change from last year's survey is the general acceptance of the Internet as a new technology platform for improved investor communication. The use of the Internet for delivery of new, value-added services is a common goal with most custodians.

"Those wishing to remain in the custody business need to increase investment in technology to create efficiencies," says one major custodian. The importance to custodians of developing a consultative partnership approach with clients was also emphasized.

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