Something in the Air

Were you surprised by BlackRock’s selection of its new providers? You shouldn’t have been, if you’ve been paying attention for the last five years.

When you’re on a winning streak, the best thing you can do is to keep on doing the same things you’ve been doing that helped you to win in the first place. In sport, that may mean wearing the same socks, or following other weird superstitions that athletes love. In business, it means focus – focus on the clients, focus on the product, focus on the team that got you to where you always planned to be.

Not rocket science, eh? And yet many inserv providers have been unable to ignore the lure of deals that fall way beyond their core franchise or their capabilities (e.g. Threadneedle). Historically, custodians were about as easily distracted as kittens chasing a bright shiny thing. Focus was great, until it wasn’t.

Things have changed – and the BlackRock transaction is further evidence of that. In case you missed it, BlackRock is rebalancing the panel of administrators for its U.S. iShares ETF business, which has USD2.3trn AuM. For some years, BlackRock has been trying to reduce its dependence on State Street as a provider – conflicts of interest, concentration risk, inter alia – and had already moved about USD1trn of low-value common trust fund assets to J.P. Morgan before it decided, in 2020, to review its entire iShares arrangements (U.S. first, overseas next).

Five years ago, BlackRock would have had nowhere to do. BBH was a great ETF service provider, but couldn’t offer the scope of services that the universal banks could provide. J.P. Morgan’s ETF product was far from impressive. As for Citi and BNY Mellon, they had not yet started to build competitive solutions.

Under previous management, Citi had flip-flopped repeatedly on its commitment to ETFs – sometimes hot, sometimes cold. But, nearly five years ago, Citi brought in one of the brightest and the best to rethink and redesign its enterprise-wide approach to the ETF market. Andrew Jamieson – ex-BlackRock – was given a broad mandate to look at how Citi could leverage its corporate and investment banking franchise to deliver a much wider package of services to issuers.

Even before Jamieson’s arrival, Citi was already working on the core ETF product and platform. Having drafted in Dominic Crowe from BNY Mellon, Citi added more talent from that bank’s ETF business – including Peggy Vena and Joe Rappa – to re-engineer the ACES platform and get the product to where it needed to be.

Under the leadership of Okan Pekin, Citi’s new management team had learnt that patience is a virtue. There were small triumphs, such as Victory Capital, but Citi was not yet considered to be a frontline provider. It needed validation that its ETF proposition was compelling – and that came in 2020, when one of Citi’s most important clients, Dimensional Fund Advisors, appointed it to provide securities services for Dimensional’s new family of actively managed, transparent ETFs. This was followed by the 2021 mandate from Dimensional to support the conversion of four US tax-managed mutual funds into active transparent ETFs with USD29bn in assets. Citi had earned the credibility it needed, making its pitch to BlackRock that much easier.

Meanwhile, BNY Mellon was also in the process of restructuring its ETF business. Having drafted in Jeff McCarthy from Nasdaq in 2017 – he had also been head of ETFs at both Citi and BBH – the bank started to make real progress in the space. In 2019 it won a mandate from Goldman Sachs Asset Management to provide asset services for its newly launched European UCITS ETF fund range. In addition to BNY Mellon’s ETF solutions supporting order management, PCF production and AP servicing, it also provides fund accounting, transfer agency, depository, custody, paying agent and common depository. A year later, it took the servicing business of United States Commodity Funds, which runs a family of commodity-based ETFs, from BBH, widely considered to be one of the top ETF administrators. The same year, Legg Mason appointed BNY Mellon to administer its first ETF using the semi-transparent technology of Precidian Investments LLC, ActiveShares.

2020 was a banner year for BNY Mellon: it scored a major coup when it hired Ben Slavin, an industry maven who had spent 11 years at WisdomTree, which had been a BNY Mellon client. Slavin has overall control of the ETF business globally, whilst McCarthy has taken on a more client-facing role.

Both Citi and BNY Mellon have proved that, with the right management support and a deep bench of talent, anything is possible. To the disinterested observer, there is an obvious question: why has J.P. Morgan been given 30pct of the iShares business in the U.S.? Citi, BNY Mellon and State Street all have a better ETF proposition. No one seriously believes that J.P. Morgan can compete on capabilities alone – something else is in play. Clearly, relationships across the enterprise are a critical factor for BlackRock, especially in the front office.

But take a look at something else: in Q3 of 2021, J.P. Morgan’s securities services business reported AuC of USD31.9trn, with total revenue of USD1.1bn. Compare that with Q3 2016: AuC of USD21.2trn, revenues of USD916m. Over this five-year period, AuC grew by more than 50pct – but revenues only grew by 23pct. Does that look like a viable business?

Of course not. J.P. Morgan buys business, for two reasons. First, it is simply not good enough to compete with other providers on product and service alone. Second, it looks at the entire corporate relationship, using securities services as a loss-leader to lock in other, more profitable business. It’s a model, but one that most of its competitors do not like. Every bank looks at balance of trade and share of wallet, but none has gone as far as J.P. Morgan. It goes some way towards explaining why BBH is selling its investor services business: it simply could not compete against that business paradigm.

J.P. Morgan does not deserve to be on that list. Be that as it may, BlackRock has given every other issuer a clear path. If you want a competent, committed administrator, look no further than Citi, BNY Mellon and State Street.


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