With the advent of regulation such as the Dodd-Frank Act and Basel III, treasurers are facing the prospect of higher bank pricing for capital-intensive services. Additional implications of these wide-ranging banking reforms include: changes to the way that companies approach their hedging (corporates are likely to begin raising capital in the required currency in order to mitigate higher hedging costs); a move from short to longer term funding; and of course, increased pressure on lending.

Biography

Morgan Downey leads the Global Custody and Agency Services (GCAS) business unit for Bank of America Merrill Lynch. GCAS provides custody, escrow and issuing & paying agency services to corporate and institutional clients with offices in Chicago, New York, Dublin, London, Singapore and Brazil.

Morgan joined the Bank in 2006 to establish the European arm of the Fund Services business unit having previously worked at Fortis for 10 years. In 2009 Morgan took global responsibility for the Fund Services business unit and then in 2010 was responsible for combining custody, escrow and IPA to form GCAS.

In what ways are market changes and turbulence affecting the corporate clients that you work with?

With the advent of regulation such as the Dodd-Frank Act and Basel III, treasurers are facing the prospect of higher bank pricing for capital-intensive services. Additional implications of these wide-ranging banking reforms include: changes to the way that companies approach their hedging (corporates are likely to begin raising capital in the required currency in order to mitigate higher hedging costs); a move from short to longer term funding; and of course, increased pressure on lending.

Coupled with the intensified focus on risk management, notably counterparty risk, and a lack of attractive investment options, this challenging and turbulent environment has resulted in many corporates stockpiling their cash. Meanwhile, corporate debt levels also remain high, and as such treasurers have a larger pool of both assets and liabilities to manage – at an escalating cost. The larger that pool becomes, the greater the operational risk and complexity.

A further hurdle is the regulatory change requiring companies to have effective collateral management in their dealings with counterparties. Complete exposure to a single counterparty is no longer acceptable and the treasurer is being tasked with keeping everything in order. They need a clear handle on all their investments: what is being invested in, where it is, and how it is being managed. As this need for intraday visibility and control becomes critical, we are witnessing a blurring of the lines between classic corporate, institutional and capital markets activities.

Would you say that corporate clients’ requirements are becoming more sophisticated as a result?

Absolutely. Over the last 12-24 months, for example, we have seen a growing number of corporates responding to the market challenges by tweaking their operational model. On the custody side, clients are seeking a ‘central hub’ where they can maintain all of their assets within a segregated environment. They also need to be able to interact with the numerous counterparties that they use in the market for their trading of FX, for example. The advantage of such a set-up is that any assets out with counterparties for collateral purposes come back into the custody environment as soon as those assets are freed up. That way, the client can maintain the minimum possible exposure to their counterparties.

Another marked difference is that before the economic crisis, a corporate client would have been fairly comfortable with exposure intervals of a day or two. Now, their focus has shifted to the timeliness of information. Clients want to be able to rebalance their portfolio multiple times during the day. They need a far more dynamic way of working and require a real-time information flow.

With treasury resources not at their most buoyant, how are the banks assisting in delivering these requirements?

Ensuring an accurate and timely cash flow is definitely a constant challenge for treasurers. With shrinking technology budgets and stretched resources, there are frequently gaps in the tools or systems that they have available to them. It is incumbent on banks therefore to provide as much of the infrastructure as possible to enable clients to manage their exposures and assets in real-time.

At Bank of America Merrill Lynch we are certainly working towards that goal by fully investing in, and building out, our custody suite and the technology behind it. We have “late mover” advantage here, as we’re not introducing the custody product on a standalone basis. In fact, custody activities will be an integrated part of the bank’s full enterprise solution by the end of 2013, and also the ‘link in the chain’ between Global Treasury Services (GTS) and Global Banking and Markets (GBAM). This integrated approach is supported by the fact that GBAM and GTS report to the same executive which facilitates our integrated client-focused approach. In turn, this co-ordination also enhances the level of service that we as a bank are able to deliver on a global basis.

The theme of integration and cross-pollination comes back to the point that I made at the beginning of this interview about classic corporate clients becoming more like global markets clients – and vice versa. With this evolving dynamic in mind, Bank of America Merrill Lynch is investing its core infrastructure. We will be one of the few global custodians to have a single global platform supporting all securities processing (GBAM and custody), which will enable us to develop tailored client solutions across prime brokerage, clearing, collateral management, securities lending and custody.

And what are the benefits of this for corporates?

From a client perspective, being able to use existing reporting tools, such as CashPro® Online, for their custody and global markets’ needs greatly assists with ensuring a smooth, end-to-end flow, where clients have real-time access to data, and the ability to execute transactions right into the exchanges by leveraging company-wide capabilities. Clients can view their portfolio in a trading environment and also make use of comprehensive risk reporting and analysis functionalities.

Historically, these capabilities have tended to be unavailable to corporate clients, irrespective of their service provider. At Bank of America Merrill Lynch, we believe that this level of sophistication is now extremely pertinent to the corporate treasurer and their ever evolving role. Of course, not every company will need all of the available functionality, but they can pick and choose according to their specific requirements.

In summary, through our commitment and investment, Bank of America Merrill Lynch is bringing a fresh approach to the custody business. We believe this will allow us to give clients not only the end-to-end flow that they are looking for, but also an enhanced level of service on a global scale.