The Last Look…

When I first started writing about foreign exchange markets 15 years ago, custody was big news: the two largest providers were being taken to account by some of their biggest customers alleging that BNY Mellon (as it was known then) and State Street had not provided the best possible outcomes to their clients on FX execution. 

A few years later, both banks agreed separate settlements with US authorities for a combined total of over $1 billion, and then…not much happened. In fact,the global FX custody and asset servicing market remains more concentrated than ever: the top four providers, including Citi and JP Morgan, safeguard some $180 trillion of assets, which allows them to dominate FX execution and flows that are operational or passive, benchmark-driven trades.  

For the last decade and a half, custody FX has been one of those areas of the market where everyone could see the potential for change, but remarkably little actually changed. Asset managers might scrutinise a basis point here or a fraction of a tick there on an investment trade, while sizeable amounts of operational FX were left to standing instructions, batch processes and custody arrangements that attracted considerably less attention.

The surprising thing about this is that for years it felt like nobody was challenging this highly-concentrated and hugely valuable segment. For some time, non-bank LPs heralded the arrival of the Great Unbundling of credit and liquidity, but that failed to materialise in a way that troubled the incumbents. 

This is astounding, in a way, but custody FX providers are proving to be as hard to dislodge as it is to get D2D FX swap markets onto electronic venues. In recent months, there is at least a sense of challenge in the air, because the rule of so few in a business so big is starting to look unsustainable. The status quo has survived Mifid II, best execution requirements, lawsuits, allegations of bad practices and lack of transparency, but what might eventually chip away at the leaders’ position has nothing to do with regulation, rather it’s all about convenience. 

If execution can be separated from custody without recreating all the operational complexity that outsourcing removed in the first place, the old model starts to look considerably less impregnable.

Deutsche Bank has been loud and explicit about its ambition to disrupt this arrangement, with its modular FX-as-a-Service proposition, Haus FX, which spans the trade lifecycle from calculation through execution to settlement, offering to introduce more automation into a manual, repetitive and non-alpha-generating FX workflows. Its February integration with BlackRock’s Aladdin is important because it puts those capabilities directly inside a platform already embedded in the investment process of hundreds of institutions. 

This attempt to make the choice of FX provider independent of the choice of custodian has been well-documented in the industry, with DB touting double-digit cost savings in a proposition that one would imagine resonates with the buy-side. 

They’re not the only ones either.  BNP Paribas Securities Services has extended its automated FX service in Europe specifically to clients whose assets are held at other custodians, with a service that covers 61 currencies and enables BNP Paribas to provide FX across multi-custodian arrangements. Even custody providers are getting more pushy: The Full FX‘s own review of single-dealer platforms last year noted that Citi was targeting custody FX through its Pulse functionality, while at least three other banks were highlighting efforts to capture more of this business. 

Citi, in fact, just launched Custody+, which moves away from what Citi itself describes as the traditional standardised custody model towards a modular architecture incorporating real-time asset servicing, instant settlement and on-demand FX. The FX element offers direct market pricing, active and passive execution, automated hedging and real-time execution. Citi is simultaneously preparing to add digital-asset custody to the same architecture

What makes Citi’s latest move especially interesting, is that it demonstrates that the custody providers understand perfectly well what is coming. Despite being a huge custodian itself, Citi seems to have cottoned on to the fact that the landscape is shifting: the bundle is being broken apart and reconstructed as interoperable services.

And this is where the real battlelines are being drawn.

Traditional custody banks have always had a formidable advantage in operational FX because they already sit in the workflow therefore they know that a security has settled, they know what currency is required and they have the accounts, cash and settlement infrastructure to complete the transaction. For many asset managers, particularly where FX isn’t viewed as an alpha-generating activity, handing the problem to the custodian has been the easiest answer (especially, if I might get my favourite hobby-horse out for a brief canter, as the buy side views FX as “free”).

But really, the problem for challengers was not about the basis points clients could save, it was providing a better price without creating another problem somewhere else. Technology is increasingly offering answers, however.

HausFX sitting inside Aladdin is a good example. The asset manager doesn’t have to build an FX operation merely to exercise more control over execution. The workflow can identify the FX requirement, automate the hedge and execution process and feed it through the investment lifecycle. BlackRock itself describes HausFX as providing efficiency, transparency and cost savings across the entire FX trade lifecycle. 

This is important because there is plenty of evidence that custody FX has been difficult to scrutinise historically. The Full FX has previously highlighted the legacy problems around timestamps and execution-quality oversight, while the Bank of England’s FX Joint Standing Committee noted in 2024 that transparency around execution and sub-custody varied between custodians and that some asset managers were consequently moving FX back in-house. 

The emerging, new model offers a third option: unbundling execution and custody, with technology bridging the two, and this is where resistance to change starts to look futile. Of course, custodians won’t just sit there and watch their business models being challenged.

BNY was already moving its custody FX proposition towards a more transparent, open architecture several years ago, adding algos, configurable rules and better timestamping and TCA. Its current custody proposition explicitly promotes client control over FX pricing, execution and netting. Now, Citi’s Custody+ takes the idea considerably further.

Custody will remain an important piece of the overall FX puzzle, but the assumption that custody and FX execution naturally have to come from the same institution is coming under pressure and this is why challenger banks are fighting over who owns the workflow. Once an FX provider is embedded inside the OMS and connected through the trade lifecycle, the set-up becomes part of the client’s infrastructure and results in a much deeper and stickier relationship.

Changes in underlying market structure are also adding momentum: investment managers are becoming less tolerant of silos as technology allows them to connect previously remote dots. Meanwhile, shorter settlement cycles, APIs, cloud infrastructure and eventually tokenised assets only increase the pressure for systems to communicate in real time.

This makes the fight over custody FX much more significant than the revenue pool itself as it’s about owning future clients relationships, rather than just making targets today.

And yes, operational FX is operational precisely because investment managers generally don’t want to spend their time thinking about it. But this is a hard to maintain position for someone with fiduciary responsibilities, as automated, integrated and potentially cheaper alternatives emerge. Still, changing long-established custody arrangements requires evidence that the alternative is genuinely better without introducing new operational risks. This is slowly happening. 

For years, the custody model benefited from the fact that changing it involved too much work for too little perceived reward. Now, some of the largest providers in the execution business think they have the evidence that can change ingrained set-ups. Whether they succeed, remains to be seen. But if history is anything to go by, inertia as a business model tends not to do well at times of major technology change. 

Let the battle rage on

eszalay@thefullfx.com