Flurry of market activity and unprecedented operational challenges test custody business continuity plans during the COVID-19 pandemic, but resilience and innovation are ensuring stable client service levels.
When the COVID-19 outbreak was declared a global pandemic in March, it posed severe operational risks for global custodians and their service infrastructure. Capital market events, regardless of the relative nature of their economic impact, came at the custody industry at two to three times the speed and frequency than we would expect under typical operating conditions.
Alongside day-to-day custody needs, resultant market flurries created by the pandemic caused clients to be particularly reactive in an age where we see a growing clamor for real-time information. To meet this unique situation, the industry had to rise to the challenge to service, as well as safeguard, assets under custody.
Ultimately, agility and resilience cut through, enabled in no small part by the dedication of sales, product, and service teams, as well as investment in technology. Well-designed business continuity plans (BCPs) were put to the ultimate test, quite unlike any mock-trial they’d been hitherto subject to.
Industry research by EY suggests that banks with custody operations managed to switch an average of 85-90% of operations to secure work from home (WFH) mode, although some inevitably fared better than others. In a matter of weeks in March, nearly 95% of Citi’s global custody team, and many of our partners, started WFH.
Having scrutinized our own operations, we believe the timeliness of both sending/receiving execution instructions as well as end-execution for clients remained similar to what it was before COVID-19 lockdowns impacted office-based operations. And that’s despite unusually higher volumes in the wake of the initial shock of the declaration of the pandemic.
To this effect, here are three very different case studies demonstrating the impact of technology and human ingenuity on Citi’s custody operations:
Case I. Private Equity client with documents stored in securities vault
At the height of the pandemic, a US private equity client needed to retrieve a certificate of custody of bonds being held in our securities vault, which was inaccessible due to COVID-19 business closure protocols. The certificate needed to be retrieved as matter of urgency in order to be delivered to a bank in East Asia, so that the bonds being held in that particular market could be tendered on in the fourth week of May.
Working with Citi Private Bank’s legal team and the client, we were able to draft a letter confirming that the bank was holding documents and would deliver as soon vault resumed operation. Following the assurance in writing, we eventually retrieved the documents and delivered to the client later in the month of May, and ahead of the deadline, when the vault resumed limited operations.
Case II. Physical stock escrow deal
An escrow deal was set to distribute physical shares that were being held in our securities vault which was inaccessible due to COVID-19 business closure protocols. Due to contractual terms of the deal, it was critical that the shares be distributed to the individual named in the document on a specific date and could not be delayed.
In partnership with our escrow team, we determined that due to the COVID-19 environment, the recipient of the physical shares didn’t have the ability to accept and secure the physical shares. In response, we promptly opened a custody account for the recipient of the shares and subsequently transferred the shares from the escrow to the custody account on the date specified in the Escrow Agreement – without the shares being removed from the vault. The result was the escrow contract terms were satisfied, and the client was reassured of a secure place to store the shares.
III. Bespoke digital documentation framework
A client needed to make a disbursement from their custody account but was unable to apply their wet signature to the letter of authority (LOA) while working remotely. We were able to add an option for a digital signature that allowed us to deliver a pdf document to the client via DocuSign and set the number of digital signatures to apply to the document.
As a consequence, the Custody Officer was able to take the LOA the client delivered via email and send it back to the client via Citi Private Bank’s secure DocuSign infrastructure, allowing the client to apply a digital signature. This solution ensured the instructions in the LOA were exactly what the client intended, as we used their exact document, and we obtained an approved signature.
These case studies demonstrate that in an unusual new normal custodians must work overtime to ensure operating functions remain as close to business as usual as practically possible in a restrictive environment.
Service benchmarks for the road ahead
With respect to general service delivery, several benchmarks have emerged in the wake of the pandemic that perhaps constitute a bare minimum from our standpoint. For instance, incremental client demands for real-time information, a true barometer of a global custodian’s service efficacy, should be duly met.
That’s in addition to routine demands for service transactions, which doubled in March and April, alongside a huge four-fold increase in valuation checks by clients for Net Asset Value (NAV) calculations due to major asset price fluctuations.
Service delivery also goes hand-in-glove with maintaining effective client communications. With global lockdowns placing strains on conventional and in-person interaction, digital video conferencing solutions and client events can ensure internal and external channels of communication are not only maintained, but enhanced.
These practices and structures should not be spur of the moment moves. Financial service providers should make BCPs, WFH policy frameworks, and technological investments well in advance of a crisis to establish secure means by which employees can work safely and proactively in their own homes.
In the past, we have emphasized that a custody service provider is only as good as its global reach in this connected world of finance. Lockdowns in the wake of COVID-19 have made financial institutions unwittingly demonstrate why a custodian with a solid BCP matters just as much when it comes to choosing the right custody partner for your wealth needs.