Three years ago, fraudulent behavior related to a few deals in the structured finance market turned a spotlight on the role of the trustee, and the obscure world of deal document management has never been the same since. "We had to go out and do a better job of explaining the role of the trustee," said Joseph Giordano, senior vice president and head of JPMorgan Chase's Worldwide Securities Services.
The "trust" in trustee may have implied explicit responsibility over aspects of a transaction, which was never really the case. After a year or two of intense scrutiny, an understanding has emerged that whatever the role of the trustee, it must be laid out in the deal documentation, Giordano explained. "But dialogue certainly continues at industry conferences," he added.
A period of consolidation in the industry has left a few key players in operation, among them JPMorgan, which has combined investor services and institutional trust services units. Following the merger of Bank One's trustee business with JPMorgan's in the merger last year, this division is responsible for its own fair share of acquisitions and lays claim to $400 billion of assets under custody.
Now, as it searches for continued growth in a maturing business, competitive elements have emerged on the outskirts of the industry as well. While the Street is most concentrated on a security during its debut, the aftermarket is where most of the fraud can occur. As a result of this concern, besides ensuring timely coupon payments and stock transfers, investors and issuers want their paperwork to be protected against fraud through increased deal monitoring.
That's a service that trustees could easily offer, for the right fee. One firm offering such monitoring is Melbourne-based Computershare Ltd., the world's largest provider of global shareholder and employee management systems. In January, Computershare announced an array of strategic products and services for fixed-income securities, including monitoring. And last week, private equity firm TA Associates announced that its Clayton Services business - the largest provider of integrated loan and portfolio analysis - would combine with its other holding, The Murrayhill Co. (see story p. 8), which broke ground as the first securities surveillance and credit risk management business. Market sources speculate that it is only a matter of time before issuers look to a one-stop shop for documentation management and deal monitoring services.
There is always the possibility that JPMorgan's trustee group could move into deal monitoring, but the key element underlying that, said Giordano, is being compensated fairly to take on that risk. For now, Giordano said his time is best spent contemplating how his business can remain on top of known competitors. While some units of the trustee business have matured, there's room for growth in the global market.
Increased demand for services in Europe has stemmed from growth in the conduit and Eurobond markets as well as collateralized debt obligation repacks, he said. Giordano noted that in addition to its growing presence in Japan, the trustee has deployed capabilities to pick up on new activity out of Singapore and Korea. Also on the radar, to a lesser extent, is Russia, as that country's debt markets begin to mature.
"Domestically, we are concentrating on states we do not currently have a large market share in, such as Florida and California," Giordano said. As noted in JPMorgan's first quarter earnings results, its treasury and securities services group added considerably to the investment bank's bottom line. Net revenues for the unit were up 46%, to $1.5 billion, compared with the prior year's first quarter, and operating earnings were $245 million, up from $147 million during the same time.
While growth in new business lines and increased volumes were noted, a considerable amount of that growth was due simply to the merger of Bank One's trustee service with that of JPMorgan. That said, last month was the largest sales month in the history of JPMorgan's global debt group. About 570 deals closed, earning about $21 million in new business
for the division. Giordano said that strong performance by MBS in Japan as well as municipal debt and CDOs were responsible for the month's sales record.
"We spend a considerable amount of money perfecting our infrastructure.
We leverage existing relationships and are always looking to add to that," Giordano said.
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