Discussion of Custodian Bank Request for Proposal

CITY OF LOS ANGELES
DEPARTMENT OF WATER AND POWER
INTRADEPARTMENTAL CORRESPONDENCE
Date:
March 21, 2014
To:
Retirement Board Members
From:
Sangeeta Bhatia, Retirement Plan Manager
Subject: Board Agenda Item 1: Discussion of Custodian Request for Proposal; and
Possible Action (March 26, 2014, Special Retirement Board Meeting)
_____________________________________________________________________
Recommendation
That the Board of the Administration of the Water and Power Employees’ Retirement
Plan (Retirement Board) select one of the three respondents to the Plan’s Request for
Proposal (RFP) for a Custodian Bank.
Summary
The Plan’s custodian bank provides the Plan with an array of custodian services
including domestic and global equity and fixed-income custody, securities lending,
investment accounting, performance analytics, and facilitation of the proxy voting
process.
The Bank of New York Mellon (BNY Mellon) has been the Plan’s custodian bank since
2005. The contract with BNY Mellon was extended in 2008 and 2011 for three years
each time. Prior to executing the contract extension in 2011, staff performed an on-site
visit and sent a comprehensive list of questions to BNY Mellon as part of the due
diligence process and found no significant issues of concern at that time. In 2014, the
firm’s contract was extended for a six-month period to complete a Request For Proposal
(RFP) process which ensures the Plan receives the best services, at the best price,
from the most qualified provider.
Staff began the RFP process for a custodian bank by publishing an advertisement in
Pensions & Investments on September 16, 2013. Respondents had until October 21,
2013 to submit their responses to the RFP. The Plan received responses from BNY
Mellon, Northern Trust Company (Northern Trust), and State Street Bank and Trust
Company (State Street). Each of the custodian banks met the Required Minimum
Qualifications with caveats (RMQ; Attachment A) and the Preferred Criteria (PC;
Attachment B). A brief description of each firm is provided below.
BNY Mellon – The Bank of New York was established in 1784 by one of the U.S.
founding fathers, Alexander Hamilton. The bank merged with Mellon Financial
Corporation in July 2007 to form BNY Mellon. The firm is currently headquartered in
1.1
New York and maintains 168 offices in 35 countries. With approximately 50,000
employees, the firm serves institutional investors in 100 markets worldwide. BNY Mellon
has more than $27 trillion in assets under custody and administration. They service 173
public fund clients with total assets of approximately $1.45 trillion.
The firm has a Tier 1 Capital ratio of 14.8%. Tier 1 capital ratio is an indicator used by
regulators to measure a bank’s core capital (equity capital and disclosed reserves) over
its risk-weighted assets (bank assets that contain credit risk). A higher ratio signifies a
more stable institution.
Northern Trust – Founded in 1889 by Chicago banker Byron Smith, Northern Trust is
the largest independently owned bank in Illinois. Northern Trust has about $5 trillion in
assets under custody and administration and about $800 billion in assets under
management for its asset management unit. Headquartered in Chicago, the firm
maintains 86 offices in 36 countries and employs around 15,000 people. The firm
serves institutional investors in 104 markets worldwide, including 229 public plans with
total assets of approximately $1.125 trillion. The firm has a Tier 1 Capital ratio of 13.1%.
State Street – The firm dates back to 1792, when Massachusetts Governor John
Hancock approved the charter for Union Bank, which is State Street’s oldest ancestor
bank. In the 1920s, Union Bank merged with State Street Trust Company creating the
firm it is today with approximately $26 trillion in assets under custody and administration
and about $2.1 trillion in assets under management for its asset management unit.
Headquartered in Boston, Massachusetts, State Street maintains 77 offices in 29
countries worldwide and has approximately 29,000 employees. The firm provides
custody services for institutional investors in 107 global securities markets around the
world, including 167 public plans with total assets of approximately $1.6 trillion. State
Street has a Tier 1 Capital ratio of 16.6%
EVALUATION PROCESS
After staff determined that the respondents met the RMQs and satisfactorily met the
PCs, the respondents were evaluated based on their responses to the RFP questions.
The RFP questionnaire was organized into five sections as shown in the following table
along with the weighting for each section:
SECTION
Organization
Operations
Monitoring / Security Processing
Other Services
Fees and Other
WEIGHTS
20%
20%
20%
15%
25%
As shown on Attachment C, each Section was broken down into subcategories.
1.2
RESULTS
Detailed results of the staff evaluation of the RFP are also shown in Attachment C. The
table below summarizes the scores of the respondents.
BANK
SCORE
Northern Trust
80.0
BNY Mellon
77.2
State Street
74.6
All of the respondents scored above average and can satisfactorily perform the
custodial duties. Staff gave the highest score to Northern Trust because of its bank’s
strong organization, experience of the proposed relationship managers, disbursement
services, foreign exchange capabilities (with no current litigation), and intuitive, user
friendly interface for performance reporting. In addition, Northern Trust offered a
competitive overall fee proposal.
The following documents are attached:
•
•
•
•
Attachment A
Attachment B
Attachment C
Resolution No. 14-76
_________________________________
Jeremy Wolfson
Chief Investment Officer
SB:JW:SV:AL
1.3
1.4
Attachment A
Required Minimum Qualifications (RMQs)
The following table lists the RMQs that all respondents to the Custodian Bank RFP were
required to meet:
Required Minimum Qualifications (RMQs)
Custody
A. The Proposer must have provided custody services for a minimum of
ten (10) years as of June 30, 2013.
B. The Proposer must not have been censured by the SEC or subject to
regulatory action within the last five (5) years.
C. The Proposer must meet the insurance requirements as indicated in
Appendix A of this RFP.
D. The Proposer must comply with City of LA and LADWP requirements
as indicated in Appendix B & C of this RFP.
E. The Proposer must agree to obtain a City of LA business tax
registration certificate once awarded the mandate.
F. The Proposer must complete the RFP questionnaire in its entirety as
well as the City’s required attachments pertaining to Worker’s
Compensation, Child Care, and Equal Employment Opportunity, if
applicable.
Securities Lending
A. As of June 30, 2013, the candidate must have provided securities
lending services for a minimum of ten (10) years.
B. The account manager assigned must have had a minimum of five (5)
years experience in the master trust/custody field with at least three
(3) years experience at the responding firm.
C. Any cash collateral reinvestment emanating from the Plan’s securities
lending program shall be in compliance with the Plan’s Securities
Lending Guidelines and guidelines established by the Plan’s Board of
Administration.
As shown in the table below, BNY Mellon and State Street met the RMQs but with a caveat
for the requirement stated in custody Letter B of the RMQ table while Northern Trust met the
requirements without any caveats. All three respondents officially signed the Minimum
Qualifications Certification section of the RFP, which states they have met the RMQs and
understand the PCs.
Respondent
Northern Trust
BNY Mellon
State Street
Firm
Indicated
Meets
RMQs?
Y
Y
Y
Caveats?
RMQ comments
N
For Letter B: Stated they are not involved in any
regulatory or government investigation that would
have a material impact on the custody services
they provide
Y
For Letter B: Stated that all major institutions like
BNY Mellon, are subject to various regulatory
actions and proceedings. Referred Staff to 10-Q
and 10-K filings on their website
Y
For Letter B: Stated they are not involved in any
regulatory or government investigation that would
have a material impact on the custody services
they provide. However, they list four cases since
2006
1.4
Attachment B
Preferred Criteria (PC)
In addition to the RMQs, the RFP contained a set of PCs that Staff believed were desirable
hurdles for the respondents to meet. The following table shows the PCs as stated in the
Custodian Bank RFP:
Preferred Criteria
Custody
A. The Proposer must not have been involved in any material litigation in the past
five (5) years.
B. The candidate must have at least $300 billion in tax-exempt master trust/master
custody assets as of June 30, 2013. This amount must include at least $5 billion
each in international equity and fixed income.
C. The account manager assigned must have had a minimum of five (5) years
experience in the master trust/custody filed with at least three (3) years
experience at the responding firm. The transition team leader and his/her
assistant must have worked together on at least one (1) prior major conversion of
an account with market value in excess of $5 billion consisting of multiple asset
classes.
Securities Lending
A. If submitting a proposal, the candidate must have at least $100 billion in securities
lending lendable base on an agency basis as of June 30, 2013.
As shown in the table below, all respondents fulfilled the PCs with the exception of being
involved in litigation for the past five years. All three respondents are currently in multiple
litigations concerning foreign exchange transactions and/or securities lending related matters.
Many of the cases are still pending and therefore the firms do not know the extent of any
monetary damages or requirements to change business practices. However, all three
respondents do not believe any monetary judgments against the firm will have an adverse
effect on the financial condition of the firm.
Respondent
Firm Indicated Fulfills
All PCs?
Caveats Pertaining to the PCs
Northern
Trust
Yes with caveats
Securities Lending litigation ongoing.
BNY Mellon
Yes with caveats
State Street
Yes with caveats
Securities Lending and Foreign
Exchange litigation ongoing.
Securities Lending and Foreign
Exchange litigation ongoing.
1.5
Attachment C
Scoring of the RFP
After staff determined that the respondents met the RMQs and the PCs, the respondents
were then evaluated based on their responses to the RFP questions. Staff also conducted
reference calls to existing clients of all three custodians. The valuable information obtained
through the reference calls were carefully considered and incorporated into the scoring table
below.
The RFP consisted of the Sections listed below and contained 239 questions. The weight for
each section is also shown in the table below.
SECTION
Organization
Operations
Monitoring / Security Processing
Other Services
Fees and Other
WEIGHTS
20%
20%
20%
15%
25%
Each section was further broken down into categories as shown in the table below. The
scores for some categories were grouped with others and scored collectively. This was
based on their relationship to each other and the number of questions.
The weight for each category is shown in the Maximum Score column and is based on
importance. For example, “Background & Organization” is weighted more heavily than the
other two categories in the Organization Section because it includes questions regarding the
financial health of the firm. The column that specifies the “average score” is equal to 70% of
the Maximum Score for each section.
1.6
Attachment C
Maximum
Score
Average
Score
BNY Mellon
Northern
Trust
State Street
10.00
7.00
7.0
8.0
7.0
5.00
5.00
20.00
3.50
3.50
14.00
3.5
3.5
14.0
4.5
4.5
17.0
3.5
3.0
13.5
10.00
7.00
7.5
7.5
8.0
10.00
7.00
8.0
8.0
8.0
20.00
14.00
15.5
15.5
16.0
15.00
10.50
11.0
10.5
10.5
2.00
1.40
1.2
1.6
1.2
3.00
2.10
1.8
2.4
1.8
20.00
14.00
14.0
14.5
13.5
10.00
7.00
8.5
9.0
9.5
3.00
2.10
2.9
2.7
2.8
2.00
1.40
1.8
1.8
1.8
15.00
10.50
13.2
13.5
14.1
1. Fee Schedule
20.00
14.00
17.0
16.0
14.0
2. Other
5.00
3.50
3.5
3.5
3.5
Section Weight = 25
25.00
17.50
20.5
19.5
17.5
Total Score
(add all sections):
100.00
70.00
77.2
80.0
74.6
I. Organization:
1. Background &
Organization
2. Personnel
3. Clients
Section Weight = 20
II. Operations:
1. Internal Controls & Risk
Mgmt
2. Administration & Client
Relations / Investment Mgr
Liason
3. Technology
4. Legal, Compliance, &
Audit
5. Accounting and
Reporting
Section Weigh = 20
III. Monitoring/Security
Processing
1. Security Processing &
Custody
2. Investment Guidelines
Compliance & Monitoring
3. Tax Claim Corporate
Actions
4. Disbursement Services
5. Cash Management
6. Foreign Exchange
Section Weight = 20
IV. Other Services
1. Performance
Measurement
2. Cash Overlay Program
3. Securities Lending
4. Transition/Conversion
5. Transition Management
Section Weight = 15
V. Fees and Other:
The overall scores were very close. Northern Trust scored the highest with a total of 80.0 and
ranked highest in two of the five sections, Sections I and III. BNY Mellon had the next highest
score with 77.2 and achieved the highest score in Section V. State Street had the lowest
overall score but ranked highest in Sections II and IV.
1.7
Attachment C
ANALYSIS
To aid the Board’s review, following are summaries of staff’s findings on key elements of the
RFP that directly impact the effective operations of the Plan.
1. PROPOSED CLIENT SERVICE REPRESENTATIVES (Section I.2 and Section II.2)
These categories provide an indication of the expertise the proposed relationship
manager/client service manager has and the number and complexity of the clients they
serve.
Northern Trust is especially competitive in these categories because its proposed
Relationship and Client Service Managers have the lowest number of combined clients to
handle. The Northern Trust managers will service nine clients compared to 18 for BNY
Mellon and 16 for State Street. The lower client load implies the Relationship and Client
Service Managers can focus more on the Plan’s account.
As shown the table below:
• Northern Trust’s Relationship Manager services five accounts totaling $14 billion.
BNY Mellon’s Relationship Manager has 10 accounts totaling $60 billion; State
Street’s proposed Relationship Manager only services two accounts: however,
these accounts total $180 billion and are complex.
•
Northern Trust’s Client Service Manager is responsible for only four accounts
compared to 18 for BNY Mellon and 14 for State Street; however, the size of the
accounts serviced by the Client Service Managers of the three firms is comparable.
Another indicator of good account service is the number of clients gained and lost over
the past four years. As shown in the Gain/Loss row in the table below, Northern Trust has
the highest gain to loss ratio of clients compared to its competitors for the period between
2010 to June 2013.
1.8
Attachment C
Criteria
BNY Mellon
Northern Trust
State Street
Office Location Proposed to Service
WPERP
Pittsburgh, PA;
Tacoma, WA
Chicago, IL
Kansas City,
MO
Dawna King
Colleen Brennan
Mike Pettit
Los Angeles, CA
Chicago, IL
Los Angeles,
CA
10
5
2
$60 B
$14 B
$180 B
Current Position Experience
1
1
7
Firm Experience
1
9
7
Industry Experience
18
9
22
Nina Caruso
Ramona Griffin
Matt Burton
Pittsburgh, PA
Chicago, IL
Kansas City,
MO
8
4
14
$68 B
$49.6 B
$21.5 B
Current Position Experience
4
7
6
Firm Experience
26
8
13
Industry Experience
34
33
14
1.83
3.06
1.56
55 / 30
269 / 88
173 / 111
Proposed Relationship Manager
Office Location of Relationship
Manager
Number of Clients Serviced by
Proposed Relationship Manager
AUM of client relationships
Proposed Client Service Manager
Office Location of Client Service
Manager
Number of Clients Serviced by
Proposed Account Manager
AUM of client relationships
Gain/Loss Ratio (2010 to June
2013)
(a higher ratio signifies more gains
vs. losses)
Number of Clients Gained / Lost
(from 2010 to June 2013)
1.9
Attachment C
2. CREDIT RATINGS (Section I.1)
The RFP also solicited information regarding the financial soundness of the respondents
based on their credit ratings, and financial health, as measured by Standard and Poor’s
and Moody’s. According to Standard and Poor’s ratings, Northern Trust’s Preferred Stock
rating is higher than its competitors and equal to BNY Mellon and State Street in the other
categories.
Standard & Poor's Credit Rating
BNY Mellon
Corporation
Northern Trust
Corporation
State Street
Corporation
Commercial Paper
A-1
A-1
A-1
Senior Debt
A+
A+
A+
Subordinated Debt
A
N/A
A
BBB
A-
BBB+
BBB
A-
BBB+
The Bank of New
York Mellon
The Northern Trust
Company
State Street
Bank and
Trust
Company
Short-Term Deposits
A-1+
A-1+
A-1+
Long-Term Deposits
AA-
AA-
AA-
Senior Debt
AA-
N/A
AA-
Bank
Preferred Stock
Trust Preferred
Securities
Custodian
Moody’s rated Northern Trust as equal or higher than the other two banks in all categories
except for Senior Debt and Long Term Deposits.
Moody's Credit Rating
BNY Mellon
Corporation
Northern Trust
Corporation
State Street
Corporation
Commercial Paper
P-1
P-1
P-1
Senior Debt
Aa3
A1
A1
Subordinated Debt
A1
N/A
A2
Baa1
A3
Baa1
A2
A3
A3
The Bank of New
York Mellon
The Northern Trust
Company
State Street
Bank and
Trust
Company
Short-Term Deposits
P-1
P-1
P-1
Long-Term Deposits
Aa1
Aa3
Aa2
Senior Debt
Aa1
N/A
Aa2
B-
B
B
Bank
Preferred Stock
Trust Preferred Securities
Custodian
Financial Strength
1.10
Attachment C
3. FOREIGN EXCHANGE (Section III.6)
All three respondents are fully capable of performing these services. Given the recent
headline risks associated with Foreign Exchange transactions, Northern Trust stands out
from the other respondents because it is not currently involved in any litigation concerning
their foreign exchange program as reported in the RFP and stated by the respondent.
4. PERFORMANCE MEASUREMENT (Section IV.1)
All three firms provide advanced analytics and performance measurement services to
their clients, including multiple asset classes, gross and net of fee calculations, custom
benchmarks, lagged as well as daily performance measurement calculations,
maintenance of historical data, and indices that are updated daily. In addition, the
respondents all have experienced staff providing the service. The average number of
years of experience for the respondent’s performance measurement team is 15 years for
Northern Trust, nine years for BNY Mellon and eight years for State Street.
Based on references from other public plans and consultants, Northern Trust’s system is
very intuitive, powerful, and user friendly. BNY Mellon’s system is dependable but not as
intuitive and more difficult to create customized reports relative to the other respondents.
State Street’s web based system, which includes performance measurement, has a very
robust and intuitive user interface.
5. SECURITIES LENDING (Section IV.3)
BNY Mellon’s securities lending program is the largest among the three respondents, with
approximately $3 trillion in lendable securities assets. The firm has 36 years of securities
lending experience and is currently the largest lender in U.S. Government Securities and
U.S. Agencies. BNY Mellon’s Securities Lending program generated about $1.54 million
for the Plan from January 1 to October 31 of 2013.
State Street’s Securities Lending program has the longest history with 40 years in the
business and about $2.8 trillion in lendable assets. State Street proposed a flat 80/20
revenue split. As shown in the table below, State Street provided the highest estimated
revenue from securities lending. The higher revenue estimate is due primarily to the firm
having the highest yield spread for securities on loan. According to State Street, this is
because they will lend securities, mostly equities that have high volatility and high demand
from borrowers. In addition, State Street has a lower level of Treasuries in their estimate
relative to the other respondents which increases the yield spread.
Northern Trust has approximately $700 billion in lendable securities and a 32 year track
record in securities lending. Northern Trust also proposed an 80/20 revenue split. Based
on the yield spread, which was the lowest of the respondents, Northern Trust was the
most conservative in terms of risk with Treasuries comprising 50-60% of borrowed
securities. This conservative approach was reflected in the earnings estimate.
1.11
Attachment C
Securities Lending Revenue Estimate
$3,000,000
$2,500,000
$2,000,000
HP
$1,500,000
RP
$1,000,000
$500,000
$BNY Mellon
Northern Trust
State Street
6. FEE PROPOSAL (Section V.1)
The table below shows the annual base fee proposal from the respondents assuming the
Plan will participate in their Securities Lending program. (The fees are lower if the Plan
participates in the Securities Lending programs because the respondent is anticipating the
revenue generated from this program.) This base fee usually only includes basic
custodian bank services, such as custody of the Plan's domestic and international
securities, wire services, performance analytics, and monthly reporting. In addition to the
base fee, the respondents also charge for various “add-ons” to the basic custodian bank
services, such as expenses for foreign exchange transactions, wire fees, out-of-pocket
expenses, services such as compliance monitor, and analytic software.
At $250,000, BNY Mellon's base fee was the lowest. In addition, BNY Mellon was the only
respondent to include Private I, an accounting and analytic software tool for alternative
investments, and compliance monitoring, in the base fee. BNY Mellon’s proposed fee for
the Short Term Investment Fund (STIF) is 6 basis points versus 8 bps for Northern Trust
and State Street. The STIF account is used to invest the Plan’s cash reserves. However,
many of the fees that are included in Northern Trust and State Street’s fee are not
included in BNY Mellon’s proposed fee, including foreign exchange fees, local wires, and
international equity settlement charges which add close to $250,000 annually.
Northern Trust’s base fee of $550,000 is a flat “all inclusive fee”. Services offered in the
flat fee include many of the same services BNY Mellon offers, such as multi-currency full
accrual accounting and reporting, proxy processing, class actions, fund transfers both
internal and external, performance measurement services, index/benchmark
comparisons, attribution analysis by plan/equity and fixed income classes, alternative
investment transaction processing. Also included are foreign exchange fees. Not included
are Private I or compliance monitoring, which BNY Mellon currently provides the Plan at
no additional charge.
1.12
Attachment C
State Street came in with the highest fee proposal at $750,000. This “all inclusive fee”
includes similar services as Northern Trust; Private I and compliance monitoring are
charged separately. However, Private I is not offered by State Street but it does offer its
own proprietary alternative and public markets analytic software as well as compliance
monitoring for a separate fee.
It should be noted that custodian bank fees are difficult to compare because the
services considered base fee versus separate fees varies greatly.
1.13

Download Report