Special Feature: Beyond Safekeeping

When Aware Super's head of investment services Michael Nairn describes what his fund wants from its custodian, settlement barely rates a mention.

"There's a constant demand for more data, more depth in data, more timely data - more flexibility as well," Nairn says.

The question for super funds is no longer whether a custodian can hold their assets safely - that is assumed - but whether it can deliver the data infrastructure to support rapidly growing portfolios in near-real-time, across asset classes, time zones, and with services that match funds' surging growth.

The data race

BNP Paribas head of securities services for Australia and New Zealand, Daniel Cheever, says the shift is industry wide.

"Five years ago, super funds looked for basic custody and settlement," he says. "Now, we need to act as an extension of their operations - scaling with them, supporting mergers, and driving efficiencies through outsourced middle and back-office services."

The shift has been propelled further by the rise of mega-funds. The number of APRA-regulated funds with more than six members has almost halved in five years, falling from 158 to 81 by June 2025, while total system assets have surged past $4.5 trillion. The top three funds alone now control almost $1 trillion between them.

Aware Super is one of those mega-funds. It is managing an increasingly complex portfolio that has a rising proportion of global and private markets exposure.

Funds are also shifting from traditional strategic asset allocation toward a total portfolio approach and need a consolidated, near-real-time view of everything they own. Creating that view remains what State Street country head Tim Helyar calls the "holy grail" for custodians.

"From a timing perspective, we can bring that together on the morning of T+1 in a fairly accurate way," Helyar says, "so you can be managing the entire fund, even though you're not managing the underlying assets."

Aware Super recently completed a multi-year technology overhaul giving it a unified, whole-of-fund view across public and private assets. It uses BlackRock's Aladdin platform as its investment book of record while the accounting book of record comes from State Street, feeding into performance, attribution and external manager oversight.

Aware Super has built its own internalised book of record for private markets via BlackRock's eFront, providing a secondary view on valuations and private market data rather than relying solely on the custodian.

"Four or five years ago, they probably looked at each other in quite an adversarial manner," Nairn says of BlackRock and State Street. "Whereas we've seen that very much change in the last two to three years - they know in certain areas they've got a common client that they're looking to provide a solution for."

The value of data extends well beyond the investment portfolio. Over the past decade, APRA has steadily increased the volume, complexity and cadence of regulatory reporting.

HESTA acting chief operating officer Sophie Jelleff says it is working more closely with its custodian to meet the data requirements superannuation funds need, most recently APRA's Superannuation Data Transformation
(SDT) project.

"When you think about the expectations that APRA has there, we're looking at how they can help fill those gaps where we're playing well with their capability and where we're playing well with our capability - we don't necessarily want to be stitching that together so we work proactively with our provider to get this balance right."

Stuart Hill, a former head of investment operations at Active Super who now advises asset owners as a custody consultant, says it has been an area of increasing attention after the departure of the last domestically-owned custodian, NAB Asset Servicing, in 2023 and 2024.

"When NAB was still in the super business, they had a really good APRA reporting infrastructure," Hill says. "One of the reasons for that was they were obviously an Australian-owned company - they understood and were prepared to invest more into that reporting infrastructure, whereas now we're left with the global players."

Private markets and the valuation challenge

The most acute data challenge sits in private markets.

"Private markets being a lot of unstructured data - it poses very different problems to the public markets, where you can buy a lot of vendor data and it's pretty standardised," Nairn says.

Unlike listed assets, where vendor data is standardised and prices are published continuously, private market holdings typically arrive as unstructured data in quarterly manager statements. It creates cascading challenges, Hill says.

"At the end of the day, the custodians are dependent on the data from the asset managers," he says. "The clients are dependent on the custodians. It's like a trickle effect - the custodians can only do so much with what they've got and when they get it."

When markets crash, the issue becomes paramount. Just days after the Trump administration unveiled sweeping tariffs on April 2, 2025, APRA contacted major super funds, prompting them to assess the impact on their unlisted asset valuations with a deadline to act within days.

Jelleff says the fund has accountability for valuation decisions but expects its custodian to undertake core processing accurately, including processing data, obtaining fund manager valuations, and executing any trustee-directed valuation decisions.

"Through Liberation Day, we really saw the value of all the hard work and effort that HESTA has put in over many years to ensure that we have a really timely and accurate investment book of record for start of day," she says.

"Our investment management team felt really comfortable that they were making the most informed, best decisions that they could, and part of that is the custodian data that feeds into that book of record every single day."

Cheever says technology, particularly AI and data tools, is playing a significant role in improving the accuracy and capacity to gather private asset data including valuations.

"Automation and digitalisation are streamlining fund valuation processes and reducing manual errors - this is particularly important for private funds, where valuations can be complex and time-consuming. Advanced data tools are providing more accurate and detailed insights into private asset performance."

Jane Dauparas, head of securities services at J.P. Morgan Australia and New Zealand, says the custodian is using AI to check the opening and closing balances on a financial statement.

"That's allowed that process to be a lot faster and so we can get our valuations out to clients quicker because we're able to do those checks faster than we've been able to do in the past."

The potential is also being applied across an expanding set of use cases that will increase efficiency across the industry. State Street's Helyar points to the power of AI when supported by stringent guardrails from rigorous testing to keeping 'humans in the loop' where needed.

"The ultimate goal is to vastly reduce the human intervention when it comes to data capture and processing, but then exception management and issue resolution. We're already seeing the benefits of that."

Time zones, offshoring and operational resilience

Offshoring is entrenched in the Australian custody industry and largely works well, Hill says. But funds are reviewing the model through a sharper lens.

CPS 230, APRA's strengthened prudential standard on operational risk management, took effect on July 1, 2025, and requires regulated entities - and their material service providers, including custodians - to demonstrate they can maintain critical operations through disruption.

Cheever says it is well equipped to respond to industry disruptions and recent coordinated cyber-attacks, which have highlighted the importance of robust operational resilience frameworks. "We have also implemented a range of measures to mitigate the risk of disruptions, including data replication, system redundancy, and regular testing of our business continuity plans."

Hill says offshore operations have become a particular area of review for funds.

"It's not so much about the level of service, or the oversight model - it's more about the geopolitical concerns," Hill says, pointing to heightened uncertainty under the Trump administration and the increased frequency of extreme weather events in Southeast Asian locations where operations are often concentrated.

Mega-funds reshape the industry and custodians

The rise of mega-funds is expanding the demands that asset owners are placing on their custodians. Hill says funds want more than operational competence - they want a strategic partner that can keep pace with how the industry is changing.

"It's not just funds' growth - it's how we're going to change how we invest, using private markets as an example," Hill says. "How are you as a custodian going to support that growth with the increased complexity?"

HESTA - which just completed a review of its custody arrangements, reappointing incumbent J.P Morgan - has now passed the $100 billion mark. Jelleff says it is on a trajectory to reach $250 billion and is planning for those increased demands.

"We wanted to make sure that our partner's capability and investment was going to grow with us, and we can also get the benefits of our scale, so it's not just getting proportionally more expensive."

Cost, transparency and accuracy were critical areas of focus during its custody review, given even small improvements will make increasingly large contributions as the fund grows.

"That's, for us, thinking about members' best interests. How can we make sure we're getting the best deal each and every moment that we're engaging with the custodian? Being able to scale with HESTA and also demonstrate continuous innovation and investment in capability were also important drivers of our decision."

As the super fund landscape has compressed, and becoming dominated by large funds, a similar shift has occurred across the infrastructure serving it.

Six full-service global custodians remain following the departures of RBC Investor & Treasury Services and NAB Asset Servicing in recent years: J.P. Morgan, Citigroup, State Street, Northern Trust, BNP Paribas and HSBC. A handful of others, including Clearstream, BNY Mellon, and Bank of America, serve different niches.

The result is ever-larger funds served by an ever-smaller pool of providers.

"We're probably not far off having a trillion-dollar fund," ACSA chief executive David Travers says. "When funds get to this size, new risks can emerge for a fund, including the risk profile of large counterparties."

A 2015 UNSW research paper identified the systemic dimension, arguing that a small number of custodians serving multiple super funds creates an interconnected environment where local failures - IT breakdowns, valuation errors, or the commercial collapse of a custodian - could propagate across the system in non-linear ways. More than a decade on, five of the ten custodians in their dataset have left the industry.

Travers says the six remaining major custodians still offer reasonable choice, and most are designated Globally Systemically Important Financial Institutions by the G20's Financial Stability Board, which imposes capital buffers and resolution planning above what domestic regulators require. But the overseas experience suggests mega-funds will need to rethink the single-custodian model.

"The overseas experience has been that when funds get to mega-fund size, you see multi-custodian models starting to come into play," Travers says.

Norway's US$1.7 trillion sovereign wealth fund, managed by Norges Bank Investment Management, uses Citibank as its sole global custodian but has appointed BNY Mellon as a contingent custodian.

That growing concentration at the top is also squeezing smaller asset owners out of institutional-grade custody. It is understood that at least one major custodian no longer accepts clients with less than $20 billion in assets.

"What we're seeing for investors probably below a $5 billion size is that getting access to the best global custody solutions is really difficult," Frontier Advisors principal consultant Claire Casucci said at the asset consultant's annual conference in June.

Only about ten super funds remain below that $5 billion mark according to APRA data, but many other asset owners - small charities, endowments, corporate funds - face the same problem. For those under a billion dollars, Casucci says the funds they invest in are limited. "You're very much a product taker."

Faster settlement and the digital frontier

Australia remains one of the last major markets on T+2 settlement due to the ASX's botched CHESS replacement. The US, Canada, India and Mexico have already moved to T+1.

"It's embarrassing," Reece Birtles, Head of Australian Equities, ClearBridge Investments, says.

"If you have T+3 or longer delays, once you think about settlement from the exchange and then from the trust vehicle for redemption - are you a modern competitive product? I think it's important in terms of ensuring our end product is competitive, that those settlement time horizons improve."

The UK and EU have set T+1 interim deadlines for late-2026, with full transitions targeted for 2027. Financial research firm, The Value Exchange, estimates Australia and New Zealand will not transition until 2030.

"There are two key areas that Australian equity portfolio managers will need to be conscious of as Australia moves into T+1," says Nick Paparo, head of securities services sales at J.P. Morgan Australia and New Zealand.

"Recognising trade allocation affirmations on trade date and earlier funding, which may require a review of current liquidity processes."

Tokenisation - the representation of traditional assets on distributed ledger technology - is another innovation on the horizon that could reshape the market. Some super funds have been looking closely at their cash holdings where it could improve liquidity and efficiency.

"This is a rapidly evolving space," says Helyar, "and the concepts there around money market funds and tokenizing those and having more real time settlement, I absolutely think that's where we're heading."

Dauparas also says similar conversations are underway.

"We're talking to clients about digital cash and how we could hold that custodially for them if they go down that path. If clients want to invest in tokenised money market funds, we have had to think about how we will support them. We have expanded our capabilities to support investor registration and dealing and partnering with tokenisation service provider."

About 10% of market turnover is expected to be conducted using digital assets and tokenised securities by 2030, according to Citi's 2025 Securities Services Evolution Whitepaper. In the US, the SEC has formally approved the Nasdaq's plans to allow trading of listed securities in tokenised form. Travers says the ASX will need to formulate a position on tokenised assets within the next 12 months.

Northern Trust participated in the RBA and DFCRC's Project Acacia, which explored tokenised settlement within existing wholesale infrastructure. BNP Paribas has also been active across Asia-Pacific, supporting the Hong Kong government's digital green bond offering and working with Maybank to launch tokenised money-market funds in Singapore.

For most Australian super funds, however, tokenisation remains a watching brief until regulatory and operational structures become iron clad.

"We're a pretty risk-averse fund," Nairn says. "So I wouldn't say we'd be on the bleeding edge of things like tokenisation. But we do see opportunities there - it needs to be a lot more holistic and stable of a solution."

But tokenisation is just one frontier. As more funds push into mega-fund territory, the demands placed on custodians will only intensify. The custodians of the future may look very different to those of today: less focused on safekeeping assets and more on enabling scale, unlocking data and helping funds navigate an increasingly complex investment landscape.

This special feature was first published on the 27th of July in the Financial Standard newspaper (Vol 24 No 14).