Australia’s superannuation funds must sharpen their oversight of custodians, offshore investment operations and liquidity risks as portfolios become larger, more global and more exposed to private markets, according to Northern Trust.
Leon Stavrou, head of Australia and New Zealand at Northern Trust, told Super Review Australia’s super system remained well supported by a sophisticated financial services sector, but its scale had also made operational infrastructure more important.
“The funds that we have are very sophisticated in the way that they invest, the way that they operate, and so the members of those funds get a lot of benefit out of that sophistication, and they’re well supported by a very healthy financial system in Australia,” Stavrou said.
“As an investor, as an asset manager, your exposure to custodians is multifaceted,” he said, noting custodians increasingly support settlement, reconciliation, investment books of record, unlisted trust administration, valuations, tax information and capital markets functions.
Stavrou said asset safety remained the core role of custody providers, but their services had expanded well beyond traditional fund administration.
“The primary focus of the custodian is asset safety and security and ensuring that you’ve got somebody that is managing the safety and security of your assets as a primary focus, and that provides a lot of comfort for the end investors as well,” he said.
He said custodians were “moving towards the front office” by supporting investment decisions, exposure reporting and funds’ digital strategies, including digital assets and the adoption of AI technology.
According to Stavrou, super funds could outsource operational processes, but not the risks attached to them, particularly under APRA’s CPS 230 operational risk regime.
“The best funds will spend time documenting operating models with their service providers,” Stavrou said.
“There’ll be multiple service providers in those chains. They need to understand where there are dependencies, where there are data handoffs from one to another, where things might go wrong, and work with those service providers to ensure that there are good backup plans or resiliency, or what happens if this doesn’t work.”
He said CPS 230 had brought greater attention to mapping critical operations across third, fourth and further-party providers.
“You may well outsource the process, but you don’t outsource the ownership of the function or really the risk that’s associated with it. You still need to manage that,” Stavrou said.
Super funds’ growing offshore allocations had also increased the need for global operating models capable of supporting investments across markets, currencies and time zones.
Stavrou said the risks in cross-border investing included reconciliation, asset safety, liquidity and counterparty exposures.
“As you’re moving money and investments around the globe, you need to ensure that you’ve got cash at the right time in the right currency to execute on a complex investment or a restructure,” he said.
“How you manage that, and how you have a good process, is really important, because you’re potentially introducing counterparty risk and liquidity risk into a process, and that’s really where a good partner can add value.”
He said exposure management was one of the most important but underappreciated operational challenges in cross-border investing, particularly as funds moved further into private markets.
“Having a good line of sight over what your exposure is to different jurisdictions and different industries is important, and as you move into private markets, some of that information may be opaque,” Stavrou said.
“If you don’t have that line of sight, then when those events occur, you’re reacting rather than being proactive in managing those risks.”
Northern Trust had also seen artificial intelligence begin to deliver practical value in custody operations, including reconciliation, document processing and private assets servicing.
Stavrou said AI and robotic processing could now help identify reconciliation breaks and source documents needed to resolve them, leaving analysts to make the final decision.
“You’re taking the preparation piece away in terms of the work that needs to be done, and then the analyst really just has to make the decision,” he said.
In alternatives servicing, Stavrou said Northern Trust had built tools that could access statements, read documents, identify required actions and place items into workflow, with exceptions escalated to staff.
“We’ve been able to, first of all, digitise all of that paper-based work and then turn that into a process workflow, and that significantly reduces our time to process events, valuation updates, etc,” he said.
“It also reduces risk, because it’s a much more recent and repeatable process, a scalable process.”
Australia’s potential shift to T+1 settlement would also require careful preparation, with Stavrou pointing to timezone challenges and the need to coordinate local settlement with overseas funding requirements.
“There are clear benefits of moving to T+1 from a counterparty, liquidity and operational efficiency perspective,” he said.
“One of the things that Australia has to deal with is where we are in the world from a time zone perspective, particularly where you’re matching an Australian settlement off against potentially funding an investment in the US.”
Stavrou said Australia was “well placed” to make the shift, but warned it would be a significant change across the market.
Technology and product capability would be central to that transition, including how corporate actions, cash settlement and data products supported market participants, he said.
Private markets were also creating fresh transparency challenges for super funds, with valuation timeliness and unstructured data emerging as key issues.
“Private markets typically are on a lag in terms of their valuation,” Stavrou said.
“There are processes that you can follow to have good estimates, but you need to ensure that your governance around how those are managed is appropriate.”
He said larger super funds were increasingly asking private capital managers for more granular data to support valuations, ESG reporting and sector exposure analysis.
“One of the biggest challenges” was bringing public and private market data together to create a total portfolio view, Stavrou said.
Tokenisation was another area where Northern Trust was seeing real-world adoption, including tokenised share classes of traditional funds, collateral management, carbon credits and real-world assets.
Stavrou said collateral was likely to be a key area for further innovation because faster settlement could reduce counterparty risk.
Looking ahead, Stavrou said custody would continue shifting as asset owners increased exposure to digital assets and private markets.
“What underpins all of that is how the data that is generated, and the significant amount of data that is available, can be utilised by our clients,” he said.
“How we deliver that, how we integrate that into their decision models, into their front office solutions, is really critical as a future state for the custodian industry.”
He said liquidity had become a strategic issue for super funds as they increased private market allocations, used more derivatives and managed members moving into retirement drawdown.
“As we have greater allocation to private markets, liquidity becomes more important,” Stavrou said.
“What we are seeing with our clients, and what we’re seeing in terms of how we’re deploying our products and services, is how do we bring all of that together to manage liquidity as an asset, as a strategic asset, and that not being such a tactical process.”
