When Citigroup and State Street announced that they were to form CitiStreet, a joint venture to provide pension administration services, it provided a pleasing symmetry to the year.

At the beginning of 1999, ABN Amro and Mellon Trust had just launched their alliance, ABN Amro Mellon Global Securities Services. It seemed to be a year when the calf would indeed lie down with the lion, although as film director Woody Allen says, "the calf won't get much sleep'. Co-operation was one of the watchwords of 1999. There were, of course, acquisitions and surrenders, without which no custody year would be complete. The biggest was the Bank of New York's purchase of RBS Trust Bank, a deal that finally closed in November to create the Bank of New York Europe. The Royal Bank's obvious delight in selling the custody business was overshadowed by its rather curious method of presenting the price that BNY had paid, but that is now history. It was another coup for BNY, snatching the prize away from under the noses of several other contenders who, on paper at least, stood a better chance of winning it. But BNY is not entirely blameless: it badly misjudged an early visit to Scotland to reassure Trust Bank's loyal and long-suffering clients, succeeding only in upsetting many of them by its approach and by failing to call on several key names. The boys from New York still have some work to do before they understand how business works in Scotland, which is why they will be pleased that Gordon Lindsay – as Scottish as haggis and neeps – remains in place as chief executive in the new structure. There was a strong whiff of inevitability about the decision of Lloyds TSB to retire from the market. But even after Wayne Kitcat moved aside in January as managing director of LTSS, the trust and custody arm, we had to wait until July before the group finally announced its withdrawal. The arrangements it made for its clients were poorly understood (and, it has to be said, poorly explained), so that many believed that State Street, the recommended alternative provider, had actually bought the business. While some money did change hands, it was not for the external client base: State Street's primary interest was in servicing the assets held within Lloyds itself through entities like Hill Samuel, Abbey Life and Scottish Widows. Why did Lloyds give up? Upon his retirement, Kitcat said that one of his proudest achievements in the job had been the acquisition of the NatWest custody business. "The NatWest deal made people take us seriously,' he claimed. But the deal, in terms of systems, never really worked and Lloyds was burdened with too much overhead and not enough business. Its own systems plans were little short of disastrous, leaving it unable to take on new UK institutional mandates in 1998. David Watson, the LTSS business development director, began to resemble an English batsman facing a South African pace attack: ducking and diving, he tried to maintain his composure but found it increasingly difficult to defend the position. "I don't see a lack of commitment,' he claimed plaintively at the beginning of the year. It was hard not to feel sorry for him. Smaller deals went on elsewhere. CIBC Mellon, Canada's second largest custodian, bought the custody assets of Bank of Montreal. State Street did the same with Wachovia and also launched a marketing alliance with Development Bank of Singapore. Higher up the scale, Deutsche Bank completed its acquisition of Bankers Trust, propelling it into the major league of global custodians. But these deals were secondary compared to what was happening lower down the food chain among the central securities depositories (CSDs). In the US, the Depository Trust Company and National Securities Clearing Corporation agreed to merge. In the UK, CrestCo continued to mop up all the domestic securities clearing operations, so that it will eventually control equities, gilts, money market instruments, OEICs and unit trusts. CrestCo also pioneered the development of bilateral links between CSDs, building links with Switzerland, Germany and the US, as well as leading the European initiative to formalise and standardise these interfaces. On the Continent, there was even greater excitement as Cedel trumped Euroclear with its plans for the European Clearing House. Although Cedel was unable to follow through on its original vision – failing to secure the signature of French depository Sicovam after months of negotiation – it did get to dance with Deutsche Boerse Clearing, and the two will form a new Cedel International. Sicovam ultimately preferred to go with Euroclear, but the story has yet to run its course and other depositories appear to be sitting on their hands before jumping one way or the other – or, as likely as not, deciding not to jump at all. As is always the case, there was a certain amount of staff churning amongst the top players. Dick Fama retired from his position as head of Chase's global investor services business and was replaced by Tom Swayne. Soon after, Bob Gartland, head of operations, left Chase to spend more time with his family, apparently disappointed that he had been passed over for the top spot. The fall-out from the Deutsche Bank/Bankers Trust deal was inevitable, with Roger Booth quitting as head of custody services, Steve Soltis quitting as head of investor services and Francis Jackson leaving the European sales team to take a top product management slot at Citibank. At HSBC, Terry McCaughey retired after seven years in charge of the trust and custody operation, only to move a couple of months later to Cedel. On the business side, there was really only one contender for the most significant transaction of the year. The Bank of New York was appointed by JP Morgan Investment Management to administer its assets of more than $300bn (E297bn), the largest back-office outsourcing deal to date. BNY openly admitted that it needed to do a lot of work to deliver what JPMIM was ultimately looking for, but the mandate puts paid to the long-held view that BNY is nothing more than a bare-bones custodian. It certainly gave BNY the confidence to declare shortly afterwards that "custody is dead', although the patient doesn't yet appear to have realised. With Tom Renyi, BNY's chief executive officer, predicting further acquisitions in 2000, it seems that little has changed in the custody world over the last 12 months. But that is far from the case. To return to where we came in, alliances are the hot topic. Very few, if any, custodian banks have it all: they may be good custodians, administrators or fund accountants, but they will rarely be all three. They may specialise in market sectors like pension funds, asset managers, banks, mutual funds or insurance companies, but they are unlikely to dominate every sector. They may be strong in one market or one region, but will have weak spots elsewhere. Having realised this, Mellon and ABN Amro reached the conclusion that the best way to address their respective shortcomings was to combine forces. In another business, Citi and State Street have done the same thing: Citi has the global distribution capability, State Street the product and expertise. Alliances, joint ventures, marketing agreements, code sharing – whatever you call them, and however they are structured – they represent a new approach to the perennial problem of how to win more business without building an entire new infrastructure. The custodians are only replicating what has already happened in other global industries, such as airlines and telecoms. But the current initiatives, all of which are bilateral, will eventually be replaced by more complex, multilateral arrangements, where a mix of local, regional and global players will join forces, possibly with external software vendors and network carriers. Utilities, such as core-processing platforms, will be shared resources within these alliances, reducing unit costs and levelling the playing field for participants. It won't happen overnight. Some custodians remain threatened by what is happening with the development of national and international CSDs. They are unwilling to concede that the securities movement and control function adds no value and should be outsourced or shared. But ultimately alliances have to happen. Buying a custody portfolio is a risky business, with no guarantees that clients or staff will hang around. Partnering mitigates that risk substantially and delivers access to markets, clients, staff, expertise or systems at a fraction of the cost. These partnerships will also carry a substantial amount of reciprocity, a word that has barely been used for the past 10 years. Global custodians, for example, will strike regional deals with sub-custodians in return for outbound custody business, possibly on a private-label basis. Everything will have a quid pro quo, whether explicit or not. Mutual back-scratching will be the order of the day. The next 12 months will witness a further erosion of the boundaries between competitors, clients and collaborators. Opportunity will eventually outweigh animosity to the extent that fearsome competitors will find themselves sharing the same bed. Some of the biggest custodians, including Mellon and State Street, have already embraced the concept enthusiastically, proving that alliances can be good for all parties concerned, including the clients. That's a result that cannot always be said for acquisitions.