Managing Director, Global Head of ETF Services, Investor Services & Markets
Brown Brothers Harriman
[Editor's note: In our May ETF Report, "Behind The Curtain," we profile four firms, which you may or may not have heard of, that have deep roots in the industry, sometimes through multiple business lines. These are the lawyers, the index providers, the custodians, the liquidity providers and the market makers that keep the gears of the ETF industry spinning. See "Dechert Paves Way For Improved ETF Regulations," and "Doing The Day-To-Day Heavy Lifting," "The Biggest Firm You Still Haven't Heard Of "]
For asset managers wanting to enter the exchange-traded fund space, there’s a big learning curve, and many of them choose Brown Brothers Harriman to get their toehold in the industry.
The firm, which is the second-largest asset-service provider for the global ETF market, based on asset size, works with a number of clients to launch, administer or be the custodian for ETFs. It’s launched products with more than 30 different ETF sponsors since starting in 2004.
Shawn McNinch, managing director, global head of ETF services, investor services and markets at Brown Brothers Harriman, says the firm just launched with Nuveen in the U.S. and is getting ready to launch in Europe with Fidelity. Those are two of Brown Brothers Harriman’s many clients, and its assets under custody and administration are over $400 billion and growing.
“Our clients really like the technology and consulting we provide. We help guide them from the product concept phase all the way through launch. This is why we continue to win business from big asset managers looking to get into the space. They feel comfortable with our product technical expertise [and] really lean on us to help them navigate the entire ETF launch process,” McNinch said.
Brown Brothers Harriman is a global custodian and administrator, providing custody work, fund administration, fund account work and transfer agency work for mutual funds and ETFs, in addition to being a back-office operational supporter for a number of ETF sponsors.
McNinch says Brown Brothers Harriman brings practical perspective to helping clients think about their product and distribution strategies, and others there have experience working on the asset-manager side.
“A lot of our mutual fund clients want to get into the ETF space, and many don’t have the experience of what it means to launch an ETF: How are ETFs different than mutual funds? How do operating models need to change to support ETF products? We spend a lot of time educating asset managers on product and distribution strategies as well as the operational implications of supporting an ETF,” he explained.
When a firm comes to Brown Brothers Harriman wanting to launch an ETF, BBH takes the client through several key milestones, McNinch says.
Some of the initial areas of focus when looking at ideas include product landscape, such as the type of products the client seeks to launch and the opportunity for the products; differentiating product design and structure; how to implement; and how to get the product idea approved through the Securities and Exchange Commission.
During the implementation process, Brown Brothers Harriman helps clients review potential exchanges, market makers and authorized participants. “We’re helping clients navigate those discussions, brokering introductions to various people in the ETF ecosystem while we create the clients’ launch plan together,” McNinch said.
With many nontraditional firms entering the ETF space, firms like mutual fund issuers are finding out that managing ETFs in the capital markets isn’t what they’re used to doing. Brown Brothers Harriman uses its capital markets expertise in that space to assist.
“Asset managers traditionally think about managing their mutual funds through a transfer agent, so the fact that ETFs trade on the exchange is very different. We spend time with clients on the process and market differences, and how to create the discipline and infrastructure that support a fund that’s trading on the exchange,” he noted.
Since Brown Brothers Harriman has been in the ETF space for 13 years, it’s built up networks in the ETF ecosystem, which McNinch says is part of its strategy to service clients.
“We don’t have the answer to every question an ETF sponsor has, but we have the relationships to get them the answers, and that’s critical,” he said. “If a client is struggling with a very technical trading question, we can turn to one of our market makers or authorized participants. That access can be the difference between a successful launch and a less successful one.”
Brown Brothers Harriman has several technological applications for ETFs to support various operational functions, McNinch says.
“A lot of our tools are unique in the marketplace. They’re built specifically to address the unique product attributes of the ETF that really don’t exist within core mutual funds,” he added. “We’re not retrofitting mutual fund technology to ETFs.”
There are a variety of applications for clients who want access to online tools to help manage and oversee their ETF business, McNinch notes. Within ETF Connect, Brown Brothers Harriman created ETF Star, which is a portfolio composition file/basket creation tool that’s integrated with the firm’s accounting platform, Star. The portfolio composition file is based on client-specific parameters and rules. Star is the fund accounting system the firm uses to strike net asset values for mutual funds as well as ETFs.
Authorized participants and ETF clients have access to a workflow automation tool, AP Exchange (APEX), a web interface platform. APEX allows authorized participants to either create or redeem into the ETF, and if clients or portfolio managers want to approve every order, APEX creates an alert to the client that a new order came in. Within the ETF order view basket, clients can see real-time status updates on the basket trades.
Brown Brothers Harriman doesn’t just provide support services to ETFs in the U.S.; it has a similar focus in European markets, where it supports unit investment trust ETFs. The firm also recently received a trustee license in Hong Kong to support Hong Kong-domiciled products, including ETFs, and it’s working on building up that operating model.
“A lot of clients want a global provider,” said McNinch. “They can work with us, starting here in the U.S., and have visions to take products and distribute around the globe. We can help them do that.”