The number of global custodians is predicted to halve over the next few years as competition intensifies in the UK market.

Already, some UK banks such as Royal Bank of Scotland and Lloyds TSB have left the sector and sold their global custody operations.

Since then the UK market has been dominated by US players such as Bank of New York, State Street, Citibank with HSBC as the only UK- headquartered global custodian. But as Steve Crockford, head of Global Investor Services at HSBC, says: "Global custody is a global business."

Indeed, it has become apparent that only those institutions with deep enough pockets to fund the necessary investment in technology can afford to stay in the business.

Jeffrey Tessler, general manager Europe for Bank of New York, believes just three global custodians could operate in the UK in the next few years, instead of the current seven or eight.

He says more banks may decide that global custody is not a core business.

"Clients want a more sophisticated service and unless the custodian is willing to invest in technology demand for the client and value-added services it is difficult to make rates of return acceptable to the provider," he says.

He believes smaller players such as ABN Mellon specialising in certain niche areas of the market and larger institutions such as Citibank will thrive.

Driving further change will be the more complex demands from fund managers who are now looking for additional services such as accounting.

Global custodians are responding by themselves moving higher up the value chain, to offer services, such as accounting, which have the additional benefit of bringing higher margins.

A study by the Bank of New York (BoNY) of around

120 trustees belonging to the UK's National Association of Pension Funds published this month found that 75 per cent had changed their views towards custodial reporting services.

Around 60 per cent now use consolidated reporting services, and of those that did not use accounting services from their custodian some 93 per cent said they would require this service in future.

Mr Tessler says accounting is now a core service.

"Recent research indicates that the level of sophistication among pension funds trustees has increased significantly," he says.

"As the demands on pensions funds trustees become more acute we have ourselves witnessed a rapid acceleration of demand for our sophisticated accounting services."

The definition of the services included in global custody is also expanding and changing. Derivatives clearance is an example of what now sits as part of global custody.

Nor does Steve Crockford expect new entrants to move into the sector. "The market is already very competitive. I don't think we will see any new entrants coming in with all guns blazing. They are already here," he says.

"What we may see is changes in geography and increasing specialisation. There may perhaps be European players which step across into the UK and specialise in a niche area."

He believes some of the smaller custodians will look at joint ventures to broaden their service capabilities.

What will distinguish global custodians is their use of technology, which is creating a barrier to entry into the market, as companies look at the trend towards information and consultancy services.

BoNY delivers its services, including custody, accounting cash management and clearing, through a global web platform. It also derives around 60 per cent of its revenues from global custody and much of its $600m a year technology spend goes on global custody.

Francis Jackson, head of global custody product management at Citibank, says technology will be a differentiating factor.

"The market is already fiercely competitive," he says. "Buyers of the service are smarter about what they are buying.

"People don't talk about global custody any more; they talk about information and how quickly they can get customised information. That means technology spend which will separate the wheat from the chaff."

Francis Jackson says he believes there will be further consolidation.

"There is only room for lean, fit aggressive competition and I think there will still be five or so main providers. Some middling sized players fall out of bed... I think you will have to be very big or a niche provider," he says.

"Margins are falling and banks may decide it is not worth spending $150m to $200m a year on technology when fees are declining," says an industry observer.