Global custody is big business - and it is getting bigger all the time. Last year, the Bank of New York (often called BoNY) was the world's largest custodian, with $6,300bn of assets under its control.

This year, it is once again the largest, with $6,900bn: a 9.5 per cent rise. Others, too, have seen their asset base increase, including JP Morgan (the renamed business of Chase Manhattan), which is another New York-based bank, and State Street, a Boston-based bank.

The global custody business is not just getting bigger, it is also becoming more profitable. Profitability at Citibank, the US bank, whose assets under custody have risen to $4,000bn this year, rose by more than 30 per cent, making 2000 its best on record.

The growing profitability - especially of the big custodians - is partly attributable to the trend towards consolidation.

In recent years, several mid-sized custodians have bowed out of the industry - notably the UK's Royal Bank of Scotland and Lloyds TSB - leaving the big custodians with an even larger market share.

The big three, all with more than $6,000bn of assets under custody, now control about 40 per cent of the market - up from less than 20 per cent in the mid-1990s.

Greater profitability is also due to the increasing variety of services provided by global custodians. If the safe-keeping of assets and the settlement of trades remains the custodians' core - or plain vanilla - offering, they now also tempt their customers with a range of higher-margin services that are altogether more exotic.

These include cash management, securities lending, compliance monitoring, risk management, regulatory reporting and performance measurement.

It has reached the stage where global custodians would love to dream up another title for their business that more adequately describes the nature of their work.

"We've thought long and hard about this," says Ron Logue, chief operating officer of State Street, "because we've not just done custody for 15 years."

Several banks bracket custody under their securities services operation. But, even then, it does not sound quite right. As Jeff Tessler, managing director of the BoNY's European operation, says: "What we're doing today takes us into the world of business consultancy."

One thing, however, could change it all for the big custodians, and force them to rethink the way they are viewed in the world of investment.

That is the decision by several fund managers to let a custody bank run not only their back office but also their middle office. (A middle office includes functions ranging from trade execution to settlement instruction.)

This has always been the holy grail for custody banks. Last year, there was talk of little else in the conference halls and boardrooms of the top custodians. It was widely predicted that fund managers, facing growing pressure to deliver good investment returns for their customers, would choose to outsource everything that was peripheral to their core task of picking the best stocks.

"It's still the hottest topic," says Mr Tessler. So what's the problem? Why hasn't there been the predicted rush to the door of the custodians? Fund managers are, it seems, adopting a "wait and see" policy, watching the way the handful of current big outsourcing contracts are managed over the next year or two.

And, while it seems unlikely that the BoNY will retain JP Morgan's asset management outsourcing contract, now that JP Morgan has merged with Chase Manhattan, BoNY's old rival,

there are other leading-edge contracts that fund managers will watch out for: BoNY's contract with Julius Baer, the Swiss private bank; State Street's contracts with PIMCO, the Boston-based fund manager, and Scottish Widows Investment Management; and JP Morgan's contract with Schroders, the UK fund manager.

"It's a leap of faith for fund managers because they are giving up something that's important to them," says Mr Tessler. But if these contracts prove successful, says Mr Tessler, "some of the anxiety, some of the uncertainty [about outsourcing the middle office functions] will go: chief executives will say 'if they can do it, why can't we do it?' ".

The future of the global custody business does not hinge, however, on the success of these contracts. Even if - when push comes to shove - fund managers choose to keep a fully resourced middle office, the outlook for global custodians is bright, not least because of worldwide trends affecting the entire investment industry.

One is the growth in saving of all kinds and especially for retirement. According to ING Barings, global funds under management rose to $50,900bn in 2000; and by 2004, pension funds are expected to increase to $17,500bn (up from $12,900 in 1999).

Just as this trend is exciting fund managers, who will be competing to invest this money, so too is it enlivening the custodians who will be competing to safeguard it.

This savings boom has been caused by the realisation that national exchequers will go bankrupt unless people, living far longer than expected, find private funds to pay for their extended retirement.

Germany has taken action, paving the way for private pension provision. Without this step, Europe's biggest economy was facing the prospect that, by 2040, its pension expenditure would be 18.4 per cent of GDP - up from 11.1 per cent in 1995.

Another trend is the growth in personal wealth: not only are rich people getting richer, but also middle-income people are becoming rich.

In 2000, the number of people with $1m of investable assets rose by 180,000 to 7.2m, according to a survey by Merrill Lynch, the US bank, and consultants Cap Gemini Ernst & Young.

This exclusive club's financial assets rose by 6 per cent to $27,000bn in 2000. This pool of assets is expected to grow about 8 per cent year, taking the total to $39,700bn by 2005.

As with pension money, this personal wealth needs fund managers and custodians to invest and look after it.

A third important development that isgiving custodians reason to smile, is the growth in cross-border investment. US investors increasingly wish to put at least some of their money into European companies.

In 1994, foreign investors owned 16.3 per cent of the UK stock market. By 1999, this had grown to 29.3 per cent. In Europe, the arrival of the euro has boosted cross-border investment.

In a recent study, William M Mercer, the pension consultancy, found that the big pension funds put less than half of their European investments into domestic assets, preferring investment in neighbouring Euroland countries.

Again, this plays into the hands of the global custodians, who will safeguard assets and settle trades in many different countries.

Global custodians are at the cutting edge, trying to make their business more exciting, more rewarding, more lucrative. But the fact remains that at heart global custody is an unglamorous job that has to be done.

That is why global custody has such huge potential. As Mr Tessler says: "If it's a boring business, it's our business, and we do it quite well."