Custodian

Generally

• A custodian’s main liability to its client is for the safekeeping and timely return of the client’s assets.
• A custodian generally will segregate clients assets from its own assets.
• The legal theory is that the client is the beneficial owner of the custody assets at all times. Therefore, assuming the custodian diligently performs its role:
  • Custody assets will not form part of the Custodian’s insolvency estate.
  • The Custodian has no economic exposure to the custody assets.

Appointment of sub-custodians

• Where a custodian does not have a physical presence in a local market, it will appoint a sub-custodian in that market to hold client assets on its behalf.
• Generally the custodian will require the sub-custodian to hold assets on the same terms that the custodian does – i.e.
  • Segregated in the sub-custodian’s records from the sub-custodian’s (and the custodian’s) own assets
  • Designated as client assets held for clients of the main custodian
  • Taking no beneficial interest in ownership of the assets and therefore isolated from the sub-custodian’s bankruptcy.
• In certain jurisdictions (particularly emerging markets), local regulation and market practice may differ so that the custodian does not segregate its own assets from client assets.
  • Custody rules would generally exclude the custodian’s liability for losses in this case provided it had diligently selected and monitored the subcustodian in question.

===AIFMD and UCITS===

• AIFMD and UCITS require custodians to accept strict liability for all losses from safe keeping (even where they have diligently selected and monitored a custodian which is insolvent). Therefore, regardless of how diligent the custodian has been if either:
  • A sub-custodian has negligently failed to respect appropriate segregation and insolvency remoteness; or
  • The sub-custodian is in a jurisdiction where it cannot,

and there is a loss to the client, the main custodian would have to accept some or all liability for that loss.

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