Template:Delegation vs subcontract

“Delegation” versus “sub-contracting”

Delegation, according to a natural definition, means “to entrust (a task or responsibility) to another person, typically one who is less senior than oneself.”.

For example a depositary delegating its safekeeping responsibility to a prime broker means (to the Jolly Contrarian, at any rate) that it will not be the depositary who holds your assets, kind sir, but the prime broker. Your custody arrangement, and your claim, will be against the PB directly (though, if the delegation happened under the auspices of AIFMD or UCITS, you may still have a pop at the Depositary if the PB proves to be a dolt.

Why does this happen? Because a prime broker needs the assets. To use them.

“Hold on,” says the PB. “If the depositary holds the assets, then I can hardly rehypothecate them, can I, and we know how important rehypothecation is to my business model, don’t we?”

The depositary shrugs. “So, I'll make you my sub-custodian,” he says, “There: re-hypothecate to your heart's content.”

“No can do,” says the PB. “I can only rehypothecate against indebtedness, and you don't owe me anything. Only the fund does. And besides, as a sub-custodian I only see an omnibus account. I don't know who owns what. For rehypo to work, I have to have a direct contractual relationship with the Fund. That's the deal.”

Contrast that with a custodian who sub-contracts his responsibility to a sub-custodian. This is not a delegation in the same way: the custodian stays liable the whole time, whatever the sub-custodian does, and unless the contract says otherwise<fref>Okay, I grant you: this is a big unless.</ref> the client has not direct claim against the subcustodian at all.