Template:Subcustodian risk: Difference between revisions

From The Jolly Contrarian
Jump to navigation Jump to search
No edit summary
No edit summary
Line 2: Line 2:
[[Custodian]]s and [[Depositaries|depositaries]] will try to disclaim all risks of the failure of their [[custody network]], as indeed they will try to disclaim all other risks, real and phantasmagorical. Be watchful of this.
[[Custodian]]s and [[Depositaries|depositaries]] will try to disclaim all risks of the failure of their [[custody network]], as indeed they will try to disclaim all other risks, real and phantasmagorical. Be watchful of this.


Custody risks ''ought'' to be fairly minimal: Unless the sub-custodian is in a weird jurisdiction<ref>Being one where by law or market convention one cannot isolate custody assets from the bankruptcy of the local custodian.</ref>, it should never take beneficial title to the assets it holds — they should remain the client’s — so they should return to the client even on its insolvency unless it has breached its custody obligations.  
Custody risks ''ought'' to be fairly minimal: Unless the sub-custodian is in a weird jurisdiction<ref>Being one where by law or market convention one cannot isolate custody assets from the bankruptcy of the local custodian.</ref>, it should never take beneficial title to the assets it holds — they should remain the client’s — so they should return to the client even on its insolvency ''unless it has breached its custody obligations in a fairly profound way''.  


This will not stop [[custodian]]s invoking the “[[Lehman]]” [[horcrux]], of course.
This will not stop [[custodian]]s invoking the “[[Lehman]]” [[horcrux]], of course.


But if a sub-custodian breaches its custody obligations — owed contractually to the main custodian — should that custodian be able to pass that risk straight on? It will say “yes” — but to what extent has it been complicit in that failure? Was it properly monitoring the sub-custodian’s performance? Was it [[Due dilly|duly diligent]] in appointing it? The [[custodian]] will wail, chomp and complain that it hasn’t priced its business to be responsible for failures of third parties in far-flung locales over which it has no control. Fair, perhaps — but then it ''did'' hold itself out as being in some way competent in the safe-keeping of [[Client asset|customer assets]] didn’t it? Wouldn’t that include being [[Due diligence|diligent]] in monitoring the performance and capabilities of its custody network?<ref>A diligence standard that, for Europeans, is enshrined in {{t|AIFMR}} (Delegated Regulation {{aifmdprov|DR20}}) and {{t|UCITS}} (Article {{ucits5prov|22a}}2(c)).</ref> And between the custodian — usually a sophisticated global multinational with experience managing sub-custodians in far-flung locales and, after all, [[contractual privity]] with them.<ref>Yet another argument, wonders this old contrarian, for tactical deployment of the [[Contracts (Rights of Third Parties) Act 1999]]?</ref>
But if a sub-custodian ''profoundly'' breaches its custody obligations — which it owes to the main custodian, of course — should that custodian be able to pass its loss back to its innocent client? It will say “yes” — of course it will — but to what degree has it been complicit in that failure? Was it properly monitoring the sub-custodian’s performance? Was it [[Due dilly|duly diligent]] in appointing it? The [[custodian]] will wail, chomp and complain that it can’t be expected to price flakiness of third parties it can’t control in far-flung locales into its business offering. Fair, perhaps — but then it ''did'' hold itself out as being in some way competent in the safe-keeping of [[Client asset|customer assets]] didn’t it? Wouldn’t that include being [[Due diligence|diligent]] in monitoring the performance and capabilities of its [[custody network]]?<ref>A diligence standard that, for Europeans, is enshrined in {{t|AIFMR}} (Delegated Regulation {{aifmdprov|DR20}}) and {{t|UCITS}} (Article {{ucits5prov|22a}}2(c)).</ref> And between the custodian — usually a sophisticated global multinational with experience managing sub-custodians in far-flung locales and, after all, [[contractual privity]] with them.<ref>Yet another argument, wonders this old contrarian, for tactical deployment of the [[Contracts (Rights of Third Parties) Act 1999]]?</ref>


The one place it makes some sense is in those “weird” jurisdictions where by law or market convention one cannot isolate custody assets from the bankruptcy of the local custodian. There, it is fair for the client to bear that risk (as it is the client’s choice to take on that “country” risk, and the main custodian cannot avoid it by exercising prudence and due diligence). <br>
The one place it makes some sense is in one of those weird jurisdictions where, by law or market convention, one cannot isolate custody assets from a local custodian’s insolvency. There, it is fair for the client to bear that risk (as it is the client’s choice to take on that “country” risk, and the main custodian cannot avoid it however prudent or diligent it is). <br>

Revision as of 10:00, 16 July 2019

Subcustodian risk

Custodians and depositaries will try to disclaim all risks of the failure of their custody network, as indeed they will try to disclaim all other risks, real and phantasmagorical. Be watchful of this.

Custody risks ought to be fairly minimal: Unless the sub-custodian is in a weird jurisdiction[1], it should never take beneficial title to the assets it holds — they should remain the client’s — so they should return to the client even on its insolvency unless it has breached its custody obligations in a fairly profound way.

This will not stop custodians invoking the “Lehmanhorcrux, of course.

But if a sub-custodian profoundly breaches its custody obligations — which it owes to the main custodian, of course — should that custodian be able to pass its loss back to its innocent client? It will say “yes” — of course it will — but to what degree has it been complicit in that failure? Was it properly monitoring the sub-custodian’s performance? Was it duly diligent in appointing it? The custodian will wail, chomp and complain that it can’t be expected to price flakiness of third parties it can’t control in far-flung locales into its business offering. Fair, perhaps — but then it did hold itself out as being in some way competent in the safe-keeping of customer assets didn’t it? Wouldn’t that include being diligent in monitoring the performance and capabilities of its custody network?[2] And between the custodian — usually a sophisticated global multinational with experience managing sub-custodians in far-flung locales and, after all, contractual privity with them.[3]

The one place it makes some sense is in one of those weird jurisdictions where, by law or market convention, one cannot isolate custody assets from a local custodian’s insolvency. There, it is fair for the client to bear that risk (as it is the client’s choice to take on that “country” risk, and the main custodian cannot avoid it however prudent or diligent it is).

  1. Being one where by law or market convention one cannot isolate custody assets from the bankruptcy of the local custodian.
  2. A diligence standard that, for Europeans, is enshrined in AIFMR (Delegated Regulation DR20) and UCITS (Article 22a2(c)).
  3. Yet another argument, wonders this old contrarian, for tactical deployment of the Contracts (Rights of Third Parties) Act 1999?