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Sub-custodian: Difference between revisions
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Custodians will try to disclaim all risks of the failure of their sub-custody network, as indeed they will try to disclaim all other risks. Be watchful of this. | Custodians will try to disclaim all risks of the failure of their sub-custody network, as indeed they will try to disclaim all other risks. Be watchful of this. | ||
The risks ought to be fairly minimal: Unless the subcustodian is in a weird jurisdiction, 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. But if it has breached its custody obligations — owed contractually to the main custodian — the question arises to what extent the main custodian has been complicit in that failure. Was it monitoring the subcustodian’s performance? Was it [[Due dilly|duly diligent]] in appointing it? The Main custodian will wail, and chomp, and complain that it hasn’t priced its business to be responsible for failures of third parties over which it has no control. The client might retort that it ''did'' hold itself out as being in some way competent in holding [[Client asset|customer assets]], and that includes being [[Due diligence|diligent]] in monitoring the performance and capabilities of its custody network — a diligence standard that, for Europeans, is enshrined in {{t| | The risks ought to be fairly minimal: Unless the subcustodian is in a weird jurisdiction, 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. But if it has breached its custody obligations — owed contractually to the main custodian — the question arises to what extent the main custodian has been complicit in that failure. Was it monitoring the subcustodian’s performance? Was it [[Due dilly|duly diligent]] in appointing it? The Main custodian will wail, and chomp, and complain that it hasn’t priced its business to be responsible for failures of third parties over which it has no control. The client might retort that it ''did'' hold itself out as being in some way competent in holding [[Client asset|customer assets]], and that includes being [[Due diligence|diligent]] in monitoring the performance and capabilities of its custody network — a diligence standard that, for Europeans, is enshrined in {{t|AIFMR}} (Delegated Regulation {{aifmdprov|DR20}}) and {{t|UCITS}} (Article {{ucits5prov|22a}}2(c)). | ||
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). | 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). | ||