Sub-custodian

A topic of some recent interest in light of AIFMD and UCITS V legislation. Under both regimes a single depositary must be appointed having strict liability for the safe keeping of assets.

Note though that being delegated a custody function is an altogether different thing to being a subcustodian.

A depositary who delegates its custody function won't hold the assets at all - it will pass that responsibility to the prime broker, who will record the end client's interests in the custody assets directly in its books and records.

It may in turn appoint a subcustodian who will hold all the prime broker's client assets in a single omnibus account, in the prime broker's name but marked as "client assets" and therefore unavailable for the prime broker's creditors.

No lien letters

CASS 6 has a requirement that subcustodians provide a no lien letter to confirm they are not taking security of retaining any other rights over custody assets other than customary liens and charges as security for their ordinary fees and expenses.

These customary charges include the subcustodian's fees for holding assets and incidental expenses arising from its safe custody, but do not include liabilities arising from margin finance or other transactions between the subcustodian and the end client.

This is because, between an end client and a subcustodian, there should be none. A subcustodian will generally hold assets in an omnibus account in the name of the main custodian (but for its clients), therefore will not know the identity of the end clients, much less have a relationship with them, and therefore should not have any direct liabilities against them (at least that have anything to do with the subcustodian relationship).

This is in contrast to the main custodian, who necessarily knows who the individual clients are and, if it is a prime broker, is likely to have lent money to individual end clients to purchase those specific securities, and a term of that finance will be that the client grants security over the assets in question, as well as possession (hence they are held in custody) and rights of reuse. Because it will have individual custody records the prime broker as a head custodian will be able to take security directly over an individual's securities within its books and records, and not over the whole omnibus pool.

See also

• Custodian
• No lien letter
• Prime broker
• Depositary (AIFMD)
• Template:Ucitsprov (UCITS V)

CASS Anatomy™ Go Premium {{{2}}} IMPORTANT: CASS changed quite a bit after MiFID II. This resource therefore may well be out of date, even if it was accurate once, which it might not have been. This is an article about the FCA’s custody and client money rules — client assets — and is fondly known by its chapter in the FCA SourcebookTable of Contents | 1 | 1A | 3 | 5 | 6 (custody rules) | 7 (client money rules) | 7A | 8 | 9 (PBDA) | 10 Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.