Template:Subcustodian risk: Difference between revisions
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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 | 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> | ||
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 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> | ||
Revision as of 09:35, 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, 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.
This will not stop custodians 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 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 customer assets didn’t it? Wouldn’t that include being diligent in monitoring the performance and capabilities of its custody network?[1] 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.[2]
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).