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Template:Subcustodian risk: Difference between revisions
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[[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 — | 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, and should have segregated them from its own assets, therefore beyond the putative reach of its ordinary [[creditor]]s — so the assets remain the client’s at all times — so they should return to the client even on the [[custodian]]’s [[insolvency]]. It follows that, if [[client asset]]s are not where they are meant to be on a [[custodian]]’s [[insolvency]], there must have been some kind of operational mismanagement, [[negligence]] or [[fraud]] on the [[custodian]]’s behalf (''and'' its insolvency). Since the [[Causa sine qua non|operating cause]] of the loss is the mismanagement, not the [[insolvency]] itself, any [[Basel III|capital charge]] should reflect [[operational risk]] and not [[credit risk]]. | ||
None of this will stop [[custodian]]s invoking the “[[Lehman]]” [[horcrux]], of course. | |||
Now 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 its delegate’s 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 unaffiliated third parties 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> After all the [[custodian]] is usually a sophisticated global multinational with experience managing sub-custodians in far-flung locales and it does have 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 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> | 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> | ||
In most jurisdictions, exposure to a [[custodian]] for the return of [[client asset]]s is not a [[solvency]] risk as such, seeing as the [[custodian]] should not beneficially own [[client asset]]s and should have segregated them from its own assets, therefore beyond the putative reach of its ordinary [[creditor]]s. It follows that, if [[client asset]]s are not where they are meant to be on a [[custodian]]’s [[insolvency]], there must have been some kind of operational mismanagement, [[negligence]] or [[fraud]] on the custodian’s behalf (''and'' its insolvency). Since the operating cause of the loss is the mismanagement, not the insolvency itself, any [[Basel III|capital charge]] should reflect [[operational risk]] and not [[credit risk]]. <br> | |||