Wednesday, January 7, 2015

Bank Custody - The Sub Custodian Network

Within the Global Bank Custody space is a key component, The Sub Custodian Network. As a  Global Custodian, you can have the best systems and best people to manage the client space but if your Sub Custodian Network is weak, this can cripple your business.

The settlement of securities and cash is heavily dependent on your Sub Custodian Network. These are the contacts overseas that ensure that your Cash and Securities settle on time.

You may find that all of your trades (cash and securities) are failing in a foreign market. It may be a time to ensure that your Network Management team is evaluating the service being provided by your Sub Custodian Network overseas. The scorecard show continually low marks, it may be time to change your Sub Custodian. Another Sub Custodian may be settling securities and cash in a more timely manner than the Sub Custodian you are currently using.

Why is this important? You Custody Clients.  If your client does not have an Investment Manager, they may decide to move the business to another Custodian. If your client does have an Investment Manager they may have the Manager move the business to another Custodian.

Again, you can have best systems and people, but your trades are failing in one market and no steps are being taking at the Network Management Level, you can lose the business. The clients may not be satisfied with,  "Settlement is slow in that market", particularly if they have an Investment Manager and find that other custodians are settling their trades in that market on time using a different Sub Custodian.  Your task at the Custodian Level is the make the steps if necessary to change the Sub Custodian and communicate the change to the client before the issue reaches a level that causes the client to move the business away from you.

There can be caste strophic issue with a constant failing Sub Custodian in a particular market.  Quite often your clients depend on the proceeds of a Sale of a foreign security  to fund a potential overdrawn currency balance. If the sale fails, the currency account never get funded unless it's a contractual account that funds the proceeds whether or not the sale settles.  Even in this case you may have to claim the interest earned in the foreign currency back from the client as "undue enrichment" if the failing trade was due to the client and not the sub custodian. These scenarios may happen in any event, but why not make sure your Sub Custodian Network is strong to eliminate that ever being a question?

Have a Strong Sub Custodian Network with a Network Management team rating the timeliness of settlement along with communicating changes to Settlement Instructions is critical to the custody business.

By Mike Holman

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