GCF: Regulation means opportunity for custodians
02 December 2015 London
Image: Shutterstock
The regulatory landscape makes for a difficult environment for custodians, but there are opportunities to be found as well, according to Habib Motani, a partner at Clifford Chance, speaking at the Global Custody Forum in London.
Motani placed the issues that regulators have addressed in to the ‘buckets’ of asset protection, financial viability and information requirements, and pointed out that many of the same issues, such as stricter liabilities, margin segregation and disclosure requirements are “peppered across different pieces” of regulation.
While many firms have conducted certain processes, such as record keeping, for some time already, the regulation brings more pressure and more responsibility to this.
When it comes to these obliged activities, Motani asked: “Who is responsible for that?”
He said: “It’s a slightly sharper edged thing to say that you’re providing these services to satisfy certain legal obligations. Are they yours or your customers’?”
He concluded that, actually, no matter who the regulated party, the responsibility often falls to the custodians. As a result, he said, they should be more aware of their own processes, and not rely on the content of contracts to protect them in the case of any loss of assets.
Despite this, Motani argued that there are opportunities for custodians, saying that the need for custodians and service providers is more acute, and their role more necessary, than ever.
He said that services like evaluations and monitoring could become more in demand, as funds and asset managers do not generally have the facilities to do these themselves.
At the same time, the additional responsibilities may mean that players may exit the custodian market, leaving more opportunities for those that remain.
“The task of being a custodian is becoming more onerous,” he said. “People's willingness to do it is being affected.”
With regards to resolution and recovery strategies, Motani suggested that while custodians have conducted “fire drills” for insolvency, it would still be challenging if a financial institution was to fail, and firms will have to figure out what the correct resolution will be when that happens.
“The world will not change to the extent that it won’t be a nightmare,” he said. “It’s going to be a different nightmare.”
Motani placed the issues that regulators have addressed in to the ‘buckets’ of asset protection, financial viability and information requirements, and pointed out that many of the same issues, such as stricter liabilities, margin segregation and disclosure requirements are “peppered across different pieces” of regulation.
While many firms have conducted certain processes, such as record keeping, for some time already, the regulation brings more pressure and more responsibility to this.
When it comes to these obliged activities, Motani asked: “Who is responsible for that?”
He said: “It’s a slightly sharper edged thing to say that you’re providing these services to satisfy certain legal obligations. Are they yours or your customers’?”
He concluded that, actually, no matter who the regulated party, the responsibility often falls to the custodians. As a result, he said, they should be more aware of their own processes, and not rely on the content of contracts to protect them in the case of any loss of assets.
Despite this, Motani argued that there are opportunities for custodians, saying that the need for custodians and service providers is more acute, and their role more necessary, than ever.
He said that services like evaluations and monitoring could become more in demand, as funds and asset managers do not generally have the facilities to do these themselves.
At the same time, the additional responsibilities may mean that players may exit the custodian market, leaving more opportunities for those that remain.
“The task of being a custodian is becoming more onerous,” he said. “People's willingness to do it is being affected.”
With regards to resolution and recovery strategies, Motani suggested that while custodians have conducted “fire drills” for insolvency, it would still be challenging if a financial institution was to fail, and firms will have to figure out what the correct resolution will be when that happens.
“The world will not change to the extent that it won’t be a nightmare,” he said. “It’s going to be a different nightmare.”
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