Geopolitics takes centre stage for custodians
11 Jan 2023
Stephen Dokken-Isgar, head of global network management for the Americas at RBC Investor & Treasury Services, discusses how the company is managing the ongoing market turmoil that has accompanied Russia’s invasion of Ukraine
Image: RBC Investor & Treasury Services
Centralised risk management
In the market turmoil that followed Russia’s invasion of Ukraine, institutional investors with exposure to the region relied on global custodians to help navigate the crisis and safeguard their assets.
The war in Ukraine and subsequent Western sanctions created significant challenges for network managers at global custodians. Following announcements of sanctions against Russia, it was critical for custodians to understand their Russian exposures — and fast.
RBC I&TS utilises two separate legal entities for contracting with its clients. The complexity of this legal arrangement, combined with the continuously-changing sanctions across the multiple jurisdictions in which we operate made it particularly challenging for us to understand the full impact of the sanctions.
Network management immediately took the lead in forming a cross-functional crisis management team to manage RBC I&TS’ cash and securities exposures to Russia across the legal entities, and to measure the effect of the multi-jurisdictional sanctions on our clients’ assets. It was vital to work closely with other parts of RBC and ensure alignment of our responses across the organisation.
The RBC global economic sanctions (GES) team, which played a key role in handling and providing guidance on the sanctions imposed on China in 2021, has been a critical resource in helping us navigate the Russian sanctions — and continues to play a vital role.
We have also engaged in close collaboration with RBC legal, enterprise group risk management and RBC I&TS’ cash management group as part of our centralised risk management approach. We adopted a ‘follow-the-sun’ model for the timely updating of our crisis management deck, and this was key to managing the book of business for our investor clients.
The all-important pivot
An effective contingency plan is essential to the network management role and central to global custodians’ asset safekeeping duties on behalf of our clients. Such a plan must be ready in the event of a sub-custodian’s sudden default or market departure. This very much applied to the situation in Russia.
The Russian assets of investors from ‘unfriendly’ states were frozen by the Russian authorities. In addition, RBC I&TS’ local sub-custodian was acquired by a Russian oligarch, who was sanctioned by Canada. It was, therefore, necessary for RBC I&TS to pivot quickly and obtain the services of an alternate sub-custody provider who could assume RBC I&TS’ Russian book of business.
As it turned out, RBC I&TS was able to leverage the Eastern European sub-custody hub provider that we had engaged through our Network 2.0 review back in 2018-19. This allowed us to transition the Russian assets to our new provider in a record timeframe.
All hands on deck
Network management has experienced many tense moments — and long days — throughout the Russian crisis. While it may sound cliché, team work and internal collaboration have been essential in successfully managing this extremely difficult situation. It has very much been a matter of all hands on deck.
First and foremost, RBC I&TS needed to update our clients on the ever-changing environment and how it was impacting their assets, which it continues to do today. This has not been an easy feat. It is hard to describe the uncertain atmosphere that has prevailed during this period.
Based on the continuous flow of information provided by RBC I&TS’ sub-custodians, complemented by the experience and expertise of the network management team and partners across the RBC enterprise, RBC I&TS has been able to keep its clients informed of the evolving situation. While the industry has largely adapted to the ‘new norm’ associated with the Russian market, the situation remains extremely challenging and a significant focus of RBC I&TS’ daily network management activities.
The next geopolitical risk
The recent conflict in Eastern Europe and a growing number of flashpoints across the globe — the current tension between China and Taiwan comes to mind — highlight the need for global custodians to be more proactive when dealing with potential geopolitical risks. To this end, we have a standing item on the agenda of our monthly network management steering committee meeting for the head of group risk management to discuss current red-flag markets and exposures.
Growing geopolitical risk also supports the case for real- or near real-time network monitoring, which can be facilitated through new technologies such as blockchain and artificial intelligence (AI). By combing social media and scraping the internet, AI software offers the potential to identify risks in local markets before an emergency materialises. Although still in the nascent stages, such predictive analytics are likely to be increasingly leveraged by custodians going forward. It’s all part of ongoing efforts to spot geopolitical risks and implement contingency plans in a timely manner, a vital tool when looking to insulate clients from potentially catastrophic outcomes.
As geopolitical tensions continue to rise, it is critical for network managers at global custodians to have a high level of awareness around the impact of these risks on the operations of their agent banks. If custodians are to weather the ongoing challenges and continue to protect their investor clients, a proactive, collaborative approach to market risk management will be essential. New technology is likely to play a growing role in effectively monitoring these conditions.
In the market turmoil that followed Russia’s invasion of Ukraine, institutional investors with exposure to the region relied on global custodians to help navigate the crisis and safeguard their assets.
The war in Ukraine and subsequent Western sanctions created significant challenges for network managers at global custodians. Following announcements of sanctions against Russia, it was critical for custodians to understand their Russian exposures — and fast.
RBC I&TS utilises two separate legal entities for contracting with its clients. The complexity of this legal arrangement, combined with the continuously-changing sanctions across the multiple jurisdictions in which we operate made it particularly challenging for us to understand the full impact of the sanctions.
Network management immediately took the lead in forming a cross-functional crisis management team to manage RBC I&TS’ cash and securities exposures to Russia across the legal entities, and to measure the effect of the multi-jurisdictional sanctions on our clients’ assets. It was vital to work closely with other parts of RBC and ensure alignment of our responses across the organisation.
The RBC global economic sanctions (GES) team, which played a key role in handling and providing guidance on the sanctions imposed on China in 2021, has been a critical resource in helping us navigate the Russian sanctions — and continues to play a vital role.
We have also engaged in close collaboration with RBC legal, enterprise group risk management and RBC I&TS’ cash management group as part of our centralised risk management approach. We adopted a ‘follow-the-sun’ model for the timely updating of our crisis management deck, and this was key to managing the book of business for our investor clients.
The all-important pivot
An effective contingency plan is essential to the network management role and central to global custodians’ asset safekeeping duties on behalf of our clients. Such a plan must be ready in the event of a sub-custodian’s sudden default or market departure. This very much applied to the situation in Russia.
The Russian assets of investors from ‘unfriendly’ states were frozen by the Russian authorities. In addition, RBC I&TS’ local sub-custodian was acquired by a Russian oligarch, who was sanctioned by Canada. It was, therefore, necessary for RBC I&TS to pivot quickly and obtain the services of an alternate sub-custody provider who could assume RBC I&TS’ Russian book of business.
As it turned out, RBC I&TS was able to leverage the Eastern European sub-custody hub provider that we had engaged through our Network 2.0 review back in 2018-19. This allowed us to transition the Russian assets to our new provider in a record timeframe.
All hands on deck
Network management has experienced many tense moments — and long days — throughout the Russian crisis. While it may sound cliché, team work and internal collaboration have been essential in successfully managing this extremely difficult situation. It has very much been a matter of all hands on deck.
First and foremost, RBC I&TS needed to update our clients on the ever-changing environment and how it was impacting their assets, which it continues to do today. This has not been an easy feat. It is hard to describe the uncertain atmosphere that has prevailed during this period.
Based on the continuous flow of information provided by RBC I&TS’ sub-custodians, complemented by the experience and expertise of the network management team and partners across the RBC enterprise, RBC I&TS has been able to keep its clients informed of the evolving situation. While the industry has largely adapted to the ‘new norm’ associated with the Russian market, the situation remains extremely challenging and a significant focus of RBC I&TS’ daily network management activities.
The next geopolitical risk
The recent conflict in Eastern Europe and a growing number of flashpoints across the globe — the current tension between China and Taiwan comes to mind — highlight the need for global custodians to be more proactive when dealing with potential geopolitical risks. To this end, we have a standing item on the agenda of our monthly network management steering committee meeting for the head of group risk management to discuss current red-flag markets and exposures.
Growing geopolitical risk also supports the case for real- or near real-time network monitoring, which can be facilitated through new technologies such as blockchain and artificial intelligence (AI). By combing social media and scraping the internet, AI software offers the potential to identify risks in local markets before an emergency materialises. Although still in the nascent stages, such predictive analytics are likely to be increasingly leveraged by custodians going forward. It’s all part of ongoing efforts to spot geopolitical risks and implement contingency plans in a timely manner, a vital tool when looking to insulate clients from potentially catastrophic outcomes.
As geopolitical tensions continue to rise, it is critical for network managers at global custodians to have a high level of awareness around the impact of these risks on the operations of their agent banks. If custodians are to weather the ongoing challenges and continue to protect their investor clients, a proactive, collaborative approach to market risk management will be essential. New technology is likely to play a growing role in effectively monitoring these conditions.
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