Institutions reveal concerns over custody banks

Concern about the safety of assets held by custody banks is prevalent among financial institutions, with some saying they find it difficult to assess risks despite extensive scrutiny.

Just over a quarter of 50 global and domestic systemically important banks and clearing houses across Europe said that despite “increasingly granular” due diligence questionnaires, they did not feel they were able to accurately assess custody bank risk profiles – including creditworthiness, operational procedures, risk management models and security policies.

The research, commissioned by Six Securities Services, found the link between custody business and investment business in agent banks providing custody services formed a particular area of concern for 64% of the financial institutions.

“An inability to separate these two business activities introduces a potentially high level of risk with regard to asset safety,” said the Six research. “This fear is particularly prevalent amongst global systemically important banks – 80% of such organisations highlight this as an issue, underscoring the systemic incompatibility of these two business lines.”

Respondents said they had “major concerns” about counterparty risk of agent banks, location and security of proprietary and client data, IT security of providers, risk profile of providers (credit, operational, risk management), and collateral management.

Half of the respondents said they felt transparency requirements around assets, imposed by regulations such as Dodd-Frank and European Market Infrastucture Regime were contributing to a collateral shortfall.

Thomas Zeeb, division chief executive for Six Securities Services – which is a central securities depositary – said: “These results are a clear representation of how seriously our industry is taking asset safety. Clients are conflicted by the need to reduce costs, possibly through outsourcing services, with questions being raised around the prudence of being so reliant on service providers.

©2016 funds europe

HAVE YOU READ?

THOUGHT LEADERSHIP

The tension between urgency and inaction will continue to influence sustainability discussions in 2024, as reflected in the trends report from S&P Global.
FIND OUT MORE
This white paper outlines key challenges impeding the growth of private markets and explores how technological innovation can provide solutions to unlock access to private market funds for a growing…
DOWNLOAD NOW

LATEST SURVEY

Visit our dedicated Ireland channel for all the latest news and analysis on the country's investment industry.
READ MORE

PRIVATE MARKETS FUND ADMIN REPORT

Private_Markets_Fund_Admin_Report

LATEST PODCAST