SUB-CUSTODY: Custodians tighten the reins

They were thrust under the microscope following the Madoff scandal, and consequently custodians themselves are now exercising far greater scrutiny of potential clients, writes Angèle Spiteri Paris.

The majority of the banks in the Nordic region were not affected by the Bernard Madoff scandal, with just two of the players having a total exposure of €58m. But regardless of the size of the exposure, clients of the Nordic custody banks are asking tougher questions and the players in the region are out to appease any fears.

Before the Madoff scandal came to the fore, and before the financial crisis rocked the world, custody clients were relatively unaware of what happened to their assets once they were deposited with a custodian.

But things have changed.

Luciana Pacor Hygrell, head of Nordic custody services at Svenska Handelsbanken, says: “Global custodians’ end clients now have an opinion on where their assets are held. So the global custodians are asking us more questions when we act as sub-custodians in the Nordics.

“We are also asking more questions to our sub-custodians on behalf of the domestic clients for which we provide global custody.”

Pacor Hygrell says that Handelsbanken reviewed its sub-custody agreements post-Madoff and post-crisis. She says: “We took a closer look at when we sell, when we buy and really dug deep into the management of the banks we appoint. Asking questions is a good thing.”

Handelsbanken hasn’t refused to take on any business because of the tighter controls, but then Pacor Hygrell says the bank had always been very conservative and prudent.

Niklas Nyberg, global head of GTS financial institutions at SEB, says the bank also has not refused any business but stronger controls have been put in place.

He says: “We are more wary of the clients we take on. We haven’t rejected any business recently but we do have stronger controls now. There is at least one example of a client we took on about five years ago that wouldn’t slip through the net now.”

Neither SEB nor Handelsbanken had any Madoff exposure. Fellow Nordic banks DnB Nor and Swedbank also said they were not exposed to the fraud.

Nordea and Danske Bank were the only two Nordic banks found to have been exposed to the Madoff fraud, with €48m and €10m invested respectively. Both firms stated they did not register any losses as a result of this exposure.

But some good has come out of this whole debacle. It seems that as a result of the Madoff scandal custodians have come to be seen as more valuable.

In the Funds Europe Luxembourg special report, published last month, asset servicers in the Grand Duchy said that post-Madoff, their clients have come to view them more as partners, rather than just providers of a service.

The Nordic players also feel this way.

Nyberg, of SEB, says: “Prior to Madoff, fund companies simply saw us as a depository, with no value added. Now they consider us to be an important part of their value chain.

“We proved how we provide controls and security and this allows their end client to see that we [us and them] are trustworthy and competent. Having a competent provider is very important now because the business is becoming more complex.”

©2010 funds europe



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