Opinions divided on the future of sub-custodians

With some players consider disintermediating sub-custodians, the industry could be in jeopardy, according to NeMa panelists.
By Jon Watkins

The viability of the sub-custodian model has been called into question by panelists at Nema, with major players believing that market exits will add stress to the system.

Speakers were split in their opinions on the future of the sub-custody model, with Northern Trust leading the calls for alternative models to come to the fore.

“We are looking at alternative operating models for these markets. Including disintermediating the sub-custodians out of the service chain, because of this level of risk we now face,” said Andrew Osborne, senior VP, head of worldwide network management at Northern Trust.

“[We are] concerned at some point we will see more exits and get to the point where there is a high amount of stress in the system.”

Osborne highlighted the risks of single providers in certain markets and the impact of them pulling out. If there is no alternative available following the exit of a bank there would be nowhere for the assets to move.

“We may end up in a stressed situation with that client or fund,” he added. “If it is an UCITS fund as a depositary we are stuck with the risk of that investment.

“If we cant convince the fund manager to exit the fund manager we would have to contact the shareholders.”

For Global Custodians, a sub-custodian exiting a market would be a serious problem with regards to arranging an alternative provider, with concerns around documentation and regulations. Osborne added that if a sub-custodian pulls out they would need at least six months notice.

“Unscheduled exits are a burden to the network community,” said Reto Faber, head of direct custody and clearing EMEA. “We subscribe to the need to be present and have commitment to the business.”

Representatives from both Citi and Societe Generale voiced their commitment to their own sub-custody models but admitted you can ‘never say never’ regarding a potential exit.

Panel moderator John Gubert, a GC contributor, said he could not envisage the disintermediation of sub-custodians, despite Osborne suggesting that there is a need for longer term sustainable models.

“At some point we have to pull the infrastructure into those solutions – as with T2S – reduce global custodian’s dependency on sub-custodians,” added Osborne.

Osborne’s suggested model was an account operator one where global custodians would connect directly into the CSD, reducing dependency on a single provider.

This model has been talked about before, as AIFMD and UCITS V changed the liability structure of the EU market, forcing the global custodian to become liable for all losses incurred at a sub-custodian level.

Along with Gubert, one defender of the sub-custody model was Commerzbank’s  Rob Scott.

“There has been a resurgence of local operators who can do things in a cost effective and nimble way. If you select local providers very well, there are some good and innovative models.”

He added there is enough business out there and he doesn’t see the demise of sub-custody any time soon.