Regulation Could Make More Markets Inaccessible to Investors

With UCITS V coming into focus, the scope of responsibility for market infrastructures looks set to change, forcing further liability on the custodians that do business in those markets on behalf of investors, according to a regulatory expert at the Global Custody Forum in London.
By Janet Du Chenne(59204)
With UCITS V coming into focus, the scope of responsibility for market infrastructures looks set to change, forcing further liability on the custodians that do business in those markets on behalf of investors, according to a regulatory expert at the Global Custody Forum in London.

On day one of the forum, panelists debated the safety of client assets, given current regulation designed to protect those assets.

Clifford Chance’s Monica Shah noted the custody industry is more risk averse now, but the level of indemnities is not matched in their pricing.

Northern Trust’s, Anthony Stevens, head of product solutions group EMEA, concurred, saying “the pricing of depositories isn’t right and there is a lot that does not get priced at the back end including sub-custody risk.”

Crucially, in regard to level one regulation such as UCITS V, the panel talked about the liability of sub-custodians as the gateway to new markets. Here, Shah pointed out that UCITS V would make CSDs more liable and that liability will extend to the sub-custodian and therefore to the global custodians, should the CSD default.

“Where there is mandatory use of an infrastructure, if the law says an element is outside your control, CSDs can be liable,” said Shah.

“With the changes of UCITS V there is no distinction if a CSD is performing custody services as an investor or issuer CSD,” she added.

AIFMD and UCITS V will bring more liability to depository function of a CSD, especially if they are an investor CSD. For a custodian, this may deter them from doing business in certain markets, was the message from the floor, due to the potential liability they have to assume and the difficulty it would be to price that risk for the end investor.

“If a CSD provides book entry and settlement there is liability and tying it together with what is in the CSD regulations, the only thing not in scope is book entry,” said Shah.

Panelists also debated the preference for segregated accounts at the sub-custodian and the CSD under upcoming regulations.

“Part of it is understanding where the assets are and that they’re not used in some other accounts used in a waterfall situation,” says Stevens. “It’s part of mitigating and mutualizing but you will have to pay for segregated accounts and that won’t be cheap.

“With T2S the first structure available will be the omnibus account. Outside that you may have other account structures and cash accounts. The issue will be how can they segregate assets at a reasonable price in the client’s own name?”

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