Foreword
The Guide to Sound Practice for Selecting and Periodically Assessing Custodians and Depositaries (the “Guide”) is the initiative of AIMA’s Sound Practices Committee.
Events like the Lehman Brothers and MF Global insolvencies or the Madoff or FTX frauds have focused attention on client asset safekeeping regimes.
In Europe the Madoff fraud brought the issues of the custodian’s liability and potential conflict of interests to the fore, and highlighted risks associated with the use of local sub-custodians if they default or fail to perform their duties appropriately. These events, and the 2008 Global Financial Crisis, have been a significant political driver in the continuing evolution of financial services regulation in key manager and fund jurisdictions.
The sound practices in this guide are aimed at managers and funds who wish to select a custodian or depositary, to perform safekeeping services. This guide should also be useful to managers and funds when periodically reviewing existing custodian or depositary relationships from a service, risk, diversification, value or cost perspective.
We would like to thank the members of the working group (who are listed in Appendix B), all of whom have volunteered their time and worked hard to produce this new guide. We intend to revise the guide further as and when material developments occur.
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This Guide explores the relationship between funds, managers, custodians and depositaries, from the initial due diligence process to selection, periodic assessment, and transition from one custodian or depositary to another.
The Guide discusses what managers should consider in relation to:
- the similarities and differences between “custodians” and “depositaries” (Section 1);
- the custodian’s/depositary’s regulatory status (Section 2);
- sub-custody (Section 3);
- entity-level due diligence (Section 4);
- on-boarding and starting new relationships (Section 5);
- periodic assessment of a custodian or depositary (Section 6); and
- off-boarding or transitioning (Section 7).
This Guide is relevant both for managers seeking custodian or depositary services for their own operations and those performing due diligence on behalf of a fund.
The information contained in this guide has been prepared by AIMA, in conjunction with Dechert LLP, the Association of Global Custodians and a working group comprised of AIMA members for general informational purposes for users of this guide only. For further information please contact James Delaney, Managing Director, Asset Management Regulation.
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For more information about the guide, please contact James Delaney ([email protected])
Table of Contents
1. Introduction
1.1 What is a “custodian”?
1.2 What is a “depositary”?
1.3 Specialty services
2. Regulatory status
2.1 Basic EU/UK custody regulation
2.2 AIFMD overlay
2.3 Basic U.S. custody regulation
3. Sub-custody
4. Entry-level due diligence
4.1 Service offering
4.2 Operating model
4.3 Compliance and controls
4.4 Organisation and governance
4.5 Industry experience and reputation
4.6 Vendors and outsourcing
4.7 DEI initiatives
4.8 ESG policy and corporate alignment
4.9 Financial audits
4.10 Understanding of regulatory conditions
4.11 Liability
4.12 Insurance
5. Establishing the relationship
5.1 On-boarding process
5.2 Negotiating the agreement
5.3 SLAs
6. Periodic reassessment
6.1 Relationship management and oversight
6.2 Performance versus KPIs and SLAs
6.3 Monitoring of financial standing, incidents, reputation, regulatory sanctions
6.4 Reporting to fund governing bodies
6.5 Due diligence refresh
7. Off-boarding/transitioning
Appendix A: Digital assets custody
Appendix B: AIMA Working Group
Appendix C: About AIMA
Appendix D: About the Sponsor