Chapter 8 - Role Of Safekeeping Assets Flashcards
What is a custodian?
Asset safeguarding role falls to a custodian, trustee or depositary - title may change depending on the type of fund (AIMFD reg fund - referred to as depositary)
Main responsibility is to ensure that fund assets or title documents to assets are kept securely/ safely and clearly designated as property of the fund
Not always required - in Bermuda required, but exemption can be obtained from Bermuda Monetary Authority - demonstrate that suitable alternative arrangements are in place
Added investor protection - third party protection of assets
Who selects the custodian ?
Custodian is selected by the governing body, if one is required - based in consideration of the fund needs, type of asset
Prepare short list and select from there
Selection criteria
Credit rating
Indicator of the likelihood of custodian becoming insolvent - fund will only want to deal with someone with strong credit rating - demonstrates that is robust entity
Capital base
More important following 2008 - regulator imposed capital base requirements on banks and other financial services institutions
Track record
Is potential party good and what they do - can they demonstrate this? Can be evidenced through references - particularly important with esoteric asset classes that require specialist care & where there are limited options
Fees
Are fees reasonable and competitive - ultimately fees are deducted from returns
Reporting and systems
Can the custodian provide reporting in a format and timescale that is suitable to fund requirements - their reporting is likely to feed into ultimate reporting from fund to investors
Role of a custodian - what does it involve?
Safekeeping of funds assets
having physical custody of assets, maintaining adequate paperwork in relation to the assets and any movements, no co-mingling of assets and being able to provide safe premises/ systems to maintain assets
Administration
Maintaining adequate records (in accordance with regulatory requirements & fund docs) in relation to any sales/ purchase if assets
Adhering to minimum holding periods
Reporting
Reporting of any breaches - dealing errors, handling of assets etc
Report in an efficient and adequate standard to administration to enable reconciliation &a ongoing reporting
Corporate actions
Ensure admin is given sufficient information with regards to corporate actions to enable necessary decision making & the decision is recorded accordingly
Exercise of voting rights
Exercise voting in accordance with instructions received from admin
Pricing
Verify pricing set by administrator based on NAV - independent check
Compliance
Review of transactions to ensure that they are permitted under fund docs.
Ensure that fund restrictions are adhered to
Observe any additional reporting obligations as detailed in the fund documentation
Cash management
Manage day to day cash movements to facilitate investment
Manage FX transactions
Operation of fund accounts will ultimately be down to how the fund has been established
Risk mitigation
Prevent any risks arising - adhering to the above
Report any risks arising or breaches to the admin and working with them to resolve situation
Segregation of assets
Custodian has the duty to ensure that assets are segregated from their own or from other assets under their oversight at all times
Ensure that assets are ring fenced - prevent possibility of in future third parties having a potential claim to the fund assets in a dispute
Issues with settling / matching physical trades
Location
It may not always be possible for the physician asset to be held at the offices of the custodian - more esoteric asset classes - maybe only title docs are held by the custodian
Where possible and where it is cost prudent gov body should consider appointing specialist custodian
Physical damage
Accidents and fraud do happen and could cause damage to physical property
Custodian should ensure that adequate insurance is in place which covers all eventualities and that policy wording contains no loopholes
Physical assets - focus real estate
Title deeds should be he,d by the custodian
Dealing with trades can be difficult and long winded process due to specific conveyancing procedure in place and other requirements such as registering interests with the land registry
Physical assets - focus esoteric asset classes
Custodian must maintain an inventory of the assets at all times
Inventory should include a valuation of each item together to enable NAV calculation and sufficient info about each asset so that it can be identified
Sub custodian which can provide adequate storage facilities - oversight of sub custodian remains the responsibility of the custodian
Reporting by the custodian in these instances needs to be detailed and accurate in order to enable the NAV calculation
Custodian agreement
Duties and responsibilities of the custodian in relation to fund assets will be outlined in the custodian appointment agreement
Governing body his ability to take corrective action if needed once agreement has been signed into
In practice it is the fund admin who liaises with the custodian on a day to day basis
AIFMD and the role of a depositary
AIFMD introduced enhance role of depositary required for each authorised investment fund
Depositary role is safekeeping of assets and ensuring that unit transactions are done in accordance with fund rules and relevant legislation
Main difference between a custodian and a depositary is the extent of their liability - depositary role is also wider, quasi auditor function - independent checker
Depositary is subject to more stringent liability
Depositary must be either credit instruction or investment firm with relevant regulatory approval to act as custodian
Must be separate entity to fund manager and fund prime broker - avoid conflict of interest reinforce role of independent party
Role of a depositary
Ultimate aim of depositary function introduction is to ensure
Fraud and error prevention
Omission prevention
Reduce and where possible eliminate conflicts of interest between fund manager and fund
Depositary ensures that
Funds assets are held safely and independently from those of the fund manager
Funds accounting records are reconciled with third party records on a regular basis
Each investors entitlement is correctly calculated and recorded
INDEPENDENT OVERSIGHT
