Custody The new look of custody risk

When the International Securities Services Association (ISSA) published its “Report on Global Custody Risk” in 1992, the securities custody landscape looked a lot different than it does now. At the time custodians were just beginning to globalize, and their biggest risk often involved lack of understanding of their new markets. ISSA’s document, written primarily for custodians, reflected this focus.

Today’s global custody landscape has more actors, more locations, more regulation and far more complexity than it did a quarter century ago. Communications technologies have also come a long way from 1992’s telephone, telex and snail mail.

This has led to a host of new processes – as well as more types and sources of risk. While the 1992 document quickly became a seminal resource for its subject, clearly the time has come for an update.

To have and to hold

As active members of the ISSA Board, we are proud of the tremendous effort put in by the ISSA working group to renew this essential report, which is now available on the ISSA site (see below).

Readers of the new “Inherent Risks within the Global Custody Chain” will find that it takes a much more holistic view than its predecessor – covering the whole life cycle from trade execution and capture to clearing, settlement, custody, reporting and portfolio servicing.

The new document is also written for a broader audience: not just custodians but all participants in the custody chain, from regulators, central banks and brokers to issuers, investors and asset owners. Here, in our opinion, are some of its highlights:

• Holding structures. As opposed to its predecessor, the updated document gives a comprehensive overview of the possible holding structures available today for cash and securities, including a detailed discussion of the pros and cons of omnibus and segregated accounts.
• Asset safety and protection. Since the financial crisis asset safety has become a central concern for the custody industry. The document looks at key principles of asset safety in today’s environment and discusses asset safety in both the investment and clearing/holding lifecycles.
• Client onboarding. Anyone working in custody knows how complex onboarding has become. Stringent due diligence requirements have led to an explosion in questionnaires often containing hundreds of questions. The new document looks at onboarding in detail, with a focus on five key factors that can mitigate onboarding risk.
• Vendor and outsourcing risk. To cope with today’s difficult environment, almost all global custodians have or are in the process of introducing various outsourcing models. The new document devotes a full chapter to a framework for managing vendor and outsourcing activities and mitigating their risks.
• Regulatory and compliance risk. Considering the massive increase in regulatory requirements, readers will also be very interested in the new chapter on regulatory and compliance risk, including a comprehensive look at the current regulatory landscape.

This is by no means all. Other important chapters include those on credit risk, liquidity risk, information technology and security risks. We think anyone involved in the securities industry, and with an interest in understanding custody processes and risks, will find this indispensable reading.

While much has changed, the need to intelligently and proactively manage custody risk has remained. Our hope is that the updated ISSA report serves the industry as well for the coming quarter century as its predecessor has for the previous.