Concern about the safety of assets held by custody banks is prevalent among financial institutions, with some saying they find it difficult to assess risks despite extensive scrutiny.
Just over a quarter of 50 global and domestic systemically important banks and clearing houses across Europe said that despite “increasingly granular” due diligence questionnaires, they did not feel they were able to accurately assess custody bank risk profiles – including creditworthiness, operational procedures, risk management models and security policies.
The research, commissioned by Six Securities Services, found the link between custody business and investment business in agent banks providing custody services formed a particular area of concern for 64% of the financial institutions.
“An inability to separate these two business activities introduces a potentially high level of risk with regard to asset safety,” said the Six research. “This fear is particularly prevalent amongst global systemically important banks – 80% of such organisations highlight this as an issue, underscoring the systemic incompatibility of these two business lines.”
Respondents said they had “major concerns” about counterparty risk of agent banks, location and security of proprietary and client data, IT security of providers, risk profile of providers (credit, operational, risk management), and collateral management.
Half of the respondents said they felt transparency requirements around assets, imposed by regulations such as Dodd-Frank and European Market Infrastucture Regime were contributing to a collateral shortfall.
Thomas Zeeb, division chief executive for Six Securities Services – which is a central securities depositary – said: “These results are a clear representation of how seriously our industry is taking asset safety. Clients are conflicted by the need to reduce costs, possibly through outsourcing services, with questions being raised around the prudence of being so reliant on service providers.
©2016 funds europe
