Definition
A sub-custodian is a local entity that provides custody services in its respective country on behalf of a global custodian. These entities ensure the safekeeping and administration of clients’ securities and assets in the local market.
Historical Context
The concept of sub-custodians evolved from the growing need for international investments and the expansion of global financial markets. Historically, custodians were national entities; however, as cross-border investments surged in the late 20th century, the requirement for global custodians became evident. This gave rise to sub-custodians, which could provide localized expertise and regulatory compliance in their respective jurisdictions.
Types of Sub-Custodians
- Bank-Related Sub-Custodians: Typically large international or regional banks with significant local operations.
- Specialized Custodians: Firms that focus exclusively on providing custody services.
- Central Securities Depositories (CSDs): Entities that facilitate the safekeeping and settlement of securities within a particular market.
Key Events
- 1974: The Bank for International Settlements (BIS) established to enhance financial stability globally.
- 1987: The U.S. adopts the Global Custody Model due to increasing cross-border investments.
- 1992: The European Union introduces the Target2-Securities project to harmonize settlement systems.
Detailed Explanations
Role of Sub-Custodians
Sub-custodians handle the local custody, including the settlement of trades, safekeeping of assets, tax reclamation, and corporate actions processing. They serve as an intermediary between global custodians and the local market infrastructure.
Importance
- Local Expertise: Sub-custodians possess in-depth knowledge of local regulations and market practices.
- Risk Management: They play a critical role in managing operational and legal risks associated with holding foreign securities.
- Efficiency: Enable global custodians to provide seamless services without the need for establishing a physical presence in every market.
Applicability
Sub-custodians are crucial for:
- Institutional investors
- Mutual funds
- Pension funds
- Hedge funds
- Insurance companies
Examples
- HSBC: Acts as a sub-custodian in various Asian and European markets.
- J.P. Morgan: Provides sub-custodian services across multiple jurisdictions.
- Deutsche Bank: Offers custody services in emerging and established markets.
Considerations
When selecting a sub-custodian, it’s essential to evaluate:
- Regulatory Compliance: Adherence to local and international regulations.
- Financial Stability: The sub-custodian’s financial health and rating.
- Service Capability: Range and quality of services provided.
Related Terms
- Global Custodian: A financial institution that provides custody services on a global scale by outsourcing to local sub-custodians.
- Central Securities Depository (CSD): A facility for holding securities and enabling their transfer and settlement.
Comparisons
- Sub-Custodian vs Global Custodian: While sub-custodians operate in local markets, global custodians manage cross-border securities services by leveraging sub-custodians.
- Sub-Custodian vs Custodian Bank: Custodian banks handle securities on a national or regional basis, whereas sub-custodians are specifically tasked with local market custody on behalf of global custodians.
Interesting Facts
- Sub-custodian networks can span over 100 countries.
- A global custodian like BNY Mellon relies on over 100 sub-custodians worldwide.
Inspirational Stories
- Emerging Market Growth: Sub-custodians have enabled international investors to tap into emerging markets by providing the necessary infrastructure and compliance.
Famous Quotes
“In the world of global custody, sub-custodians are the unsung heroes, ensuring the safety and efficiency of local market transactions.” — Anonymous Finance Expert
Proverbs and Clichés
- “Think global, act local”: Relevant in the context of global and sub-custodians.
- “A chain is only as strong as its weakest link”: Highlighting the importance of reliable sub-custodians in the global custody chain.
Jargon and Slang
- Custody Chain: The network of global and sub-custodians involved in the safekeeping of securities.
- Settlement: The process of completing a securities transaction.
FAQs
Q: What is the primary function of a sub-custodian? A: To provide local custody services, ensuring the safekeeping and administration of clients’ securities within a specific market.
Q: How do sub-custodians differ from global custodians? A: Sub-custodians operate locally and handle regional securities, while global custodians oversee cross-border transactions using sub-custodians’ services.
Q: Why are sub-custodians important in emerging markets? A: They provide essential local knowledge and infrastructure, helping international investors navigate complex regulations and market practices.
References
- Bank for International Settlements. (1974). Overview of Global Custody Services.
- European Central Bank. (1992). Target2-Securities Initiative.
- HSBC. (2020). Custody Services in Emerging Markets.
Summary
Sub-custodians are indispensable in the global financial ecosystem, providing specialized local services essential for the safekeeping and administration of securities. They facilitate cross-border investments by offering local expertise, compliance, and efficient transaction handling. Their role underscores the importance of a robust and interconnected financial infrastructure that supports international market participation.
graph LR
A[Global Custodian] --> B[Sub-Custodian 1]
A --> C[Sub-Custodian 2]
A --> D[Sub-Custodian 3]
B --> E[Local Market 1]
C --> F[Local Market 2]
D --> G[Local Market 3]
This diagram illustrates how a global custodian works with various sub-custodians to manage securities in different local markets.
