Concerns Rise Over Asset Safety

Shanny Basar

SIX Securities Services, which operates Switzerland’s financial market infrastructure, published research last week which found that two-thirds of financial institutions are concerned that agent banks have both custody and investment business lines.

“An inability to separate these two business activities introduce a potentially high level of risk with regard to asset safety,” added SIX. “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.”

Just over a quarter, 26%, of respondents said the pressure to ensure and prove asset safety comes from institutional investors and 16% said pressure came from the clients of these investors such as pension funds and insurance companies.

Thomas Zeeb, division chief executive SIX Securities Services, said in a statement: “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.”

Last month the Association for Financial Markets in Europe also published a report, “Principles of Asset Segregation, Due Diligence and Collateral Management” which called for greater harmonization of asset segregation across European regulation.

AFME said segregation of client assets currently falls under a number of EU regulations without any consistency in either the meaning of “account segregation” or in the level of segregation required.

Werner Frey, managing director of the AFME Post Trade division, said in a statement: “Given this patchwork of legislation, asset segregation lacks coherence and creates a level of uncertainty and confusion among industry participants.”

The trade body made recommendations to ensure that client assets are kept safe while minimising operational complexity and cost. The AFME key asset segregation principles include – internal accounts should be fully segregated and identify the immediate client for whom the assets are being held; external accounts should be segregated between proprietary assets and securities account holder assets; and that in the event of the insolvency of a securities account provider, client asset protection is of utmost importance.

Last month the European Securities and Markets Authority also published responses to its call for evidence on asset segregation and custody services on its website.

BlackRock said in its response that it looks to its network of global custodians to demonstrate that all client assets are held separately from the assets of the custodian or those belonging to any delegate in the custody chain. In addition, the fund manager’s custodians undertake the appropriate reconciliations to certify that client assets can be readily identified at the underlying fund level.

“Full and physical segregation, we would argue, would significantly complicate the reconciliation, settlement and exceptions management process due to the volume of accounts required to support such a model,” added BlackRock. “Whilst T2S and CSDR [Central Securities Depositories Regulation] are geared towards improving settlement rates, and the asset management industry is focussed on reducing investor costs, the notion of full segregation and the exponential growth of required custody accounts would appear to threaten both of those goals.”

BlackRock warned that the costs related to the spike in account opening and ongoing maintenance (reconciliations, reporting, settlement monitoring) would be passed onto investors, who will receive no further asset protection in exchange for the increased cost of ownership.

The fund manager said that, therefore, it supports either maintaining the status quo or permitting each fund to select the most appropriate method of segregation from the range of options Esma have suggested.

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