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What do custodians need to do? - Coggle Diagram
What do custodians need to do?
Must evidence at any time that they have control of the asses and are ensuring their protection
A custodian is akin to a legal guardian
Need to show they have adequate records relating to acquisition or disposal of assets and that the title to the assets is retained by them
Eg if it is a property then the name of the fund will be on the title deeds but the custodian will be charged with holding those title deeds securely
Safekeeping
Must ensure they hold physical custody of the investments
Maintain bookkeeping and records associated with those assets
Ensuring the those assets are not commingles with the custodians own or those of another fund
Has to provide secure premises for assets or secure systems for their registration ensure that theft or destruction of the assets does not occur
Administration
Custodians must maintain adequate records of purchases and sales of investments, including the acounting behind it to ensure matching of trades and settlement of transactions
the minimum standards required in terms of records to be retained will ordinarily be set by the local regulators unless the standards within the custody agreement exceed local regulatory requriements
The records will also need to be retained for a minimum retention period to be able to recreate any of the activity undertaken in relation to the fund in accordance with the local regulatory requirements
Reporting
Custodians provide reporting to the fund admin and board as required regarding the custody services
Summarsiign any breaches that have occurred in relation to the handling of the assets including pricing or dealing errors as well as the value of assets within the fund under their custodianship
Can extend to live data reporting such as providing a summary of assets in custody for the fund and number of units in each equity held to enable the fund admin to reconcile their own records
Accessibility of the info and frequency of this reporting will be agreed upon by the custodian and fund admin
Corporate actions
Custodians manage corporate actions to ensure that they are given to the fund admin to make a decision, recording where a response is provided and then communicating that decision as necessary
Custodian may also liaise directly with the manager regarding corporate actions instead of the admin depending on how the fund has strcutrured the relevant agreements
Exercise of voting rights
Where it is electronic records held such as equities enabling the exercise of any rights in a particular equity on behalf of the fund in accordance with the admins instructions
Pricing
Custodians verify the pricing by the fund admin and maintain records on the fund value
This is a safety net, a second pair on independent eyes to check that the value on which the fund pricing has been undertaken is correct and all underlying calculations to arrive at the NAV and therefore the price at which investors are dealing at is accurate
Particuarly important for funds dealing on a daily basis where incorrect pricing can have a massive impact on the value of the fund and the compensation that then may become payable because of the error
Compliance
Custodians check that any transactions are in accordance with the fund's constitutive documents so that any leveraging rules, asset class restrictions or similar are adhered to, called the investment restrictions restrictions are complied with
In terms of further monitoring it depends on the responsibilities placed on the custodian within their agreement for provision of services
Best practice will often see a custodian undertake an annual site visit tot he fund to perform a compliance review
The review by the custodian will include checking dealing procedures used by the admin, identifying if they provide for best execution, reviewing valuations procedures and checking the breaches register to ensure that where the custodian should have been notified of the breach, they have been
The custodian will also go over the details of any pricing errors that have occured in the period since their last visit and ensure that the reasons why they occurred have been addressed sufficiently to prevent recurrence
The custodian will ordinarily issue a feedback report which is provided to the admin and the board
Provides an independent oversight role of the activity of the fund admin
Cash management
On occasion the custodian will manage a client money account in order to facilitate investment
In doing so, they will need ensure reconciliation of that account, regular communication with the fund admin in relation to investor records and the fund manager in relation to investing that money
They may place FX transactions to facilitate trades being undertaken in different currencies
Client money accounts cn also be managed by the fund admin, so it will be down to how the fund has been established to operate and the contracts in place as to who has responsibility for operating them
Risk mitigation
The aim of the custodian is to prevent risk issues arising in the first place through a combination of measures
If a risk incident does arise, ensuring the timely and effective dealing with it
This will involve liaising with the fund admin, ensuring records are prepared recording the issue and how it has been addressed, updating records such as breaches register were appropriate and determining if the incident is sufficiently serious to require reporting to the local regulator