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Regulatory framework - Coggle Diagram
Regulatory framework
Regulators have tried to ensure independence and oversight role of the custodian function to reduce risks in relation to fund assets, because of areas of risk which have been identified
Mispricing
Where a fund is incorrectly priced, there is usually a requirement to report it to custodian/depositary together with details of compensation payable to the investors
Fraud
Custodian acts as a guard or second pair of eyes in relation to any trading or transactions being undertaken to prevent employees of the manager or fund admin committing fraud
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Settlement errors
When delivery of shares and receipt of monies do not match up to each other, this creates a mismatch between units held and cash balances
The custodian records can help identify and rectify the matter to find out which part of the trade has not been completed
Failure to repond
Where the admin does not respond to requests for instruction on corporate actions, the custodians will follow up to ensure a response is posted if required
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Conflicts of interest
Greatest risk that arises from a regulator's perspective is that which arises where a custodian and investment manager or admin are within the same group of companies, given the conflicts of interest and potential for fraud
Having related parties involved means that the detection of any kind of irregularity or the mismanagement of assets increases significantly which negates the effectiveness of the custodian role
Jersey
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Custody must be sourced from separate custodian/ trustee with a physical presence in the island, subject to certain exemptions for hedge funds
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Cayman Islands
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Any that is licensed for that activity, may need to be regulated pursuant to the Mutual Funds Law
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Isle of Man
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Licensed by IOM Financial Services Commission or regulated for that activity in a jurisdiction that the IOM has a co-operation agreement with for CIS
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Guernsey
Class Q Scheme
Any institution that is licensed under the Protection of Investors Law 1987 and has a place of business in Guerseny
Cannot have directors in common with the manager or subsidiary of the manager - must have net assets of £4m