Asset Safety Reviews

  • When the next crisis occurs will you be certain that all your investments are yours and not part of some defaulting counterparty’s estate?
  • Exactly where are all your assets? Who are all the intermediaries in the chain of ownership and what risk do they pose to you? How might you measure that exposure?
  • Just how safe are your assets and what extra measures should you take in a crisis to ensure they are protected?

Thomas Murray IDS suggests that you answer these questions before the event, not after. Our asset safety reviews cover all these topics for institutional investors responsible for global mandates.


An asset safety review identifies the generic issues surrounding the major asset classes (cash products, derivatives, pooled investments) along the chain of intermediaries. Once these are understood they are then applied to your specific portfolio, the risks are identified and remedial actions articulated. Any immediate correction measures will be highlighted and recommendations made to rectify concerns.

Your first contact in a crisis is likely to be your custodian and prime broker.

The role of custodians

Asset servicing, including custody, is often considered to be a low risk and low cost activity. However, failures do happen and although the probability of such an event occurring is low the impact could be catastrophic for you.

Since the globalisation of financial markets, custodians and their counterparties (sub-custodians, central securities depositories (CSDs) and central clearing counterparties (CCPs) play an increasingly vital role in the processing and safekeeping of invested assets. It is through the custodian that all trade instructions flow. The global custodian is also responsible for ensuring that international investments are properly recorded, processed and held safely in the local market. You rely on electronic trading by your fund managers and brokers and the recording of investments in the books of your custodian, its sub-custodians, CSDs and CCPs in the markets in which you invest. Functions such as income collection and corporate action processing often rely on the efficiency of other third parties as well as your own appointed custodian.

In addition to its role in the safekeeping of an investor’s assets, the relationship that the custodian has with your investment managers is important to the efficient processing of trades and the reduction of operational risks. It is therefore vital that you ensure that your global custodian is able to service your current and future operating needs and can operate effectively on a continuing basis.

Through the entire post-trade chain, starting with your global custodian, through the network of domestic custodians and ending at the local central securities depositories, your assets are exposed to several risks in different forms including possibilities that:

- invested assets may not be clearly identifiable
- book-keeping records may be inaccurate
- invested assets may be mis-appropriated or misused
- invested assets may be comingled with that of an insolvent party
- invested assets may be frozen or their portability inhibited
- cash may be lost on insolvency
- invested assets that were previously earmarked as liquid are suddenly frozen.

Typically, the contractual terms that exist between you and your global custodian provide some protection against operational mistakes by it and its sub-custodians but usually only in circumstances where gross negligence has occurred – something that might be difficult to prove or that may be subject to dispute if two third-parties are involved. However, the contractual terms are not likely to protect you from errors made by, or the failure of, a CSD or CCP.
The default of one of the parties presents two issues for a fund:

- Ultimate Recoverability - will investments be recoverable, irrespective of the time taken?
- Timely Recoverability – can investments be recovered quickly?

The regulators have recognised asset safety weaknesses in the current custody model and are seeking to strengthen this with a new concept of a depository. This is enshrined in new regulations - AIFMD and will also be incorporated into UCITS V.

The role of a prime broker

Which activities do you assign to your prime broker?

- Stock borrowing or lending?
- Derivatives clearing?
- Collateral management?
- Repo and reverse repo?

When dealing with a prime broker, the assets normally controlled by the global custodian directly or through its chain of legal intermediaries, are covered by a completely different chain of ownership. This is not normally visible to you as the beneficial owner. The asset safety issues can then become unmanageable.

How can Thomas Murray IDS help minimise asset safety risk?

While carrying out an asset safety review, Thomas Murray IDS’ team takes a holistic view of the risks associated with your direct (global custodian) and indirect (sub-custodians and central securities depositories) counterparties. It is important that indirect counterparties are examined as there may be circumstances where you are exposed to these if one of them should experience acute financial or operational stress. Having assessed the risks, the team provides recommendations covering the mitigation or limitation of your exposure to such risks. A full asset safety review typically includes thorough analysis of all the main counterparties, as described below.

Global custodian level

You are provided with an evaluation of your global custodian, including financial, asset safety, asset servicing and operational risk assessments. A review of the current custody agreement between you and your global custodian is conducted, where various clauses are benchmarked against market practices that, in Thomas Murray IDS’ view, would be more beneficial to you. The team also performs analysis of the contingency arrangements that the global custodian has in place to ensure continuity of service should one of the sub-custodians experience acute operational or financial stress. Moreover, the team will highlight the risks that have been identified by an external auditor on the internal controls of the global custodian.

Sub-custodian level

Although proper segregation of invested assets (this is to be examined as part of the asset safety review) would facilitate the recovery of assets should a sub-custodian bank become insolvent, recovery could take some time and expose you to market risk. Accordingly, it is preferable that the sub-custodian network is financially secure, as you have indirect exposure as described earlier. The asset safety review identifies the actual legal entities used as sub-custodians and provides information about the credit ratings of these entities (bearing in mind that a parent rating may well not extend to the entity used for sub-custody) and any implicit or explicit support from the sub-custodians’ parent banks. The review also analyses how your assets are recorded on every sub-custodian’s books, including cash, the risks involved in the current arrangements and how these can be limited.

Market/ CSD level

At the market level, the review identifies the exact accounts at the local CSDs where your assets are held at. It provides analysis and commentary on the safety of assets held in the existing accounts and comparison of the current arrangements against other safer arrangements offered by the local CSD (action points are listed for each of the markets to improve safety of the assets). Moreover, risk assessments of local CSDs used in the markets where you hold assets are also be provided.

Detailed analysis is the recommended approach as it allows the identification of all risks associated with the custodian and its counterparties. However, you may choose to focus only on a few specific components of the review.

How can Thomas Murray IDS help AIFMs?

With the Alternative Investment Fund Manager’s Directive (AIFMD) effective in EU member states as of 22 July 2013, the safety of AIF’s assets will be more scrutinised than ever. However, many fund managers remain unaware of the requirements and if such obligations are met by the appointed single depositary responsible for safekeeping of their assets.

The mandatory segregation of AIFs’ assets and clear naming conventions on the books of the parties involved in the custody chain, the question of liability for loss at each level of the chain, the depositary’s obligation to verify assets that cannot be held in custody are the main (but not all) areas that Thomas Murray IDS offers to review. The team would analyse the arrangements with the depositary in addition to the regular asset safety review, as described above.

Thomas Murray IDS has designed a health check to verify that your previous custodian has obtained the relevant permissions to offer depository services and has also strengthened its procedures to deliver the required level of protection demanded by the new directive. Hedge funds can access a set of key questions on-line to check their depository arrangements under the new directive. Answers for all the major custodians offering depository services are verified against Thomas Murray IDS’ database of validated responses from each of the custodians. This is a quick low cost way for hedge funds to check their third party post-trade providers.

OTC derivative products

With the expertise in derivatives products within the team, Thomas Murray IDS identifies risks associated with the administration of OTC derivatives contracts transacted on behalf of you. The team identifies generic issues and current best market practices in terms of asset safety solutions available for derivative contracts. Following a review of the contractual chain between all entities involved, the team highlights specific issues with the current arrangements and where these do not meet best market practice.

What next?

Following the completion and presentation of the findings from the asset safety review, you will be better placed to renegotiate with your global custodian using the recommendations made by Thomas Murray IDS. You may wish to do this yourself or instruct Thomas Murray IDS to act as an intermediary on your behalf during the negotiations.

Select the links below to learn more about each service.

- Overview
- Global Custodian Assessment and Selection
- Achieving Best Practice in Capital Market Infrastructure

If you would like to find out more, please contact: Nick Bradley, Managing Director at or telephone him on +44 (0) 20 8600 2300