The board and/or management seek professional safekeeping of the investment assets of the social security institution, whether internally or externally managed.
Guideline code
INVEST_02200
Mechanism
Mechanism
- The custodian should check regularly the assets under custody against the accounting registration of transactions and balances.
- There are a number of considerations that the board and/or management should take into account when selecting and appointing a custodian:
- Asset safety: consideration of both the financial security of the organization and the operational effectiveness of internal systems and processes;
- Strong focus on technology: the custody of assets is a technology-focused business; there should be sufficient technology to ensure efficient processes, as well as to provide appropriate client experience of accessing data;
- Scale: the custody of assets is a large-scale industry; a custodian has to be of a certain size in order to operate efficiently and compete sufficiently to deliver long-term investments to keep pace with the competition;
- Resourcing: a strong relationship manager is important, as well as a strong, wider risk management team.
- The selected custodian should be approved by the board.
- At the outset, it is important that an appropriate service level agreement (SLA) is put in place, setting out the expectations of both parties. In addition, quarterly or six-monthly key performance indicator (KPI) reports should be agreed. Key performance indicator reports are a way of monitoring the effectiveness of both the custodian and the fund’s investment managers, and, consequently, are an important governance tool.
- When there is transition of assets between custodians, the board and management should put in place the relevant procedures and processes to ensure that the transition takes place appropriately. Given the limited number of high-quality global custodians, these organizations are very experienced in transitioning assets between themselves following the loss or win of any business. Specialist teams tend to be organized, connected and efficient, and as such the process tends to be made easier for clients, aside from having to complete and sign documentation. However, there may be situations where the board and management need to ensure that the transition is as smooth as possible. There may be some legal costs incurred in changing custodian, reviewing and agreeing the master custody agreement and, typically, some administrative burden, such as having to arrange tax documentation.
- Where the board, management or investment committee lacks sufficient resource, expertise or governance budget to undertake fully informed custodian selection and appointment, the board, or the management or investment committee with board authorization, should seek expert advice or appoint external professionals to carry out these functions.
Parent
Structure
Structure
- There should be an independent custodian appointed or approved by the board and reporting directly to the board and/or management, to ensure the safety of the assets of the institution.
- The investing institution should ensure the separation of the investment assets that are managed by the external fund manager from its own operating assets, to enhance accountability and transparency.
- The custodian should be independent and not related to the business interests of the external fund manager. The custodian may provide important management and analytical information to the institution.
- Sufficient resource and expertise should be dedicated to the selection and appointment of the custodian.
- The success of a custody relationship is often based on the quality of the relationship manager (RM). Those representatives of the fund who are most likely to manage the day-to-day relationship with the custodian should ensure that they are comfortable with the proposed relationship manager of the custodian.
Title HTML
Guideline 19. External safekeeping measures and custody of assets
Type
Guideline_1
Weight
26