Link between agent bank custody and investment lines raises asset safety concerns

Independent research commissioned by SIX Securities Services, has revealed that almost two thirds (64%) 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. 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.

32% of respondents argue that the pressure to ensure and prove asset safety comes primarily from ‘own balance sheet liability’, followed by 26% who point to the regulators and 26% who point to institutional investors. 16% see pressure coming from the clients of these investors, such as pension funds and insurance companies.

Respondents identified the following major concerns:

·         Counterparty risk of Agent Banks

·         Location and security of proprietary and client data

·         IT security of providers

·         Risk profile of providers (credit, operational, risk management)

·         Collateral management

Despite increasingly granular due diligence questionnaires, 28% of respondents don’t feel they are able to accurately assess the risk profile – including creditworthiness, operational procedures, risk management models and security policies – of agent banks.

Collateral shortfall also emerges as a concern. 50% of those questioned believe that the transparency requirements around assets, imposed by regulations such as Dodd-Frank and EMIR are actually contributing to a collateral shortfall.

 Thomas Zeeb, Division CEO SIX Securities Services comments: “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. As a Financial Market Infrastructure, it is our role to address these issues and provide safe, secure and robust solutions to our clients.”