Appointment of foreign sub-custodians: Overview, definition, and example
What is the appointment of foreign sub-custodians?
The appointment of foreign sub-custodians refers to the process by which a primary custodian (typically a financial institution or a custodian bank) appoints another institution in a foreign jurisdiction to handle the safekeeping and administration of assets, such as securities or funds, located outside of the primary custodian’s home country. These foreign sub-custodians are specialized in managing local assets and ensuring that the assets are in compliance with local laws, regulations, and market practices. The appointment is made to ensure that the assets are properly safeguarded when the primary custodian is not directly present in the foreign country where the assets are held.
Why is the appointment of foreign sub-custodians important?
The appointment of foreign sub-custodians is important because it enables custodians to manage assets on behalf of their clients in multiple countries, ensuring that investments in foreign markets are properly protected and administered according to local laws and regulations. Foreign sub-custodians are often needed to hold securities or assets that are not eligible for safekeeping in the primary custodian’s home country due to regulatory or market restrictions. By appointing these sub-custodians, the primary custodian can extend their services globally, allowing clients to access international markets while ensuring that the assets are properly managed and secure.
Additionally, foreign sub-custodians play a critical role in facilitating services such as settlement of trades, income collection, proxy voting, and tax reclamation, all of which are necessary for managing international investments effectively.
Understanding the appointment of foreign sub-custodians through an example
Imagine a large investment fund, Global Fund, which has a portfolio that includes both domestic and international securities. The fund's primary custodian is based in the United States, but it holds assets in European, Asian, and Latin American markets. To ensure proper safekeeping and compliance with local laws, the primary custodian appoints foreign sub-custodians in each of these regions.
For example:
- In Europe, the primary custodian appoints a sub-custodian in Luxembourg to hold European securities.
- In Asia, a sub-custodian in Hong Kong is appointed to manage Chinese and Japanese assets.
- In Latin America, a sub-custodian in Brazil is responsible for Brazilian securities.
These foreign sub-custodians are specialized in local market practices, such as regulatory compliance, reporting requirements, and settlement procedures. By appointing sub-custodians in these regions, Global Fund ensures that its international assets are managed and safeguarded effectively.
Example of an appointment of foreign sub-custodians clause
Here’s how an appointment of foreign sub-custodians clause might appear in a custodian agreement:
“The Custodian is authorized to appoint sub-custodians in foreign jurisdictions as necessary to hold and safeguard the Fund’s assets located outside of the Custodian’s jurisdiction. The Custodian shall ensure that each foreign sub-custodian is qualified and capable of complying with the applicable laws, regulations, and market practices in their respective jurisdictions. The Custodian shall remain fully responsible for the actions of any sub-custodian, and the sub-custodians shall act in accordance with the terms and conditions set forth in this Agreement and the local laws of the jurisdiction in which the assets are held.”
Conclusion
The appointment of foreign sub-custodians is essential for financial institutions and custodians that manage international investments. By appointing local sub-custodians in foreign markets, the primary custodian ensures that assets are managed according to local laws and regulations, protecting investors and maintaining the integrity of the assets. This process allows global access to markets while ensuring that the safekeeping, settlement, and compliance requirements are met. It is a critical component in the global financial system, especially for investment funds, banks, and other institutions involved in international securities and assets management.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.