Termination of a sub-custodian: Overview, definition, and example
What is termination of a sub-custodian?
Termination of a sub-custodian refers to the process of ending the relationship between a custodian bank or financial institution and a sub-custodian. A sub-custodian is typically a local bank or financial institution that a primary custodian hires to handle assets and transactions in a specific country or region. Termination occurs when the primary custodian decides to cease working with the sub-custodian, either due to performance issues, regulatory concerns, or the conclusion of a contract term.
Termination may involve the transfer of assets held by the sub-custodian to another sub-custodian or the primary custodian, ensuring the continued safekeeping and management of assets.
Why is termination of a sub-custodian important?
The termination of a sub-custodian is important because it can affect the safety, security, and management of assets. If a sub-custodian is not performing as expected, is not complying with regulations, or has been deemed to be unreliable, the primary custodian must take action to protect the assets under their care. A termination process ensures that the transition of assets is handled smoothly and that the assets remain secure throughout the change.
Additionally, the termination of a sub-custodian often reflects a shift in strategy, a response to poor performance, or an attempt to reduce risk in asset management. Ensuring proper termination procedures is essential to maintain the integrity of financial operations and prevent any disruptions to asset management.
Understanding termination of a sub-custodian through an example
Let’s say you are a global asset manager, and you use a sub-custodian to manage investments in a foreign market. Over time, you notice issues with the subcustodian’s handling of transactions and reporting, causing delays in settlements and discrepancies in account statements. After evaluating the situation, you decide to terminate the relationship with the sub-custodian.
To do this, you work with the primary custodian to initiate the process, which may include transferring the assets to a new sub-custodian in the same region or bringing them back to the primary custodian. The termination must be handled in compliance with any contractual obligations, ensuring that the transfer is seamless and that no assets are lost or compromised during the process.
Example of a termination of a sub-custodian clause
Here’s an example of how a termination of a sub-custodian clause might appear in a contract:
“The Custodian reserves the right to terminate the appointment of any Sub- Custodian with immediate effect upon written notice, in the event of the Sub- Custodians failure to comply with the terms of this Agreement, failure to meet regulatory standards, or any other performance-related issues. Upon termination, the Custodian will ensure the timely transfer of all assets held by the Subcustodian to another approved Subcustodian or back to the Custodian, in accordance with the procedures outlined in this Agreement.”
Conclusion
The termination of a sub-custodian is a critical process in the asset management and financial industries. It ensures that asset safekeeping and transactions continue without interruption, even if the primary custodian decides to end the relationship with a sub-custodian. Whether due to performance issues, regulatory concerns, or strategic changes, it’s important to follow proper procedures to protect assets and maintain the integrity of financial operations. By having clear termination clauses in contracts, parties can mitigate risks and ensure smooth transitions when changes need to be made.
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.