Process objective
Ensure fees are transparent, represent good value for the quality of services delivered and are billed with clarity

Process requirements
Standard practice is to charge a fee for principal transactions (trade instruction and/or settlement) and a composite charge for safekeeping plus the range of asset servicing activities.  A number of additional fees may also apply.

The composite fee for safekeeping and servicing portfolios is usually computed as a basis point charge on market value - with the rate varying according to the market (reflecting the efficiency and costs in the respective market).  Alternatives include a flat rate for a market or a fixed fee per line of stock - where this is adopted, it is more often applied to the domestic market only.  In some cases, fees are "unbundled" - with perhaps a lower flat rate or rate per line of stock applying for safekeeping plus individual charges for each of the services provided.

The principal transaction charge might be levied on settlement of all trades, or perhaps for physical certificates only.  There may be a supplementary charge for trade instructions requiring repair, or manual input, by the service provider.

Additional fees might apply for the inward or outward transition of portfolios, each tax reclaim, each proxy voted (or proxies reported), cash movements, third-party foreign exchange transactions, derivatives processing, account maintenance, additional or tailored reports, telecommunications fees for a direct link, provision of a workstation, training services and other costs.  With securities lending programs, it is standard practice for service providers to bear the cost of the program and to share in the lending fee income.  Out-of-pocket expenses (including stamp duties/securities transfer taxes, certificate fees, charges levied by central depositories on the deposit or withdrawal of securities and registration fees) are generally passed on.

Most often, it is the principal transaction fee plus basis point charge which are levied.  There has been a fortunate trend away from the practice of applying a wide range of additional fees for elements of the core custody service, which has made it easier for clients to track and control costs.  Nevertheless, the billing process can still be complicated by a range of line items for additional services.  The unbundling of the central securities depository fee element, and providers looking to charge for liquidity, mean that billing can still be complex.

Two further elements are very important: cash management and foreign exchange.  A client may bear a significant hidden cost if its service provider offers uncompetitive rates and it does not have easy access to alternative providers and the tools to make a quick comparison across providers.  So, quoting competitive rates consistently across all major, emerging and frontier markets - and demonstrating reliable benchmarking of rates - may well warrant a higher custody fee than another provider which offers poor rates.  In cash management, credit and debit interest rates should follow an appropriate, published interbank lending rate for the currency concerned plus a competitive spread.  Payment of credit interest should not be subject to punitive minimum balances or tiering of rates.  Netting of debit and credit balances - with interest applied to the net balance - is an advantage.

A service provider's services may be partly or wholly subject to value added tax ("VAT" or "TVA"), goods and services tax ("GST") or other taxes.  The treatment may vary from one provider to another.

The full picture
There is a natural temptation to consider fees first in contemplating a service provider.  But this should be the final consideration.  There's a host of factors to consider first: the range of services required, the provider's quality of service and the impact on costs for the client (and perhaps its investment managers) and many other aspects.  Then it will be appropriate to consider fees and determine whether they represent good value for the service which the provider commits to.  And the fee should not be considered in isolation: what matters is the overall cost of fees and any additional charges plus the elements of cash management and foreign exchange.  And finally, your service provider must generate a reasonable return if it is to deliver a good service in the short term - and still be in business in the medium-term, so you're not forced into a burdensome transition to a new provider.


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