Ensure assets are protected
Securities must be designated and protected for the benefit of the client to ensure they can be recovered in the event of insolvency or bankruptcy of the service provider or of any sub-custodian or depository. The risks and arrangements should be clearly defined and communicated to the client. Ideally, they should be specified in the contract for services.
Service providers will maintain individual client securities accounts on their own records. At the sub-custodian level (and at the depository) individual accounts may be maintained for each client or client securities may be mixed in an omnibus account. (There will usually be a number of omnibus accounts in order to comply with legal or regulatory requirements or to ease the collection of tax relief at source.) Individual client sub-accounts make for easier reconciliation and simpler definition of risks. Omnibus sub-accounts can bring efficiencies of scale and, for some central securities depositories, are required. Whichever form of sub-account is used, it is imperative that securities are clearly designated as client assets, distinct from the proprietary assets of global or sub-custodian.
Where omnibus sub-accounts are used, it is standard practice to register securities in the name of a nominee company which is distinct from the global or sub-custodian. In these circumstances, clients should be advised of the controls applied by global and sub-custodian to protect the client's securities and should demonstrate that no additional tax or other consequences arise due to the arrangements. This is of particular relevance in those jurisdictions (for instance, Thailand) which do not recognize the common law concept of looking through the legal owner (the nominee company) to the beneficial owner of securities.
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