Products & Services

Custodian Bank Health Check

The situationToday, custodians are caught in the ambivalence of their role as independent watchdog for the interests of funds’ investors, on the one side, and their role as a service provider, on the other. This double role can create challenges in balancing the fiduciary role and the operational aspects of the function. Recent events have shown that for many stakeholders, there is a strong expectation surrounding the depositary role as well as the fact that custodians are natural “deep pockets”, to whom to turn when things go sour. In several European countries, an obligation of restitution of assets is even foreseen by regulation, i.e. the custodian bank is required to replace assets which may be lost due to defaults or similar events in its sub-custodian network.

Overall, the regulatory responsibility of due diligence and supervision of its delegates, if any, and the monitoring of UCITS operations are likely to increase in the near future. It is, therefore, essential for custodians to assess regulatory compliance and to define the regulatory tasks, as well as the future service level offered to a UCITS.

The legal obligationsThe roles and responsibilities of the custodians are under scrutiny in almost every major market in the world. Recent communications by the EU regulators and the Hong-Kong SFC are only a first taste of what to expect. In Luxembourg, a custodian bank acting for funds subject to the Law of 2002 has as its main legal obligations the duty of safekeeping a fund’s asset and, for FCPs, of controlling the investment policy of a UCI. In addition, the bank is in charge of the administration of the UCI’s assets as well as of the control of the activity of the fund management company, i.e. the control of the NAV calculation (for FCP), control of the issue of units, control of timely settlement of assets, control of the distribution of income.

The first role of a custodian is the safekeeping of the UCI’s assets. This role is currently defined as including the selection and monitoring of sub-custodians and any other entities/counterparties with which the fund places assets and the knowledge of how assets of the UCI are invested and where they are deposited at any time. A similar obligation exists for non-UCITS funds and SIFs. In recent years, the ever increasing role of global custodians in general and the growth in the use of prime brokerage arrangements has served to fuel the debate around the practical and technical aspects of discharging such responsibility effectively. Such debate has been heightened in the light of events in recent months, starting with the demise of Lehman, and remains a key area of concern for the industry in Europe.

SafekeepingRisk

MonitoringRisk

OwnershipRisk

The management and supervision of entities where assets are held with a due diligence and a continuous

monitoring obligation.

The due diligence on other service providers to the

UCITS and the monitoring of tasks and controls

as required by laws and regulations.

The oversight of over-the-counter assets

and contracts including the logistical, legal and counterparty

related risks.

Our service

Based on the latest market events we have identified three main risks which should be considered both in terms of the current regime, but also as they are likely to be at the center of the future regulatory initiatives:

Our approach

PricewaterhouseCoopers has designed a modular range of services which can be easily scaled to your specific needs.

• DescribeLuxembourgregulatoryrequirements

• Understand theimpact of recentmarket events

• Benchmarkorganisation againstrequirements

• Identification ofbusiness risks

• Identification ofcompliance risks

• Evaluation of risksin executivesummary riskroadmap

• Definition ofrecommendations

• Definition of actions& quick wins

• Planning of nextsteps

• Implementation ofactions & quickwins

1 Optional extension of the diagnostic.

Risk Diagnostic

RiskRoadmap

Adapt1

In the light of recent market events, the role and responsibility of the UCITS funds’ custodian bank is increasingly under scrutiny and may even become subject to future regulatory initiatives. At the forefront is the discussion around a more harmonised regulation on securities safekeeping and corresponding investor protection in Europe.

Products & Services

PricewaterhouseCoopers can provide a rapid diagnostic of your organisation against the key areas of responsibility. This diagnostic will be performed through a catalogue of approx. 100 specifi c questions to be analysed through interviews or review of selected documents. Focus will be put, in particular, on the following issues:

© 2009 PricewaterhouseCoopers S.à r.l. All rights reserved. PricewaterhouseCoopers refers to the network of member fi rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Your contacts

John Parkhouse Luxembourg Investment Management and +352 49 48 48 2505 john.m.parkhouse@lu.pwc.com Real Estate Practice Leader

Olivier Carré Investment Management and +352 49 48 48 2615 olivier.carre@lu.pwc.com Real Estate Regulatory Compliance Director

www.pwc.com/lu

What’s in it for you?

Our diagnostic comprises (1) a presentation of Luxembourg regulatory requirements in terms of the roles, responsibilities and the liability related to your bank, (2) an executive summary Risk Roadmap combining both compliance and business risks, which will highlight the areas where your organisation is already largely compliant with regulation and market standards, as well as those areas where we have identifi ed weaknesses that threaten the soundness of your future business conduct. Finally, (3) optionally, a summary of recommendations and quick wins for your consideration.

Benefi ts to your organisation

Review compliance with regulatory obligations•

Benchmark the organisation against market practice in/outside Luxembourg•

Roadmap the organisation identifying loopholes or areas of vulnerability•

Identify and create internal awareness on business and compliance risks•

Why PricewaterhouseCoopers?

PricewaterhouseCoopers Luxembourg (www.pwc.com/lu) has about 1800 professionals from 49 different countries. PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

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Extensive improvement needed

Improvement needed

Fullfillment of basic requirements

Extensive knowledge; specific improvement possible

Expert; no further improvement required

Caption

Safekeeping Administration of assets

NAV control

Compliance control

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-- - = + ++• Do you have in place clear

procedures for selecting sub-custodians?

• Do you have clear proceduresfor validating counterpartiesselected by the fund?

• Have you defined regularmonitoring procedures?

• …

• Do you consult independentsources to monitor corporateactions?

• Do you keep all positions (incl.OTC) on record in your system?

• …

• Do you perform a due diligenceon the fund accounting agent?

• How do you review theaccounting valuation procedureof the central administration?

• …

• Do you review the compliancemonitoring system of the centraladministration?

• Are you aware of detectedbreaches and the compensationprocess according to Circular02/77?

• …

Transfer Agent control Transactions settlement & income control

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• Do you perform a due diligenceon the transfer agent?

• What reporting do you receive incase of escalation issues?

• …

• Do you perform a counterpartyacceptance check?

• Do you have a written incomecontrol procedure?

• …

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