Custody business in the financial sector

Abstract

Investor protection has always been at the heart of the investment services industry and was undoubtedly given primary scope in such. Numerous methods have been adopted to cater for investor protection, amongst which a robust regulatory framework imposed on service providers including the subject matter of this thesis; the custodian. The custodian plays a fundamental role in the safekeeping of securities and keeping an ongoing oversight function over the management of such securities. In Chapter 1 of this thesis, the author shall be answering the question as to what constitutes this sui generis functionary i.e. the custodian and his relevance in today's financial world. The author shall also look through the various legislations in place within the Maltese legal context in the attempt of finding a clear definition of such functionary, as this, is still lacking. Furthermore, the author shall undergo a comparative analysis through the different institutes emanating from the Maltese Civil Code, namely, deposit, mandate, contract of works (locatio operis), trust and fiduciary, not to pigeon-hole the custodian in its proper legal context but to simply clarify and reach an understanding of the juridical nature and role of the custodian which will help the reader in identifying similarities or otherwise of this functionary with other institutes. Finally, another question which the author shall be answering in this chapter will be as to why there is a need to have a custodian in the industry and what the benefits of having such a functionary are. Chapter 2 shall be focusing on the historical part of the custodian and how did such a role develop. The author shall also be outlining the various services offered by a custodian. Even though the services mentioned won't be the full package, the highlight is on the core services. Chapter 3 gives light to the structure of the custody industry by examining the major participants involved. In chapter 4 the author shall be analysing the main risks faced by the custodian, that is, the operational, credit, legal and systemic risks. The 3 main European Union Directives (MiFID, UCITS and AIFMD) which affect the custodian considerably shall be deliberated in chapter 5. The methodology of the study delivered in this thesis is objectified on the role, which the custodian performs in financial services industry. Apart from the aforesaid, the author intends to provide a working document which offers a full spectrum of the custody business starting from its development till present day, a set of recommendations on the possible ways to strike a balance between the benefits and challenges emanating from new regulations such as UCITS V and AIFMD and shall pursue to answer the questions posed in the introduction of this thesis within the parameters set in the said introduction. Ultimately, the author's study will look through the analysis of the juridical nature of the custodian, the service it provides, the major participants in the custody industry and risks involved and finally the 3 main European Union Directives which effect the custody business.