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The role of the Custodian Bank

Obligation to safeguard the deposited


good

This obligation to safeguard is a duty of conservation of the deposit


pursuant to which the custodian must ensure that the deposit does not
deteriorate or perish.

Obligation to monitor the assets

The custodian must know at all times how and where the assets are deposited
and how they are available.

Where the deposit has been placed with a sub-custodian, the custodian must
monitor the sub-custodian namely, from the outset and during the entire
duration of the agreement the custodian must monitor the repute,
qualifications and solvency of the sub custodian with the due care and
diligence expected from a reasonably competent and circumspect
professional placed in the same circumstances.

Obligation to return the deposited assets to the


depositor

The custodian must return the deposit.

This is an absolute obligation and the failure of the custodian to return


the deposit to the depositor automatically results in a violation of the
obligation even if the custodian has committed no fault (subject to
defenses and limitations).

Questions surrounding the three


obligations

Is it an obligation of means or an obligation of results for each custodian obligations

Are these three obligations equally enforceable in all types of situations or is there
different degrees of enforceability. Can some of them be subject to the bilateral
agreement of the two parties

How do these obligations apply in some concrete cases of the day to day life of the
business, where for example:

A fund invest in a market where cash and securities can only be held in accounts
which are in the name of the final beneficial owner (i.e. the fund) and not in the
name of the custodian (India, China, etc...)?

A fund insists to have its assets sub-deposited in a particular market with an


institution which is not part of the sub-custody network of the custodian, or even
sometime do not even match the criteria to belong to the custodians network (i.e.
Madoff case)

Obligation of means vs
Obligation of results
Obligation of Means

Custodian only undertakes to comply with its obligation on a normal effort basis, no specific
result targeted

Custodian must use diligence and care expected from a reasonably competent and
prudent professional placed in the same circumstances

=> Claimant has to prove the fault of the custodian : burden of proof lies on claimant

Obligation of Result

Custodian undertakes to achieve a specific result

Presumption of a fault of the custodian if targeted result is not achieved

=> Custodian has to prove force majeure to be exonerated: the burden of proof lies on it

obligation of means vs
obligation of results

Obligation to safeguard the deposited good : Custodian is liable unless it can


prove that the damage or loss of the deposit is not a result of its negligence or
fault => Obligation of Means

Obligation to monitor the assets : Custodian is liable unless it can prove that the
damage or loss of the deposit is not a result of its negligence or fault in the
selection and monitoring of the sub custodian. => Obligation of Means

Obligation to return the deposited assets to the depositor: the custodian is liable
for its failure to return assets where such assets were deposited with a subcustodian. Defense is limited to force majeure. With respect to force majeure,
the insolvency of a sub-custodian could, as the case may be constitute a force
majeure event. => Obligation of Result

Possible Mitigations

Obligation to safeguard the deposited good : it is possible for the custodian to


limit the liability in relation to the safeguarding of the deposited assets to gross
negligence and willful misconduct

Obligation to monitor the assets : the obligations to monitor the assets and the
sub-custodian cannot be delegated to a third party and it is not possible to
contractually limit the liability of the custodian.

Obligation to return the deposited assets to the depositor :a contractual


exclusion of the custodians liability for loss of deposit other than a loss caused
by the custodians gross negligence or willful misconduct might be upheld in
court provided that (i) the clause does not empty the obligation to return the
deposit of its substance (which will discretionarily be evaluated by courts) and
(ii) the depositor agreed to the sub custody arrangement.

What we have done at RBC Dexia

Review of the existing thorough acceptance and monitoring process of RBCDs


network

Reinforce the Network Management governance bodies

Scope covering Sub custodians and cash correspondents as well as Prime


Brokers

Improve selection process, strengthen the regular due diligence process

Implement monitoring /limits on cash balances

Key topics in Luxembourg


Safekeeping duties to be clarified :

Assets overall control

Segregation of assets

Re-use of assets

Obligations of sub-custodians

Need for harmonization in the custodian liability framework :

Across fund vehicle and markets

Criteria for improper performance

Charge of proofs to be on the claimant

=> Custodian should not be the insurer of the fund whether UCITs or non UCITs

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