11 January 2023
Hong Kong and China's role and presence within the global investment scene have grown significantly in recent years. Many people expect more of the same - a significant increase in trading volumes, IPOs and new listings - which will take Hong Kong to a different level. While much has been made of recent meetings with Middle East representatives and potential investors, do investors need to pay more attention to the role of global custodians?
As the term suggests, the modern-day custodian can operate globally, appreciative of local culture and regulations. The idea that brokers will advise, manage and execute transactions while custodians will safeguard assets and delivery is heavily ingrained in the mind of investors. However, the role of the modern-day custodian is significantly undervalued.
The concept of segregating client assets from those of brokers, advisers and wealth management companies is nothing new. This ensures that client assets are separate from company assets, which is very important in the event of financial difficulties or the closure of a business. The fact that an outside party manages this segregation gives investors even more confidence. Regular reconciliations and production of statements allow investors to monitor assets held and track movements.
Even though we are in a digital age, some investment markets have stringent local investment regulations. This could mean that client assets need to be held closer to that particular market to ensure prompt delivery and receipt of funds/assets when transacting. While not such a significant issue today as it was in the past, some local procedures still need to be appreciated.
The fact that we take global custodians for granted, often failing to appreciate their market reputation, says everything. As a company, Global Investment Strategy works with leading global custodians with impeccable reputations. The fact that we have confidence in their services allows us to concentrate on client-centric activity and expand the business. However, we do receive regular updates so that we can track assets and levels of efficiency.
As we have seen in recent times, concerning digital assets, global custodians must invest in the latest security technology. This will be a constant battle; as hackers try to gain entry, custodians slam the virtual doors even tighter. Continuous investment in security services means that the leading custodians can stay one step ahead of the criminals. Unfortunately, while much is made of security breaches, investors rarely take notice when everything is going well.
On the subject of digital assets, the recent demise of FTX has prompted many investors to put forward global custodians as the answer to this crisis of confidence in the digital assets sector. This would not be the first time that global custodians have become involved in the security of digital assets. Consequently, it makes sense to at least look at this option?
Global custodians have been part of the investment and safe custody regulatory framework for some time. However, as international regulations tighten, security issues emerge, and new investment asset classes appear, global custodians will become integral to all investment regulations. Historically, this was a challenge with different regions having very different regulations, but international regulations are now merging. Regulators are keen to work together, improving investor and market confidence.
Many of us underestimate the role of global custodians and their power and influence. Yet, they are the glue that keeps many areas of the investment settlement system together. Ironically, after years of concerns regarding the security of cryptocurrencies and digital assets, the answer has beenvisible from the start. Global custodians already look after various types of digital assets, so why shouldn’t crypto assets be the next step?
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