With alternatives, the word “custody” can conceal several different functions. Understanding exactly who does what is a fundamental element of risk management.
Who has legal title?
Identify the registered owner and distinguish custody of the asset itself from recordkeeping for an economic interest. Understand any nominee or special purpose vehicle arrangement.
Who is the qualified custodian, if one is required?
Verify the institution, governing regulatory status and contractual obligations. A broker, adviser, administrator and custodian may be separate parties.
How are positions independently reconciled?
Seek a clear process for trade confirmation, transfer records, corporate actions and discrepancies. In illiquid markets, valuations may depend on methodologies rather than executable prices.
What happens under stress?
Consider operational failure, delayed transfers, key-person dependency, legal disputes and the insolvency of a service provider. Documentation should identify rights and escalation pathways.
The practical takeaway
A credible custody arrangement can be explained in precise, verifiable terms. If title, control and reconciliation are unclear, the underlying economics are not the only risks to investigate.
This article is for general information and discussion only. It is not investment, legal or tax advice, or an offer to buy or sell a security. Obtain advice from appropriately qualified professionals for specific circumstances.