The great risk vs. compensation debate

Abstract

Inside the seemingly mundane world of global custody lurks a myriad of risks with which global custodians and sub-custodians must contend. As investors venture further afield into emerging markets, the risk profiles change, but the risk tolerance of the investors seemingly does not. With increasing frequency, the expectation is that the global custodians — and by extension the sub-custodians — should assume these risks. At issue is a fundamental question of fairness. In a world where investors are venturing further into emerging markets that carry more pronounced risk profiles, is it fair to assume that the risks of these markets should be borne by the custodian banks at a time when these same investors are paying the custodian banks less and less? Some may argue that these risks are simply the costs of being in the custody business. Others might argue that the pricing dynamic is out of sorts — in other words, the investment managers are taking significant risks and the custodian banks are being asked to underwrite these risks. As the legal and regulatory environments grow in complexity, the questions of risk versus reward will become self-evident. The question remains: who will pay for the costs of managing the operational risks in global markets?