Global custody : an English legal analysis
Global custody is a service whereby a single custodian holds its client's international portfolio through a network of local sub-custodians, clearing systems and depositaries. Modern custodial practice is electronic and cross border. The lack of a tangible and allocated subject matter cuts across the traditional characterisation of custody as bailment. Ambiguities as to the location of custody assets raises novel questions of conflict of laws. It is argued that computerised debt securities are not negotiable instruments, but that the benefits of negotiability are available by other means, in particular the rules of equity and of private international law. It is argued that the impact of computerisation of registered securities is more limited, due to the historically intangible and unallocated nature of company shares. Traditionally, the custodian is a bailee in resect of securities, and a bank debtor in respect of cash. It is argued that because computerised custody securities are intangible and fungible, the custodian is not a bailee but a trustee. Where the securities of different clients are conuningled, the difficulty in showing certainty of subject matter for a valid trust is discussed. It is suggested that commingled clients should be treated as equitable tenants in common. Principles of private international law are discussed in relation to global custody generally, negotiability, taking security and custodian insolvency. The fiduciary duties of the custodian are considered in the light of recent case law. It is concluded that the uncertainties raised by the electronic and cross-border nature of global custody may largely be addressed by greater use of the principles of the law of trusts, and careful drafting in customer documentation.