05/07/2015 - CUSTODIAL RISK QUESTION TO ANSWER: What do you really own when you buy an investment?
In our complex financial world of securities, derivatives, counterparty agreement and rehypothecation of the collateral of assets under management virtually no one has the actual physical share certificates of stocks or other assets held by their custodial financial investment firm.
“Custody Risk is one of the biggest, most important issues to consider if you want to maintain your wealth when the next round of systemic risk hits!” Graham Summers – Phoenix Capital
TWO PROBLEMS
1- CUSTODIANS OFTEN DON’T KNOW WHERE YOUR ASSETS ARE HELD
The SEC recently performed a study of some 400 investment advisor firms. As the SEC itself stated in its report – approximately one-third (140) failed to meet custody rule requirements. What this says is custodians don’t know where their clients funds are! Many didn’t even know they themselves were legal custodians of their clients funds!
2- YOUR ASSETS WILL LIEKLY BE FROZEN WHEN YOU NEED THEM MOST
Even if an appropriate legal framework is in place to eliminate the risk of loss of value of the securities held by the custodian in the event of its failure, it can take weeks or even months to transfer the securities to new custodians. During that time, you cannot close out open positions .. they are effectively frozen.
In the case of MF Global, some investors were locked out of their accounts and couldn’t trade their positions for weeks. As a result many of them incurred massive losses.
