Assets held with a custodian can be lost through the custodian's insolvency, negligence, fraud, or poor recordkeeping. This is called custody risk. Financial market infrastructures such as central counterparties are expected to hold assets at supervised and regulated entities and to make sure the assets are protected against claims of the custodian's creditors1.

Under Japan's margin rules, the party that receives initial margin must manage it so that the margin can be used promptly if the counterparty defaults and is returned to the counterparty if a close-out netting event occurs for the receiving party. The Financial Services Agency gave the use of a custodian, along with setting up a trust, as an example of such a method2.

Notes

  1. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraphs 3.16.1 and 3.16.2 (custody risk and use of custodians), pages 128–129 (in Japanese). ↩

  2. Financial Services Agency, "コメントの概要及びコメントに対する金融庁の考え方" (Summary of public comments and the FSA's views; December 11, 2015), No. 109, page 16 (in Japanese). ↩