Navigating the Custody Landscape

In the institutional investment world, asset custody has often lived in the operational shadows; essential, but not always evident in strategic discussions. Yet as markets evolve and risks become more complex and interlinked, the decisions around the selection of global custodians are moving closer to the centre of institutional risk and governance frameworks.

Custody is no longer just about safekeeping assets. It’s about data integrity, resilience, and the ability to support an institution’s operating model across geographies, asset classes, and regulatory environments. The structure and configuration of custody arrangements, whether consolidated with a single provider or distributed across multiple, can have material impacts on both operational efficiency and risk exposure.

Custody as a Strategic Infrastructure Layer

At its core, custody is infrastructure. It underpins the investment process, enabling trade settlement, cash movements and asset servicing. Increasingly it also enables access to analytics and reporting capabilities that feed directly into risk, compliance, and performance functions.

As investment strategies become more complex, from multi-asset portfolios to private markets and digital assets, the infrastructure required to support them must keep pace. A fragmented or misaligned custody setup can become a silent drag on performance. This can manifest as delayed data, inefficient workflows, increased operational risk, or limitations in market access which can impact both institutional investors and their end clients.

At the same time, institutions are re-examining whether the diversification of providers, once pursued as a risk mitigation strategy, may now be layering unnecessary complexity.

Consolidation vs. Diversification: The Trade-Offs

A key strategic question many institutions face is whether to consolidate custody services with a single global provider or to diversify across multiple relationships.

Consolidation offers the appeal of simplified oversight, integrated reporting, and potential cost savings. It can streamline operations, reduce reconciliation breaks, and enhance accountability through clearer ownership of service issues. In an era where real-time data and system interoperability are increasingly vital, consolidation may support a more agile operating model.

However, diversification, such as maintaining regional custodians or splitting by asset class, can be a prudent strategy. It could help mitigate counterparty risk, maintain redundancy, and preserve flexibility. It also allows institutions to benefit from specialist expertise in certain markets or services.

Neither model is inherently superior. The optimal approach depends on an institution’s scale, complexity, and risk appetite. What’s critical is that the model is intentional and aligned with the broader operational and investment strategy.

Risk is Changing, So Should Oversight

Traditionally, custody risk was focused on asset safety, particularly in cases of negligence, insolvency or fraud. Today, the risks are more varied and subtle:

• Cyber security and data integrity are now fundamental. Custodians are targets for sophisticated threats, and a breach can affect not only the assets but also trust in the broader post-trade system.
• Operational resilience is under the spotlight, particularly after the pandemic and various geopolitical disruptions. Institutions want to ascertain the robustness of their providers’ contingency plans and understand how failure might unfold in a hyper-connected ecosystem.
• Regulatory fragmentation creates challenges for compliance and reporting. Providers must keep pace with evolving standards across multiple jurisdictions, and clients are ultimately responsible for ensuring accuracy and timeliness.
• Technology debt in legacy platforms may hinder innovation and integration. It can limit an institution’s ability to evolve alongside market infrastructure changes such as shortened settlement cycles or tokenised assets.

Effective custody oversight is no longer a function isolated to the back-office. It requires engagement from legal, risk, operations, and even front-office stakeholders, requiring regular review of both contractual terms and service delivery.

Efficiency is No Longer Just About Cost

While custody fees remain under pressure, the true value of an efficient custody setup often lies in what it enables:

• Timely, reliable data that feeds investment decisions and risk models.
• Automated processes that reduce manual intervention and associated errors.
• Frictionless integration with internal systems and third-party platforms.
• Insightful reporting that supports ESG disclosures, tax optimisation, and performance attribution.

Efficiency, in this sense, is not just a matter of cost reduction, it’s an enabler of strategic capability.

Rethinking the Status Quo

Many institutional investors operate with legacy custodial arrangements that have evolved incrementally, rather than by design. In some cases, relationships have outlasted the operating models they were originally built to support.

With the pace of change accelerating, from shortening settlement cycles (such as T+1) to digital asset custody, there is a growing imperative to step back and re-examine whether existing arrangements are still fit for purpose.

Key questions institutions are asking themselves include:

• Are we generating sufficient data and service quality to support our investment strategy?
• Are our custody risks, including operational, legal, and reputational, well understood and mitigated?
• Is our current model scalable, flexible, and resilient to future shocks?
• What would it take to upgrade, and how might this unlock new advantages?

Final Thoughts: Custody as Strategic Enabler

Custody may never be glamorous, but it is foundational. Institutions that treat it as a strategic enabler, rather than a commodity service, are better positioned to navigate the dual challenges of risk and efficiency in a changing market environment.

There’s no one-size-fits-all answer, but a thoughtful, forward-looking approach to custody and post-trade infrastructure can unlock real value. Whether through consolidation, diversification, or a hybrid model, the key is clarity of purpose and alignment with the institution’s broader goals.

The optimal custody setup is not necessarily the most familiar, nor the least expensive. But it is the one that most effectively supports your investment ambitions while safeguarding the trust placed in you by beneficiaries, stakeholders, and future generations.