Intermediated Securities from the Perspective of Investors - Quick Fixes and Long-term Solutions

Abstract

This chapter analyses intermediated securities from the perspective of investors. At first the characteristics of the intermediated infrastructure are briefly described (section II). Then four recent examples where these characteristics have affected the value of assets are analysed (section III). Section IV explains the perspective of the providers of the current infrastructure. In section V the perspective of investors is analysed. The problems analysed in this paper only arise because investors permit custodians to outsource custody and accept that they bear the risk associated with sub-custodians. At an international level custody chains do not need to be as long as they currently are. It will be shown that there are good reasons to assume that there is a market failure and that behavioural patterns can explain that investors do not appreciate the implications of the current framework and are also not able to put in place a more cost effective contractual framework that better suits their financial interests. There are quick fix alternatives (section VI). Investors with bargaining power can insist on better custody terms or on holding UK securities directly. International investors can also avoid English law. It will be argued in section VII that the availability of distributed ledger/blockchain technology is unlikely to remedy the problems associated with custody chains. The chapter will point towards longer term solutions available to the government (section VIII). It concludes by tentatively observing that we may have reached a point where property rights in securities no longer exist, where client asset rules are no longer sufficient to ensure financial stability and where custody should be treated in the same way the taking of deposits (section IX).