AUSTRALIAN PRUDENTIAL
REGULATION AUTHORITY
CROSS INDUSTRY CIRCULAR
NO. 1
CUSTODIAN REQUIREMENTS FOR APRA SUPERVISED
ENTITIES
NOVEMBER 2000
CUSTODIAN REQUIREMENTS FOR APRA SUPERVISED ENTITIES
DISCLAIMER AND COPYRIGHT NOTICE
1. The purpose of this Circular is to provide general guidance on issues arising out of the
legislation under which the Australian Prudential Regulation Authority ("APRA") regulates
insurance (both general and life) companies and certain classes of superannuation entities. It
does not apply to non-superannuation operations of friendly societies. It is not exhaustive in
its coverage of rights or obligations under any law.
2. This Circular is based on APRA's interpretation of the relevant legislation in respect of the
superannuation entities for which it is the regulator and has no legal status or legal effect
whatsoever. Any reference to self managed superannuation funds is for general assistance
only. Trustees of self managed funds should seek appropriate guidance from the Australian
Taxation Office in respect of the application of the legislation in respect of those funds.
3. This Circular may be affected by changes to legislation. APRA accepts no responsibility for
the accuracy, completeness or currency of the material included in this Circular.
4. Users of this Circular are encouraged to obtain professional advice on the relevant legislation
and to exercise their own skill and care in relation to any material contained in this Circular.
5. APRA disclaims any and all liability or responsibility for any loss or damages arising out of
any use of, or reliance on, this Circular.
6. This Circular is copyright. You may use and reproduce this material in an unaltered form only
for your personal non-commercial use or non-commercial use within your organisation. Apart
from any use permitted under the Copyright Act 1968, all other rights are reserved. Requests
for other types of use should be directed to APRA.
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Contents
Paragraph
Objective
1
Introduction
3
Application of the requirements
5
Implementation
11
APRA/ASIC interface and information sharing
12
Definitions
14
Layout of the requirements
15
General requirements
16
ASE requirements
21
Agreement content
29
Board Sign Off
45
Responsible Board Certifications
49
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Objective
1.
The aim of this Circular is to provide guidance on custodian requirements for
APRA Supervised entities (ASEs). The custodian requirements are directed at insurance
(both life and general) companies and superannuation entities and provide guidance as to
how these ASEs should fulfil their duties to policyholders and fund members.
2.
The requirements are based on the need for these ASEs to satisfy themselves that
the custodian arrangements they have in place to hold their assets are safe, transparent
and clearly understood. This need exists whether the arrangements are internal to
the ASE itself, within the same ‘group of companies’ as the ASE, or undertaken by
an independent and arm’s-length custodian.
Introduction
3.
It is crucial that ASEs ensure that the assets supporting the financial soundness of
an ASE are safely and accurately maintained across various jurisdictions. The
requirements reinforce the duties of the Board of an ASE to fully understand the risks and
responsibilities in their custody arrangements. Whether these arrangements are external
or internal to the ASE, there is a need for these services to be monitored on an ongoing
basis to protect the interests of the clients of the ASE.
4.
While the requirements are focussed on ASEs, there will be consequential effects
on the custodian contract where external custodians are used (refer to paragraph 29
entitled ‘Agreement Content’). The requirements will help to promote consistency in the
terms of custody contracts.
Application of the requirements
5.
These requirements replace previous APRA requirements on life insurers, general
insurers, superannuation fund trustees and others with a single uniform set of principles.
However, they do not displace the need for compliance with the relevant law. The
requirements do not apply to the non-superannuation / non-insurance operation of banks,
credit unions and building societies nor to the non-superannuation operations of friendly
societies.
6.
APRA has avoided an overly prescriptive and all encompassing approach and has,
instead, provided ASEs with discretion as to how to achieve the prudential objectives of
the requirements.
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CUSTODIAN REQUIREMENTS FOR APRA SUPERVISED ENTITIES
Apply to internal and external custody arrangements
7.
The requirements apply whether insurers or trustees act as their own custodian or
engage an external party to act as their custodian. Some of the detail of the requirements
will obviously vary between internal and external arrangements but the principles should
be followed in both cases. Where arrangements are internal to the ASE some of the detail
of these requirements will not be applicable. Many of the concepts and principles,
however, will apply. APRA expects ASEs who hold policyholder and fund member
assets themselves to have considered these requirements and to have implemented
internal arrangements consistent with the requirements.
Intent is for requirements to govern direct and indirect custody arrangements
8.
The intent is that the requirements extend to govern custody arrangements whether
these are direct or indirect. For example, APRA recognises the significant role that
investment mangers play and expect ASEs to arrange their agreements with their
investment managers in such a way as to substantially meet the requirements.
Recognise stricter legislative provisions
9.
While the requirements reflect certain shared aspects of legislation affecting ASEs’
arrangements with custodians, they recognise that where stricter requirements are
prescribed under legislation, these legislative requirements must be adhered to (refer to
Requirement 3).
Do not apply to securities depository arrangements
10. The requirements do not attempt to cover the arrangements which ASEs or
custodians have with securities depositories, either in Australian or overseas. This is
particularly relevant to Requirement 5 relating to the holding of the assets belonging to
ASEs.
Implementation
11. APRA expects ASEs to modify their processes to comply with the requirements as
soon as possible. These requirements were released in final form on 17 December 1999
and APRA expects ASEs to have undertaken a review of arrangements and contracts
existing at that date. Where ASEs perceive that there is divergence between custody
arrangements and contracts and these requirements, the ASE must consider the extent of
the divergence and formulate a plan to move towards compliance with the requirements.
This should be discussed with APRA and must be within a time frame acceptable to
APRA.
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APRA/ASIC interface and information sharing
12. The requirements contain references to the relevant paragraph of ASIC’s Policy
Statements 130 – 133 on Managed Investments: Scheme Property Arrangements. Their
inclusion is to avoid ASEs having to provide different documentation to APRA and ASIC
in relation to their custodial arrangements.
13. Information provided to APRA or ASIC by an entity that details how it meets either
APRA’s requirements or ASIC’s PS 130 – 133 will be exchanged between the regulators.
Where full current information is provided to one regulator, additional information is
unlikely to be required by the other. However, where there is an issue as to currency of
information and/or where the underlying business has changed, both regulators reserve
the right to obtain additional or updated information.
Time frames
14. In line with APRA’s approach of not being overly prescriptive, many of the
requirements do not stipulate a definite timeframe within which events are to occur and /
or, do not stipulate that these timeframes should be set out in the contract. For example,
Requirement 13(2) relating to the transfer of assets upon termination of the custody
agreement simply requires the parties to the Agreement to determine when the assets are
to be transferred. Notwithstanding this, when applying the requirements, parties are
encouraged to adopt a ‘best practice’ approach at all times, this may mean that the
Agreement contains an agreed time frame.
A - Definitions
15.
For the purposes of these requirements, unless a contrary intention appears:
APRA is the Australian Prudential Regulation Authority.
ASEs are limited, for the purposes of this circular, to insurance companies and
superannuation funds. All other non-insurance and non-superannuation operations of
other institutions supervised by APRA are excluded from the operation of these
requirements. Non-superannuation operations of friendly societies are also not subject to
these requirements.
Clients of the ASE mean, but are not limited to, the policyholders or fund members of
the ASE (whichever is applicable).
Custodian1 means the custodian with which the ASE is contracting to provide
safekeeping services for the assets of the ASE. These requirements apply to internal and
external custody arrangements as appropriate.
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Subcustodian1 includes an entity appointed by the Custodian to hold assets of the
Custodian’s clients on its behalf but excludes securities depositories.
Agreement1 means any custody contracts, direct or indirect, between the ASE and
Custodian.
Relevant Law means, but is not limited to, any requirement of the Insurance Act 1973,
Life Insurance Act 1995 and Superannuation Industry (Supervision) Act 1993, including
any other associated Acts, regulations, APRA circulars, determinations, orders and
directions.
1
These definitions can be used to interpret the Australian Securities and Investments Commission (ASIC) Policy Statements
(PS) 130 – 133.
Layout of the requirements
16. These requirements apply at different levels and the layout of the requirements
reflects these different applications. Following the definitions, contained in section A (at
paragraph 15 of this circular), the requirements have been divided under the following
headings:
B.
General requirements
This division contains requirements that pertain to the arrangements as a
whole between ASEs and the custodian.
C.
ASE requirements
This division sets out the specific responsibilities of ASEs and covers the
issues that the Board of an ASE must specifically examine and understand in
entering or continuing custody arrangements.
D.
Agreement Content
The requirements under this division set out certain terms and guidelines as to
terms that must be included in the custody contract between ASEs and
custodians.
E.
Board sign off
This division consists of two (2) certificates that the Board of the ASE is
required to sign – one before the appointment of a custodian and the other on
an annual basis.
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B - General requirements
Requirement 1 – Assets to be held in Australia1
17. Assets (including guarantees) required to be held in Australia by an ASE under the
Relevant Law should be held in Australia by the Custodian or its Subcustodian.
1
Whilst not specifically referred to in ASIC Policy statements 130 – 133, ASIC must be advised where this requirement is not
met by the Responsible Entity and an appropriate explanation provided.
Requirement 2 – Custody contract to be executed in Australia1
18.
The agreement with the ASE should be executed in Australia.
1
Whilst not specifically referred to in ASIC Policy statements 130 – 133, ASIC must be advised where this requirement is not
met by the Responsible Entity and an appropriate explanation provided.
Requirement 3 – Stricter legislative requirements apply1
19. Notwithstanding any of these requirements, where stricter legislative requirements
are contained in the Relevant Law, these should be observed.
1
Whilst not specifically referred to in ASIC Policy statements 130 – 133, ASIC must be advised where this requirement is not
met by the Responsible Entity and an appropriate explanation provided.
Requirement 4 – Arrangements when general insurer is a branch insurer1
20. Any Agreement entered into by an authorised insurer that operates in Australia as a
branch, should be entered into directly by the insurer’s Agent in Australia. The power to
issue instructions under the Agreement should be limited to the Agent or persons
appointed in writing by the Agent.2
1
This is only pertinent to APRA.
2
The combination of branch and Subcustodian increases the risk of prudential regulation being affected by overseas
authorities. To guard against this risk, stricter standards apply in such a case to ensure local control.
Requirement 5 – Holding of ASE assets1
21. The assets (other than cash) of the ASE2 should be kept separate and distinct from
the Custodian’s own assets. Full identification of the ASE’s assets should be made in the
Custodian’s books of account and internal and external audit processes should be able to
verify this. When contracting with the Custodian, an ASE should also consider whether
it is practical or desirable for identification to be made at other levels, having regard to
market practices. The assets of life and general insurance companies are not required to
be registered in the name of the insurance company.
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1
The ASIC equivalent to this requirement is PS 133.12 and 133.30ff.
2
In the case of life companies, the Life Insurance Act 1995 requires that the assets of each statutory fund be kept separate and
distinct. In practice this will require the use of unique accounts or sub-accounts by the custodian. It does not require that the
custodian maintain assets registered in the name of individual statutory funds of the life company.
C – ASE requirements
Requirement 6 – ASE to monitor and assess the Custodian’s performance1
22. APRA expects the ASE to implement a demonstrable process to monitor and assess
the performance of the Custodian on an ongoing basis.
1
The ASIC equivalent to this requirement is PS 130.36(b), 133.25 and 133.26.
Requirement 7 – ASE to ensure protections are in place to minimise any custodial
risks
7(1) APRA expects the ASE to undertake regular checks and seek information from
the Custodian as to its audited internal controls, organisational structure, staffing
capabilities, administrative resources and arrangements for holding the ASE’s
assets.
23. APRA expects the ASE to conduct regular checks and seek information to satisfy
itself that the Custodian’s audited internal controls are adequate and continue to operate
effectively. The ASE should consider whether these controls ensure that its assets are
secure and whether the Custodian has appropriate procedures for the acceptance and
implementation of authorised instructions. The ASE should seek periodic information
from the Custodian in respect of the adequacy and effectiveness of such controls, and
actions taken or planned, to address any concerns.1
24. APRA expects the ASE to ensure that the Custodian has and continues to have, the
appropriate organisational structure, staffing capabilities, administrative resources and
arrangements for holding the ASE’s assets.2
1
The ASIC equivalent to this requirement is PS 130.36, 133.25 and 133.26.
2
The ASIC equivalent to this requirement is PS 133.4 – 133.12, 133.25 and 133.26.
7(2) ASE to satisfy itself as to the Custodian’s process of selecting, monitoring and
reviewing its Subcustodians1
25. APRA expects the ASE to satisfy itself as to the continued effectiveness of the
Custodian’s process of selecting, monitoring and reviewing (including the testing and
auditing of the operations of) its Subcustodians.
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1
The ASIC equivalent to this requirement is PS 130.36, 133.20(g), 133.25 and 133.26.
7(3) ASE to satisfy itself as to the financial strength of the Custodian and where
reliance is placed on insurance, satisfy itself as to the adequacy of that insurance1, 2
26. APRA expects the ASE to satisfy itself that the Custodian has the requisite
financial strength to fully, and in a timely manner, meet any liabilities to the ASE that
may arise under the terms of the Agreement. In considering whether the Custodian has
the requisite financial strength, the ASE should consider the adequacy of insurance or
guarantee arrangements, and / or capital (or any combination of the foregoing) of the
Custodian.
27. In seeking to rely on the insurance arranged by the Custodian, the ASE should
understand the practical manner in which any loss would be recovered3 and determine
that the arrangements are satisfactory to protect the Clients of the ASE.
1.
The ASIC equivalent to this requirement is PS 130.36, 131.20 ff, 133.20(e), 133.25 and 133.26.
2.
This requirement should be read in conjunction with Requirement 11(2).
3.
For example, by making a claim against the Custodian who in turn will claim against its insurer.
7(4) ASE to satisfy itself as to standard of reasonable care and which risks are borne
by whom1
28. The Agreement should at least provide2 that the Custodian accepts liability based on
the standards of reasonable care applicable in relevant markets. It is therefore incumbent
on the ASE, from time to time, to monitor market practices as to the standards of
reasonable care that apply in these markets and to ensure that they are acceptable in the
context of the ASEs obligations to its clients.
29.
The ASE should clearly understand and satisfy itself as to the:
• types of risk borne by the ASE; and
• risks for which the Custodian does not accept liability. (For example, the
Custodian may not accept liability for losses arising from the insolvency of its
Subcustodians, or investment related events such as counterparty default)
1
The ASIC equivalent to this requirement is PS 130.36 and 133.25.
2
As per Requirement 11(2).
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D – Agreement content
Requirement 8 – Agreement to state it is subject to Australian law1
30. The Agreement should provide that it is to be subject to the laws of an Australian
State or Territory and the non-exclusive jurisdiction of the courts therein.
1
Whilst not specifically referred to in ASIC Policy statements 130 – 133, ASIC must be advised where this requirement is not
met by the Responsible Entity and an appropriate explanation provided.
Requirement 9 – General provisions to be contained in Agreement1
31.
The Agreement between the ASE and the Custodian must clearly specify:
• the nature of the arrangement and the obligations of each party;
• how the Custodian will provide assurances to the ASE that it meets the
applicable standards set out in these requirements2; and
• that the Custodian is prohibited from taking a charge, mortgage, lien or other
encumbrance over, or in relation to, assets of the ASE. The Custodian may,
however, do this for expenses and outlays made within the terms of the
Agreement (but not including unpaid Custodian or Subcustodian fees).
1.
The ASIC equivalent to this requirement is PS 133.20(a), 133.20(b), 133.20(c) and 133.20(f).
2.
For example, the Custodian may be able to provide ‘comfort’ letters from auditors, at pre-agreed intervals, that the custodial
system and its implementation are in accordance with the agreed standards.
Requirement 10 – Agreement should specify how the ASE’s ownership is
established1
32. The Agreement should clearly cover how records identifying the assets will be
maintained and the verification procedures for the reconciliation and auditing of the
ASE’s balances employed by the Custodian2.
1.
The ASIC equivalent to this requirement is PS 133.20(h).
2.
The parties to the Agreement are to determine the extent and detail of this Agreement provision.
Requirement 11 – Agreement provisions to facilitate safe keeping of ASE’s assets
11(1) Agreement to provide for giving of instructions, reports and notifications1
33. The Agreement should clarify how the ASE will give authorised instructions to the
Custodian, and how and when the ASE will receive periodic reports, including
notifications of any transfers to, or from, the ASE’s account.
1.
The ASIC equivalent to this requirement is PS 133.20(d) and (i).
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11(2) Agreement to provide for Custodian accepting liability1, 2
34.
The Agreement should provide that the Custodian accepts responsibility for
liability arising from its failure or failure of its agents and / or its Subcustodians to
exercise reasonable care, based on the standards applicable to the Custodian in the
relevant market3.
35.
The Agreement should provide that in the event the ASE suffers loss due to those
acts/omission for which the Custodian is liable, or accepts liability for (as above), the
Custodian will make the ASE ‘whole’ and independently pursue its rights against the
agent and / or Subcustodian4.
1.
The ASIC equivalent to this requirement is PS 133.20(e).
2.
This requirement should be read in conjunction with Requirement 7(4).
3.
This will include compensating the ASE for the value of the assets lost. The issue of compensation for consequential loss is to
be agreed upon between the parties or settled by a court of law.
4.
This requirement does not in any way interfere with the Custodian’s right of bringing suit against its agents or Subcustodians. A
suit may be brought at any time and any liability of the Custodian to the ASE under the Agreement is independent of the
Custodian’s rights against any agent or Subcustodian.
36. Requirement 11(2) is a major cornerstone of the requirements. This requirement
relates to provisions of the custody agreement connected to the custodian accepting
liability for its agents and sub-custodians (paragraph 33) and for the custodian making
good certain losses which the ASE suffers (paragraph 34).
37. The rationale of this requirement is for the ASE to be able to recover its losses from
the custodian with whom it has a contract, without being required to look further down
the custody chain. Implicit in this requirement is that under no circumstances should the
ASE’s recovery of losses be contingent upon, or postponed to, the custodian successfully
recovering its loss against an agent or subcustodian. In other words, the custodian with
whom the ASE has a contract agrees to pursue its own actions against these other parties,
without making the ASE’s rights dependent upon the success or otherwise of such
actions. Similarly, this requirement makes it clear that the custodian’s right to pursue its
agent or subcustodian is independent of any claim of the ASE against the custodian.
11(3) Appropriate provision to ensure ASE satisfies itself that APRA directions are
able to be followed1
38. The ASE should satisfy itself that any directions given to it by APRA will be able
to be effectively relayed to, and followed by, the Custodian through appropriate
arrangements, including relevant provisions in the Agreement. The parties to the
Agreement are to determine the extent and detail of this Agreement provision.
1.
This is only pertinent to APRA.
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Requirement 12 – Agreement to provide for pre-notification of Subcustodian1
39. The Agreement should provide that before arranging for assets of the ASE to be
held by a Subcustodian, the Custodian will provide the ASE with written notice of the
identity of each Subcustodian with which the assets of the ASE are intended to be placed.
The Agreement should also provide that the ASE will be notified of any subsequent
appointments of new or replacement Subcustodians, at the earliest practicable time
(which may be after an appointment is made).
1
Whilst not specifically referred to in ASIC Policy statements 130 – 133, ASIC must be advised where this requirement is not
met by the Responsible Entity and an appropriate explanation provided.
Requirement 13 – Agreement to stipulate grounds of termination and reporting of
breaches1
13(1) Agreement to provide for instances of right of termination
40. APRA expects that the Agreement should, as a minimum, provide that it is able to
be terminated by the ASE where it has reasonable grounds for believing that the
Custodian is not complying with, or is unlikely to comply with, these requirements, the
Agreement or the Relevant Law.
41. Other grounds for termination which may be set out in the Agreement at the
election of the ASE include:
• where the Custodian is unable or is about to become unable, to meet its liabilities
(for example, because of impending insolvency, external administration or
receivership); and
• where there is a change in the effective control of the Custodian (for example,
through an acquisition or merger).
13(2) Agreement to provide for obligations upon termination, including the transfer
of assets to ASEs
42. The Agreement should provide that upon termination, the assets must be transferred
into the name of the ASE (if not already held in the name of the ASE) or otherwise be
transferred as the ASE lawfully directs (including to another custodian). The timeframe
within which the assets are to be transferred after termination can be agreed upon
between the parties to the Agreement.
43. The Agreement should also provide for other obligations of the parties at
termination, including the payment of any outstanding fees and charges to the Custodian.
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13(3) Agreement to provide for reporting of breaches1
44. APRA expects that the Agreement provisions will facilitate for each material and /
or systemic breach of the Agreement to be brought to the Board of the ASE or its
Compliance Committee for consideration within a reasonable time of the Custodian
becoming aware of the breach2.
1
Whilst not specifically referred to in ASIC Policy statements 130 – 133, ASIC must be advised where this requirement is not
met by the Responsible Entity and an appropriate explanation provided.
2
It is for the parties to the Agreement to determine who is to report which breaches and the process by which these breaches
are brought to the notice of the Board or Compliance Committee.
E – Board Sign Off
Requirement 14 – Board Certification1
14(1) Board of ASE to sign off certification prior to using a Custodian
45. APRA expects the Board of the ASE to sign off the certificate at paragraph 49
before entering into an agreement to use the services of a Custodian.
14(2) ASE to sign off certificate on an annual basis
46. APRA expects the Board of the ASE to sign off the annual certificate at paragraph
50 while using the services of a Custodian.
14(3) Certificates to be retained and made available to APRA upon request2
47. It is not intended that APRA will routinely seek the submission of either of these
certificates. APRA, will, however, expect them to be available at request and when
carrying out on-site supervision activity.
1
2
The ASIC equivalent to this requirement is PS 133.25.
For removal of doubt, it is clarified that the contractual rights of the ASE against the Custodian (including Subcustodians) or
its agents in regard to the custody arrangement are not to be in any way abridged, abrogated, waived or modified to the
detriment of the ASE solely on the basis that the ASE has certified as provided herein. The ASE may wish, as a matter of
abundant caution, to incorporate a provision in the custody agreement to clarify this intention explicitly.
Effect of certifications
48. Requirement 14 and the related certificates play a pivotal role in the operation of
the requirements. These key requirements oblige ASEs to certify upon the appointment
of a custodian and annually thereafter, that the compliance with the requirements is
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occurring. These certificates are to be retained by ASEs and made available to APRA
upon request.
49. Before entering into an agreement to use the services of a Custodian, APRA
expects that the Board of the ASE will sign off a certificate in the following form2:
Responsible Board Certification1
The Board of XYZ certifies that:
1
it is aware that it is responsible for the custody and control of the assets of the
company / fund and for compliance with the Relevant Law where the services of a
Custodian are used.
2
itself and management have made an assessment of the various risks that could
arise for the company / fund from the use of Custodians and have systems in place
to manage those risks.
3
there are adequate systems in place to monitor the operation of the Custodian
arrangements including the identification of, and action in respect of, material and /
or systemic breaches.
4
it is satisfied with the procedures, processes and standard of care of the Custodian
to safeguard the interests of the clients, including to ensure that only properly
authorised transactions are accepted and settled.
5
it is satisfied the Custodian’s administration and reporting systems are adequate to
ensure that legislation is complied with and the risk control measures required by
the ASE are implemented.
6
any risk to the entitlements of its clients resulting from provisions of the proposed
custodial agreement, which reduce the possible liability of the Custodian, are
acceptable in the context of the totality of the totality of the custodian
arrangements.
_______________________________________
1
For the removal of doubt, it is clarified that the contractual rights of the ASE against the Custodian (including
Subcustodians) or its agents in regard to the custody arrangement are not to be in any way abridged, abrogated, waived or
modified to the detriment of the ASE solely on the basis that the ASE has certified as provided herein. The ASE may wish,
as a matter of abundant caution, to incorporate a provision in the custody agreement to clarify this intention explicitly.
2
If the ASE believes that it is unable to sign off on the certificate as worded above, the certificate should be qualified and the
qualifications explained. Where an Agent of a Branch of an ASE signs the certificate, the reference to ‘Board’ should be
changed to ‘Agent’.
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50. APRA expects the Board of the ASE to sign off the certificate below on an annual
basis in relation to its use of the services of a Custodian2, *.
Responsible Board Certification1
Certificate for the period …………………………..to……………………………….
In the opinion of the Board of XYZ Ltd:
1. it is satisfied that the custody agreement has been complied with and that only
properly authorised transactions have been accepted and settled, except to the
extent as detailed in the Attachment**;
2. it is satisfied that in using the services of a custodian, all the relevant requirements
of the Relevant Law have been complied with except to the extent as detailed in
the Attachment*;
3. it is satisfied that the risk controls measures it has implemented are sufficient to
permit it to properly manage any risks to the ASE’s assets in the safekeeping of the
Custodian.
4. the use of the custodian arrangements (including the system of the Custodian to
select and monitor its Subcustodians) continues to be in the best interests of the
Clients of the ASE;
5. it has considered all reported material and / or systemic breaches (if any) of the
custodian Agreement and has either initiated appropriate action or has determined
that no action is appropriate.
6. it is satisfied that during the above period, it has complied with the Custodian
Requirements for APRA Supervised Entities.
*
Instances of non-compliance must be detailed in an Attachment to this Certificate. The details of
action against the Custodian for non-compliance must be provided. Where action has been waived,
the basis on which it was determined that this was appropriate must be specified.
_______________________________________
1.
For the removal of doubt, it is clarified that the contractual rights of the ASE against the Custodian (including Subcustodians) or
its agents in regard to the custody arrangement are not to be in any way abridged, abrogated, waived or modified to the detriment
of the ASE solely on the basis that the ASE has certified as provided herein. The ASE may wish, as a matter of abundant
caution, to incorporate a provision in the custody agreement to clarify this intention explicitly.
2.
If the ASE believes that it is unable to sign off on the certificate as worded above, the certificate should be qualified and the
qualifications explained. Where an Agent of a Branch of an ASE signs the certificate, the reference to ‘Board’ should be changed
to ‘Agent’.
November 2000
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CUSTODIAN REQUIREMENTS FOR APRA SUPERVISED ENTITIES
Certificates
51. Concerns may exist that the certification requirements might adversely affect the
rights’ of ASEs in pursuing custodians in regard to any breach of their obligations under
the custody agreement. APRA emphasises that these requirements are premised on the
need for ASEs to fully understand the risks and responsibilities in the custody
arrangement and monitor the services on an on-going basis. They do not diminish the
contractual rights of ASEs in pursing breaches of custody contracts. In exercising its
prudential role, APRA regularly seeks confirmation that ASEs monitor their service
providers (e.g. investment managers, IT service-providers, insurers etc) on an ongoing
basis without such confirmation precluding contractual rights being exercises. These
requirements in respect of custodians should be seen in the same light. Should, however,
an ASE entering into a custody contract have any concerns about the certifications giving
rise to a waiver in any action against the custodian, these could be addressed through
clarifying in the contract the regulatory reporting requirements to which the certificates
relate. For example, it could be clarified in the agreement that any reporting to the
regulator would not involve the ASE waiving or abridging the ASE’s contractual rights
and obligations.
52. In signing the required certificates, the Board may choose to seek representation
from the custodian or other parties (for example, where the ASE has delegated its duty to
monitor its custodian). If such representations are sought, APRA expects the Board to
make sufficient inquiries to satisfy itself that it is reasonable to rely on such
representations. This does not necessarily require the Board to have an independent third
party to verify the representations but it does mean the Board must have a process to
asses the ‘reasonableness’ of relying on them. For example, relying on a custodian
advising that it has not breached the contract when the ASE has had breaches reported to
it during the year would clearly not be reasonable.
53. In respect of the certification requirements, APRA expects ASEs to have in place
the proper processes to facilitate their sign off as soon as practicable. APRA expects the
Annual Certification to be signed off for all balance dates subsequent to 29 June 2000.
November 2000
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