5 questions you should ask your custodian about outsourcing

It’s fairly common for custody banks to outsource day-to-day securities processing work to external vendors – both domestically and overseas. Since this can introduce both risks and benefits, here are five due-diligence questions you should ask when considering potential custody providers.

Tags: Custody, International, Risk mitigation
Published: May 19, 2022

Question 1: What work do you outsource?

Outsourcing, or contracting work to an outside party, can be done for a variety of reasons. It becomes problematic if communications gaps emerge – which may lead to errors, delays or a decline in quality. However, it can also present some potential advantages:

  • Expense reduction
  • Gains in productivity
  • Labor flexibility
  • Greater specialization
  • Increased capacity
  • Skillset-specific efficiencies and more

 

Question 2: How much outsourced work is offshored?

Offshoring, or outsourcing work to a vendor in another (usually less-expensive) country, can be done for similar reasons – but usually cost cutting is the primary driver. When a service partner offshores key functions, additional risks emerge. Complications to consider include:

  • Communications gaps
  • Pandemic preparedness
  • Time zone delays
  • Increased turnaround times
  • Cultural and language differences
  • Political turmoil
  • Misaligned holidays and office closures

 

Question 3: How will your outsourcing/offshoring impact my day-to-day activities?

Work that’s outsourced – and specifically offshored – can often add disruptions to the course of daily operations. The best partners prioritize proactiveness, responsiveness and flexibility to ensure you’re able to get what you need when you need it. Ask these questions to assess compatibility:

  • What are your turnaround times?
  • What are your response times?
  • What’s your client service approach?
  • What’s your ability to accommodate urgent requests?
  • How do you accommodate time zone difference?
  • What’s your location strategy today and into the future?

 

Question 4: How do you maintain regulatory compliance?

A great wealth of experience, expertise and technology often resides in a custody provider like U.S. Bank. Relying on the centralized resources of a knowledgeable partner can be a key step toward staying in sync with regulators and best practices.

Compliance becomes more difficult when a provider adds additional links to the outsourcing chain. Keeping vendors in check requires diligent oversight, so you should confirm that your custody provider has a framework in place to ensure governance, manage risk and maintain business continuity.

 

Question 5: Do the potential cost savings outweigh the potential financial and reputational risks?

Every situation is unique, so it’s crucial to find the right custody provider that’s best suited to your specific needs. It’s important to assess your short- and long-term goals to determine the best balance of potential cost savings to potential risk.

The client-provider relationship often suffers when a provider starts offshoring too many essential functions, which can in turn reduce the control of the client and custodian. If your provider is outsourcing tasks and you feel it’s impacting their level of service, that’s a clear sign it’s time to reassess.

At U.S. Bank, we don’t use domestic sub-custodians, and we maintain direct depository relationships with domestic clearing organizations, including but not limited to the DTC, FED and NSCC.

 

Learn how we can help you with your custody needs. Visit us at usbank.com/custody.