Citi/China: joint custody | Monetary Occasions

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There are higher methods of building your credentials as a protected pair of arms than mistakenly transferring $900m. Even so, Citi — red-faced after a mistake involving Revlon collectors — has develop into the primary US financial institution to obtain a Chinese language fund custody licence. The worth of this coveted piece of paper will depend upon fractious geopolitics, offered the financial institution can keep away from additional unforced errors.

Beijing has granted the licence in a broader loosening of economic market regulation. Earlier this 12 months, China permitted international firms to personal their mutual fund companies totally for the primary time. East-west political tensions threaten this easing.

Custody is often too boring for politicians to care about. For banks, it’s reliably profitable. Asset managers pay about 6 foundation factors for administrative companies akin to commerce settlement, extra if funds are small. Greater than $160tn of property beneath custody are largely lined by 4 firms, together with Citi. By itself, the financial institution has over a tenth of the worldwide market.

Quick development makes Chinese language custody extra thrilling than the western model. Chinese language banks compete intensely for enterprise, however Commonplace Chartered and Citi are the one international contenders. As China opens its doorways to offshore funds, demand for international service suppliers ought to develop quickly.

Regulatory dangers loom massive, nevertheless. For instance, the online asset requirement for custody service suppliers which additionally settle trades is predicted to rise quickly to at the very least Rmb40bn ($5.9bn) — a 20-fold enhance.

US sanctions might show to be one other drawback. The US Treasury lately imposed curbs on Hong Kong’s chief govt Carrie Lam, amongst others. These froze the property of named Chinese language residents “in [the] possession of US individuals”, funds included. The enchantment of US custodians diminished accordingly for rich Chinese language individuals.

Citi’s hefty shopper funds and international community would in any other case place the financial institution to prosper in Chinese language custody. If a US presidential victory for Joe Biden sparked a US-China rapprochement, life would develop into pleasingly duller for US banks in China. How they need to want for a world the place clerical errors are their solely drawback.

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