At the heart of investment fund mechanics, the custodian bank plays a pivotal role, far beyond simply guarding assets. Between compliance monitoring, regulatory oversight, and securing flows, it serves as a strategic trusted third party.
A regulatory function that has become essential
Since the 2008 financial crisis, European regulators have significantly tightened requirements for the security of investment funds. The AIFM Directive and the UCITS Directive require each fund to appoint an independent depositary bank, responsible for the safekeeping of assets and also for a genuine regulatory oversight role.
Concretely, the depository bank ensures:
- The custody of the fund’s assets (physical or dematerialized);
- Monitoring the regularity of management decisions with regard to regulatory documentsand statutory (strategy in the prospectus)
- Cash flow monitoring, in order to detect any anomalies or suspicious transactions;
- Verification of asset valuation and calculation of net asset value (NAV).
It therefore acts as an independent third party, guaranteeing transparency, integrity and investor protection.
A control role reinforced by ESG and tax regulations
With the rise of non-financial regulations (SFDR, taxonomy), the role of the custodian bank is expanding. It must now ensure that funds marketed as “sustainable” meet the stated criteria, particularly through monitoring the ESG policies included in the prospectus or the DIC.
At the same time, it also intervenes in the tax traceability of transactions, in connection with FATCA or CRS obligations, and may be required to exchange with the tax authorities on certain holder data. Its control mission therefore goes well beyond the financial sphere alone, to encompass a more holistic vision of compliance.
A strategic partner in fund structuring
The custodian bank is involved from the fund creation phase, alongside the management company and legal counsel. It plays a key role in validating regulatory documents, setting up the subscription account, selecting international sub-custodians, and configuring operational controls.
Its expertise also allows it to anticipate the regulator’s expectations, adapt the fund’s structuring according to its strategy (private equity, real estate, infrastructure, listed securities, etc.) and guarantee the robustness of the governance system.
This three-party relationship (manager/custodian/regulator) is based on transparency and coordination. The more seamless it is, the faster and more secure the launch or modification of a fund can be.
Towards a progressive digitalization of the depository function
Historically perceived as a low-tech link, the depository function is now evolving thanks to automation and data. Many players are developing tools for automatic flow recognition, irregularity alerts, and multi-asset class reconsolidation.
Some go further with real-time platforms, integrating:
- Dynamic monitoring of VLs and deviations;
- ESG compliance indicators;
- Performance dashboards by compartment or by jurisdiction.
This digital transformation allows custodians to provide new added value: actionable data, in direct support of risk management and compliance.
Often hidden in the shadows, the custodian bank is actually a key player in the soundness of the financial system. It secures, monitors, and alerts—and is becoming a strategic partner in an increasingly regulated and complex investment world.
As alternative assets, ESG requirements, and cross-functional regulations redefine the contours of asset management, custodians that successfully combine regulatory rigor with technological innovation will become more than custodians: true co-pilots of fund transformation.
