Fennell Betson asks what level of responsibility custodians are taking for their pension funds clients' assets in Asia

Every time a frisson or more se-vere sets of shock waves go through the investment world, the question of the security of custody networks surfaces. Nowadays, when one shock wave has subsided, another is frequently pulsating through the system, and the interest in the issue is constantly high.

But what happens if you are not a big investor and you do not have a global custodian, but you do have concerns about your assets being invested in the Far East? This was the issue facing the Dublin-based pension fund of Fás, the government training and employment authority. With assets of around Ir230m ($317m), it knows it is not the biggest player in the world.

Oliver Egan of Fás explains: What we are trying to do is to make sure that the custodian agreements we have fully protect the assets. We want to know what exactly is going to happen if there is a banking collapse in Japan and where that leaves us." Looking at what happened in Korea and elsewhere, he says that people are less inclined to take things on trust.

When they made enquiries of their investment managers, the initial reaction from one manager in particular was "to make reassuring noises". "They pointed out that we are getting exactly the same treatment as everyone else and that they can only give a certain degree of security."

After full discussions with the managers (the scheme currently uses four: AIB Investment Management, Bank of Ireland Asset Management, Irish Life Investment Managers and the recently ap-pointed Standard Life), Egan says that matters are now at an ad-vanced stage of negotiation. "We feel we have agreed a suitable guarantee that we are happy with."

Fás had been concerned particularly with the custodial agreements and says that these are now being amended. "We were able to put in something that provided protection to us in the event of anything going dramatically wrong. It was not a full guarantee of the sub-custodian, but it limits our exposure to what we consider to be a very acceptable level."

In such discussions, he says, there is always the question of how far you want to go. He asks: "How do you get around this, without compromising your relationship with your manager, with whom your are otherwise happy?"

The scheme is due to review its managers later this year and may take the opportunity to look at the question of appointing a global custodian.

The concerns that Fás has are similar to those of other users of investment management services. As Regine Besnier-Docet, head of marketing and sales for Credit Agricole Indosuez securities services in Paris notes, clients are placing much greater emphasis on credit ratings. "What is happening in Asia will reinforce it. Our clients are very interested in knowing what sub-custodians they are working with."

Much of this concern and interest were originally triggered by the Barings crisis, where clients having money with the bank could have lost it had not the bank been bought. At CICM, the international asset management arm of Commerzbank in Frankfurt, Richard Schneider says that because of the discussions with clients after the Barings episode, "the aftermath of the Asia crisis was not an issue".

He says that the Barings and the more recent crises has pushed a number of clients into going the global custody route. For investment clients who do not have such relationships, CICM naturally enough uses the network of Commerzbank, its parent and in the Far East region, the bank will use big players such as HSBC or Citibank.

At CICM, a similar situation did arise for a small number of clients who looked for additional security. "There have been demands,just one or two instances from Asia, but after we explained the situation and said that 'you accept some kind of risk or you do not invest'. That message was more or less understood, you cannot have your cake and eat it."

For those who choose Midland Security Services for global custody, the matter is very clear cut. Kevin Sims of MSS says: "Any of our clients who have securities held through us need not worry, be-cause we take full liability for our agents in our legal agreements, whether they are group members or not." About half of Midland's 66 sub-custodians are outside the group. "Group companies only get ap-pointed as sub-custodians if they are the best in a market."

But one problem that each successive crisis brings,is that the well- established global custodians can suffer from capacity problems and may not be prepared to take on more clients, just at the time when the need for their services are most pressing."