Swiss first-pillar custodian mandate award raises security questions

Thomas Matter, a member of parliament (MP) of the Swiss People’s Party in the national council, the lower house of the parliament, has raised security questions on the government’s decision to replace its global custodian UBS with State Street.

In a motion, the MP asked the Federal Council if it considered it “appropriate that UBS has lost its mandate as global custodian” for the assets of Swiss social security funds AHV, IV and EO, worth CHF40bn (€42.5bn), and that the mandate had been transferred to US-based State Street.

The MP is also asking the government to clarify whether “all securities” held in the AHV, IV, and EO funds – which are managed by Compenswiss – will be deposited with State Street in the future.

He asked about the reasons why the federal government withdrew the mandate from UBS after it engineered the takeover of Credit Suisse in March last year.

Pension funds feared concentration risks in asset management and global custody, and a lack of competition, especially in the global custody business, following the merger of the two banks.

More than two thirds of the schemes in Switzerland had a global custody relationship or contract with UBS (39%) or Credit Suisse (31%), according to a survey released by consultancy PPCmetrics. Pension funds were considering whether to re-tender mandates.

The government decided on 1 July to terminate UBS’s contract for managing the securities in the first pillar pension funds — a contract that ran for 26 years.

The management of the first pillar social security funds “is systemically important” for Switzerland as a country, Matter said in an interview with Blick newspaper.

International securities of first pillar funds will be held by a bank based in the US in the future, and the US government could freeze these assets as part of sanctions, as it did with Russian assets, he noted.

Back in July, Compenswiss said in a statement to a media agency that the custodian bank had purely an administrative function.

“It selects the sub-custodians […] and for State Street the sub-custodian in Switzerland is UBS, so all our Swiss assets remain with UBS, while foreign assets remain abroad,” it added.

The MP is questioning whether it makes sense for “reasons of security” to have first pillar assets managed by a Swiss bank instead of a US-based one.

UBS and Compenswiss did not reply to a request for comment. State Street declined to comment.

The latest digital edition of IPE’s magazine is now available