Do’s and Don’ts of Offshore Fund Custodianship

Offshore fund custodianship looks deceptively simple—open accounts, park assets, get statements—but the real job is protecting investor money across borders, time zones, and asset classes while regulators watch closely. When it’s done well, you barely notice it. When it goes wrong, you’re fighting fires across settlement, cash controls, sanctions, and reputational damage. After years working with fund boards, administrators, and custodians, I’ve learned that most headaches are avoidable with good structure, the right partner, and relentless operational discipline.

What Custodianship Really Covers

A custodian’s core mandate is to safeguard assets and cash. For offshore funds, this spans three practical pillars:

Safekeeping and settlement: Maintaining secure accounts, settling trades, collecting income, and managing corporate actions using a sub-custodian network across markets.

Cash monitoring and control: Opening and operating bank accounts, overseeing subscriptions and redemptions, and ensuring money flows match fund documents and AML/KYC frameworks.

Oversight: Depending on the regime, the custodian (or depositary/depositary-lite) verifies ownership, monitors compliance with the fund’s rules, and flags breaches.

Offshore structures complicate the picture. You may have a Cayman master, a Delaware feeder, a Luxembourg feeder, and multiple SPVs, with a prime broker, a derivatives clearing broker, a subscription line lender, and a trustee or depositary-lite for EU marketing. Keeping custody aligned across these entities isn’t just paperwork—it’s core control over your investors’ assets.

Custodian vs. Depositary vs. Depositary-Lite

Custodian: Holds assets and cash, settles transactions, and manages corporate actions. Liability regimes vary by jurisdiction and contract.

Depositary (full AIFMD): For EU AIFs, the depositary has strict liability for loss of financial instruments in custody and oversight duties across ownership, cash flows, and compliance with fund rules.

Depositary-lite: For non-EU AIFs marketed into the EU via national private placement regimes, a “lite” depositary provides ownership verification, cash flow monitoring, and oversight—but not the full strict liability regime. The operational impact is still significant.

Regulatory Anchor Points (Without the Jargon)

You don’t need to be a lawyer, but you do need to anchor your custody setup to a few key regimes:

Cayman Islands:

Mutual Funds Act and Private Funds Act require a custodian unless not practicable, in which case “title verification” must be provided by an independent party. Directors must document the rationale if there’s no custodian and ensure a robust asset verification process exists.

CIMA expects documented cash controls, valuation policies, and oversight reporting.

EU AIFMD:

Full-scope depositary for EU AIFs with strict liability for loss of assets in custody, plus oversight of cash monitoring, subscriptions/redemptions, and compliance with fund rules.

Depositary-lite under Articles 36/42 for non-EU AIFs marketed into the EU via NPPR. Expect ownership verification, cash flow monitoring, and periodic checks on valuation and compliance.

Jersey/Guernsey/BVI/Mauritius/Singapore:

Each has specific governance and oversight expectations. Even when a full depositary isn’t mandated, regulators expect demonstrable asset safekeeping, cash controls, and independent verification for private assets.

Digital assets:

Jurisdictions such as Cayman (VASP Act), BVI, and The Bahamas have licensing regimes for virtual asset service providers. If you hold crypto or tokenized assets, custody must be with a regulated VASP or equivalent, with documented key management and wallet governance.

The practical takeaway: your custody model must match where you’re regulated, where you market, and the assets you hold. One size rarely fits all.

Do’s and Don’ts at a Glance

Do’s

Do map your entire structure: Every entity, account, sub-custodian, and PB relationship, including who can move cash and how.

Do run a formal RFP: Compare custody, depositary/depositary-lite, FX, and cash banking on capabilities—not just price.

Do negotiate a clear SLA: Include operational KPIs, reporting timelines, escalation paths, and breach handling.

Do review sub-custodian networks: Understand country risks, settlement cycles, and where omnibus vs. segregated accounts are used.

Do implement maker-checker cash controls: Dual approvals, payment templates, whitelist critical beneficiary accounts.

Do test business continuity annually: Walk through a real scenario—market holiday, sanctions hit, ransomware, or a failed sub-custodian.

Do keep signatory matrices current: Update immediately after governance or staff changes.

Do document “not practicable” decisions: If you don’t appoint a custodian for private assets, formalize your verification approach and board approvals.

Do monitor fees and FX spreads: Ask for transparency and benchmark quarterly.

Do run periodic custodian due diligence: SOC reports, cyber posture, overnight batch success rates, reconciliation timeliness, and regulatory breach logs.

Don’ts

Don’t pick on fees alone: The cheapest custodian can be the costliest when settlement fails or assets are stuck in a distressed market.

Don’t let PB rehypothecation run unchecked: Cap rehypothecation, understand title transfer vs. security interest, and tie to risk limits.

Don’t leave derivatives collateral off the map: Margin flows should be monitored with clear controls and daily reconciliations.

Don’t rely on email for payments: Use secure portals, enforce four-eyes approvals, and kill free-form instructions.

Don’t assume tax relief happens automatically: Check capabilities for relief at source and reclaims by market.

Don’t ignore sanctions updates: Screen investors, assets, and counterparties continuously, not just at onboarding.

Don’t delay incident reporting: Regulators and boards expect prompt notification and a documented remediation plan.

Don’t operate with undefined ownership for private assets: Maintain legal opinions, registers, and executed share certificates.

Don’t skip exit planning: Termination notices, lien releases, data extract formats—and the timeline to repaper.

Selecting the Right Offshore Custodian

I’ve seen selection processes go astray by focusing on logos and headline fees. A structured RFP with weighted scoring saves months later.

Step-by-Step Selection

Define your scope:

Jurisdictions and entities, asset types (listed, OTC, private, digital), cash bank accounts, FX needs, securities lending, and any depositary or depositary-lite requirement.

Build a measurable requirements list:

Settlement windows, corporate actions cutoffs, proxy voting, SWIFT connectivity, file/API formats (ISO 20022, SFTP, REST), and reconciliation frequency.

Request transparency on:

Sub-custodian network by market and whether they use omnibus or segregated accounts.

Credit rating of the custodian and concentration of assets by legal entity.

SOC 1/ISAE 3402 (Type II) and SOC 2 reports, plus ISO 27001 certification.

Evaluate operational strength:

T+1 reconciliation coverage, average settlement fail rate (global listed assets typically 2–4% in emerging markets, below 1% in developed markets), and corporate actions election handling.

Interrogate cash and FX:

Do they offer virtual IBANs to help reconcile flows? What’s the FX spread policy? Can they provide transaction-level FX markup reporting?

Assess private asset competency:

Ability to perform ownership verification, maintain registers of shareholders, escrow management, and document custody for share pledges and debt instruments.

Test technology:

Real-time dashboards, STP rates, open APIs, two-factor authentication for portals, and role-based access control.

Demand a draft SLA with KPIs:

Examples: 99.5% STP on listed settlements, T+1 cash and position reconciliations with daily break aging reports, corporate actions election confirmation within two hours, and incident escalation within 24 hours.

Get references:

Speak with clients that match your asset mix and jurisdictions.

Price holistically:

Compare safekeeping basis points, transaction charges, corporate actions fees, proxy fees, cash account charges, FX spreads, and any depositary/depositary-lite fees. Normalize using your expected volumes and AUM profile.

What I Look for Personally

A head of operations who can explain how they handled their last major outage.

Evidence of quarterly sub-custodian due diligence updates.

Transparent FX markup reporting; willingness to benchmark.

A data extract you can actually use, not a PDF-only report pack.

Onboarding Without the Logjam

Custody onboarding can take 4–10 weeks depending on jurisdictions, KYC complexity, and account structures. A disciplined plan reduces friction.

The Document Pack That Moves Fast

Corporate documents: Certificate of incorporation, M&As, registered office confirmations, board minutes authorizing account opening, and chart of the entire structure showing UBOs.

Fund documents: Offering memorandum, subscription documents, valuation policy, side letter register (if governance-related), and the latest financial statements.

KYC/AML: Director IDs, proof of address, source of funds/wealth summary for the fund, investment manager license/registration, and administrator details.

Banking/cash: List of authorized signatories with specimen signatures, dual approval rules, and payment templates for administrators and portfolio companies.

Private assets: Registers of members, share certificates, SPV organizational charts, shareholder agreements, and any pledge or escrow agreements.

Practical Onboarding Tips

Pre-clear markets: Some markets require beneficial owner IDs or tax forms. Start W-8BEN-E/W-9, GIIN confirmations, and market-specific tax docs early.

Stage asset migration: Avoid moving everything at once. Start with cash accounts, then listed assets, then complex OTC and private holdings.

Freeze windows thoughtfully: Coordinate blackout periods with the administrator and managers to avoid settlements colliding with NAV strikes.

Parallel run: For two weeks, reconcile both old and new custody statements to catch gaps before flipping the switch.

An Operating Model That Actually Works

The most valuable controls are the ones you use every day. Here’s the operating model I recommend and have seen work.

Cash Control Framework

Dual approvals and maker-checker: No exceptions, even for small amounts.

Whitelist key beneficiaries: Administrators, recurring brokers, portfolio companies. Any new beneficiary triggers enhanced checks.

Use secure channels only: Custodian portals with two-factor authentication or SWIFT. Ban email instructions.

Standing instructions with expiry: Time-limit payment templates to force periodic review.

Daily cash reconciliation: Administrator reconciles bank accounts to the accounting system; the custodian provides same-day statements and intraday sweeps.

Reconciliations and Break Management

T+1 position and cash reconciliations with automated break capture.

Age breaks and set materiality thresholds: For example, investigate same day for any break over 10 bps of NAV or $50k, whichever is lower.

Root-cause and close: Settlement fail? Track reasons—counterparty mismatch, market holiday, missing tax form—and fix the cause, not just the instance.

Corporate Actions and Income

Election tracking with confirmation: Custodian should confirm receipt of your election within two hours.

Record proof: Store notices, elections, and confirmations in a central repository tied to the position.

Income accrual validation: Reconcile expected vs. actual income; investigate shortfalls promptly.

FX and Cash Sweeps

Policy-based FX: Define approved currencies, hedging rules, and who can trade. Custodian FX can be convenient, but compare quotes or use a multi-bank platform.

Interest and sweep terms: Negotiate credit interest on cash and specify sweep frequencies. Ask for transparency on net vs. gross interest.

Collateral and Derivatives

Map every CSA and control account: Who posts collateral, under what thresholds, and where it sits.

Automate margin calls where possible and reconcile daily.

Tri-party arrangements: Ensure control agreements give you visibility and a clear path to seize collateral on default.

Private Assets and Hard-to-Custody Instruments

Private equity, real estate, credit, infrastructure, trade finance—offshore funds increasingly hold assets that don’t “sit” in a traditional custodian account. You still need robust custody-equivalent controls.

Ownership Verification and Record-Keeping

Maintain definitive evidence: Executed share purchase agreements, share certificates, board resolutions, registers of members, notarial confirmations where appropriate.

Independent verification: If no custodian is appointed for private assets, engage an independent party to verify title and existence; document the methodology and frequency.

Control of original documents: Decide who holds original certificates (custodian, counsel, or registrar) and how they’re protected (vault, dual-control access, digitized copies with hash verification).

Cash Flows and Monitoring

Subscription/Deferred call controls: Link capital calls to documented investment approvals. Custodian or administrator should match receipts to calls.

Escrows and lockboxes: Use neutral escrow agents for complex closings; keep control agreements precise on release conditions.

Common Pitfalls

Relying on emails and PDFs as “evidence” of ownership without updating legal registers.

Missing pledge perfection steps for secured lending.

Not tracking covenants tied to collateral, risking leakage of value.

Working with Prime Brokers and Depositary-Lite

Hedge funds often rely on prime brokers (PBs) for financing and execution. That introduces custody nuances.

PBs vs. Custodians

PB accounts may be omnibus and subject to rehypothecation. Understand whether you’ve granted title transfer or a security interest.

Cap rehypothecation and align with the fund’s leverage and liquidity risk appetite.

Use a “custody plus PB” model where liquid assets sit with a custodian and are moved to PBs as needed for financing. Depositary-lite providers usually prefer this.

Depositary-Lite Oversight

Expect monthly or quarterly reviews of:

Ownership verification across PB and custodian accounts

Cash flow monitoring for subscriptions/redemptions

Compliance checks against the fund’s offering documents (investment limits, borrowing, valuation frequency)

Provide them direct data feeds from PBs and custodians to avoid manual gaps.

Practical Guardrails

Daily PB-custodian reconciliations for transfer balances.

Standardize margin reporting and keep a single source of truth for exposure.

Embed PB terms into your risk policy—especially close-out netting, rehypothecation caps, and margin call timelines.

Digital Assets Custody Offshore

If you hold crypto or tokenized assets, your custody discussion changes fundamentally.

Key Principles

Wallet governance: Cold, warm, hot wallet policies; multi-approval workflows; segregation at fund level; and address whitelisting.

Key management: Multi-party computation (MPC) or hardware security modules (HSMs), with dual controls and formal key ceremonies.

Insurance: Crime and specie cover is possible but read exclusions carefully (e.g., social engineering).

On-chain transparency: Proof-of-reserves can add comfort, but it doesn’t replace legal ownership or counterparty risk assessment.

Controls That Matter

Transfer approvals: Require multiple approvers for any outgoing crypto transfer above a set threshold.

Chain analytics: Screen addresses for sanctions and AML risks using a recognized provider.

Reconciliation: Match wallet balances to the books daily; reconcile staking rewards and slashing events.

Jurisdictional compliance: Use VASPs licensed in a credible jurisdiction and align with Travel Rule obligations via compliant messaging networks.

Cross-Border Tax, Income Collection, and Class Actions

A good custodian earns its keep on the small things that compound over time.

Withholding tax relief:

Relief at source can add 10–25 bps of annual yield in some markets. Confirm which markets your custodian can handle and the documentation required.

Reclaims: Track statute of limitations by market (commonly 1–4 years) and ensure your administrator and custodian coordinate.

Beneficial owner requirements:

Some markets require registries or specific tax IDs. Start early, especially in emerging markets where processing can take months.

Class actions and shareholder litigation:

Confirm whether the custodian enrolls you automatically for eligible cases and how proceeds are claimed and allocated.

Securities lending:

If you participate, ensure alignment on collateral, indemnification, borrower quality, and recall timelines. Understand the revenue split and how it’s reported.

Oversight, Monitoring, and Audits

Custodianship isn’t “set and forget.” Build a cadence and measure it.

Board and Manager Reporting

Monthly service pack:

Position and cash reconciliations with aged breaks

Settlement fail rates and reasons

Corporate actions processed and pending elections

FX volumes and average spreads

Incident and breach log with status and remediation

Quarterly review:

SLA KPIs vs. targets with root-cause analysis for misses

Sub-custodian changes and market risk updates

Cybersecurity posture updates (notable patches, pen test highlights)

Regulatory developments affecting asset holding or reporting

Assurance You Should Ask For

SOC 1/ISAE 3402 Type II: Controls over financial reporting—non-negotiable for administrators and custodians.

SOC 2: Security and availability controls, especially if you rely on their portals and APIs.

ISO 27001 certification and results of recent penetration testing (at least a summary).

Data retention and privacy policy aligned with your investor jurisdictions (e.g., GDPR for EU investors).

KPIs That Actually Matter

Settlement efficiency: >99% on developed markets; justify and address exceptions.

Reconciliation timeliness: T+1 for positions and cash, with >95% breaks under 3 days old.

Corporate action election timeliness: >99% within custodian cutoffs.

Incident response: Initial acknowledgment within 24 hours; root-cause analysis within 10 business days.

Fees, Conflicts, and How to Negotiate

I’ve watched managers leave 10–20 bps on the table because they didn’t look past the safekeeping basis points.

Know the Fee Levers

Safekeeping fees: Basis points on AUC, tiered by market risk or asset class.

Transaction fees: Per-settlement ticket charges, often higher in emerging markets.

Corporate actions and proxy: Charge per event or per instruction.

Cash and banking: Account maintenance, payment fees, intraday statement fees.

FX: Spread over mid or over interbank—often the least transparent element.

Depositary/depositary-lite: Flat fees plus incremental charges for complex assets or multiple vehicles.

Practical Negotiation Tips

Standardize definitions: Ensure “basis points” apply to the same AUC measure and exclude double counting (e.g., PB-held assets).

Benchmark FX: Ask for periodic TCA (transaction cost analysis) or allow third-party price checks for larger trades.

Push for committed SLAs: Tie chronic underperformance to fee credits.

Manage conflicts: If the custodian’s affiliate is your PB, securities lender, or FX desk, document conflict management and reporting lines.

Operational Resilience, BCP, and Incident Response

The average time to recover from a major operational outage varies widely, but recovery time objectives (RTO) of 2–6 hours and recovery point objectives (RPO) of near real-time for critical systems are realistic targets for tier-one providers. Validate them with evidence.

What to Verify

Data replication: Are they using multi-region replication with immutable backups?

Crisis communications: Named contacts and escalation paths, including after-hours.

Run-book drills: Ask for their last test scenario and what they changed afterward.

Ransomware readiness: Segmented networks, endpoint detection, and offline backups.

Sanctions and AML triggering events: How fast can they freeze, notify, and segregate assets?

Your Incident Playbook

Define internal roles: Who assesses financial impact, who informs the board, and who manages the custodian relationship.

Timeline discipline: Acknowledge within hours; follow with a facts-only update; agree a remediation timeline.

Evidence: Preserve logs and communications. If you need to report to regulators, having clean evidence reduces friction.

Investor Communications and Special Events

Custodians play a quiet but pivotal role when the fund’s normal flow is disrupted.

Subscriptions and redemptions:

Deposit confirmations should hit the admin and custodian promptly with a unique reference. Mismatched references are a frequent source of reconciliation breaks.

For gates or suspensions, ensure custodian portals are updated and payments are disabled to prohibited beneficiaries.

NAV errors and restatements:

Use the custodian’s data as an independent source for back-out calculations.

Confirm whether the custodian’s contracts address liability and process for operational losses.

Side pockets and side letters:

Coordinate on account structure and access rights, especially for side-pocketed assets that require dedicated custody.

Building Your Exit Plan

You hope to never use it, but you’ll be glad it exists.

Termination provisions:

Notice periods (often 30–90 days), asset transfer timelines, and what triggers lien release.

Data migration:

Define formats for historical statements, corporate action history, tax documents, and reconciliations. Test a sample extract.

Open items:

Identify pending income claims, tax reclaims, unsettled trades, and corporate actions. Agree on who finishes what.

Investor communications:

Inform administrators and auditors early; silence breeds suspicion.

Quick Checklists

Board-Level Custody Checklist

Approve custody/depositary appointments with documented rationale.

Review and sign off on SLAs and KPIs.

Confirm asset ownership verification approach for private assets.

Receive quarterly service pack and incident logs.

Review BCP and cyber assurance annually.

Confirm fee benchmarking and conflict management.

Manager/COO Daily–Monthly Cadence

Daily: Cash and position reconciliations, FX review, margin/collateral checks, corporate actions dashboard.

Weekly: Aged break review, settlement fail root-cause, new beneficiary whitelists reviewed.

Monthly: SLA KPI review with custodian, fee and FX benchmarking, sub-custodian market changes, sanctions and PEP screening updates.

Common Mistakes I See (And How to Avoid Them)

Treating the custodian as a vendor, not a control partner:

Fix with quarterly service reviews, shared incident post-mortems, and joint process improvements.

Static signatory lists:

Implement a 90-day review cycle; stale lists are a fraud risk.

Ignoring the sub-custodian map:

Ask for updates and watch for geopolitical or regulatory changes in markets you use.

Incomplete private asset records:

Make a data room the single source of truth—fully executed documents, registers, and ownership evidence.

Overreliance on emails for time-sensitive actions:

Move elections and payments to structured workflows with confirmations and audit trails.

Underestimating FX costs:

A 10–20 bps hidden spread on recurring flows can erode returns. Benchmark and negotiate.

A Practical Path Forward

If you’re standing up or refreshing your custody model, here’s a no-nonsense plan that works:

Map your structure and asset mix; decide whether you need a depositary or depositary-lite.

Run an RFP with measurable requirements and insist on a draft SLA.

Negotiate FX transparency and conflict management up front.

Build a robust onboarding pack; stage asset transfer and do a parallel run.

Enforce daily reconciliations, strict cash controls, and election workflows.

Implement monthly service reviews and annual onsite due diligence.

Document your incident and exit playbooks; test them.

The right custodian makes your fund stronger: smoother settlements, tighter cash controls, better investor confidence, and fewer compliance surprises. The wrong fit bleeds time and basis points. Focus on operational substance, not just a glossy name, and you’ll set your fund up for durable, scalable control over the assets your investors trust you to protect.