Custody Is Not a Warehouse. It Never Was.

A category of assumption in financial services never gets challenged because it lives in the wrong part of the conversation. Not strategy. Not risk. Operations. Because it lives there, it quietly costs firms money for years without anyone noticing, or, more precisely, without anyone deciding to notice.

Custody is one of those assumptions.

Ask most senior executives what their custodian does, and you’ll get some variation of the same answer: they hold the assets, settle the trades, keep everything safe. Which is true. It’s also roughly as complete as saying a CFO’s job is to count the money. Safety and settlement are the entry requirements, not the service ceiling. What sits above them, and what most firms are systematically failing to access, is an entirely different conversation.

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The Situation

In 2021, I reviewed the cost structure of a mid-tier asset manager. Standard work. The kind of exercise where you expect to find a few contract renewals overdue, some vendor consolidation opportunities, the usual operational drift. Custody appeared in the analysis as a line item under operational overhead. No flag. No red circle. Just another fixed cost being paid on time every quarter, which apparently meant there was nothing to discuss.

I pushed to look at the actual relationship, not just the invoice. The operations lead looked mildly confused. “We haven’t had any issues,” he said. That sentence, I’ve learned over the years, is the one that should worry you most.

What we found when we looked properly wasn’t a disaster. It was something subtler and, in some ways, worse: a slow, systematic bleed that had been running unexamined for three years. Securities lending revenue was sitting uncollected, the programme existed in theory, but the commercial terms had never been optimised and monitoring had lapsed. Collateral was being posted inefficiently across three trading desks that were operating independently, each solving its own problem without any view of the aggregate drag. And withholding tax reclaims on European dividends, treaty benefits the firm was legally entitled to, had not been filed in eighteen months. The money wasn’t lost. It was just sitting unclaimed inside a process nobody had thought to run.

I’ll be honest about what I felt when we quantified it. Not vindicated. Uncomfortable. Because the operations team were competent people who hadn’t been negligent, they’d been under-resourced, under-informed about what was available, and operating inside an unspoken organisational assumption that custody was a settled, closed question. Nobody had told them otherwise. And I’d been in enough boardrooms to know that nobody was going to volunteer that conversation upward unprompted.

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What Custody Actually Is

**Securities lending is not a passive income stream.** The mechanics are familiar enough: the custodian lends holdings to counterparties in exchange for collateral and a fee. But the difference between a well-run securities lending programme and a poorly managed one isn’t marginal. It depends on the split negotiated with the custodian, the demand profile of the underlying securities, the quality of counterparty selection, and whether the programme is being actively monitored against market benchmarks. Dormant assets, equities held through a long-only strategy, bonds held to maturity, are not dormant from a lending perspective. They are inventory. Whether that inventory earns anything depends entirely on whether someone is paying attention. Most firms I’ve reviewed aren’t.

**Collateral management is where capital efficiency lives or dies.** When trading desks operate independently, which they almost always do, collateral decisions get made locally without visibility into the portfolio-wide position. The result is duplication: the same eligible assets being used multiple times across margin calls and counterparty obligations, but not optimised for where they create the least drag. A custodian with proper collateral management infrastructure sees the whole picture and can route assets to minimise capital consumption. The firms using this well have a structural cost advantage over the ones still running the three-spreadsheets-in-parallel model. This isn’t a sophisticated observation. It’s just one that requires someone senior enough to demand the conversation and junior enough to actually sit in the operational detail. That overlap is rarer than it should be.

**Tax reclamation is money most firms don’t know they’re owed.** Cross-border dividend payments are subject to withholding tax under domestic rules, but double taxation treaties between countries create entitlement to reclaim the difference. The process is administrative: filings, deadlines, documentation requirements that vary by jurisdiction. It’s also the kind of work that falls between the custodian’s scope and the internal tax team’s awareness if the relationship isn’t actively managed. Eighteen months of uncollected reclaims on a European equity allocation isn’t an edge case. I’ve seen it more than once, in organisations that would describe their tax function as sophisticated. Automation exists. Treaty entitlements exist. The gap is almost always governance, specifically, who owns the question.

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What This Means Practically

The organisations that treat custody as infrastructure, as something to be reviewed, not just paid, have a measurable advantage that shows up in net returns. This isn’t about switching custodians or renegotiating contracts as an annual performance. It’s about establishing a regular discipline of asking what value is available inside the existing relationship and whether it’s being accessed. That means someone with enough authority to sit outside the operational team’s comfort zone and ask the questions that feel impolite: What is our current split on securities lending? When did we last file a reclaim? What is our aggregate collateral utilisation and who owns it?

The relationship with a custodian is not unlike the one I described in [when cyber risk becomes a human failure rather than a technical one](https://lakshvaswani.com/when-firewalls-fail-the-human-side-of-cyber-risk/), the exposure is often not in the event that gets escalated, it’s in the assumption that has never been examined. And as I’ve argued in the context of [regulatory expectations across different jurisdictions](https://lakshvaswani.com/the-trust-deficit-why-transparency-empathy-and-execution-are-the-future-of-compliance-leadership/), the cost of oversight is almost never as high as the cost of its absence.

The most expensive service you can buy is one you’re already paying for and not using.