Here again, an important issue is the extent to which settlement through a global custodian exposes a non-resident counterparty to custody risk. The essence of the custodial relationship is contractual. A global custodian and its customer will generally bargain and reach agreement with respect to the obligations and risks that each party is willing to assume. A key question is which party bears the risks of insolvency, negligence or fraud on the part of a sub-custodian. The global custodian may provide guarantees regarding the performance of the sub-custodians that it selects. More typically, the custody contract provides that the customer bears the risk of loss arising from the use of sub-custodians. The resulting risk may be substantial. The sub-custodian has no direct contractual relationship with the global custodian's customer and in most cases would have no knowledge of the customer's interest in the securities it holds. The risk borne by the customer is instead controlled by the contract between the sub-custodian and the global custodian. Thus, a non-resident that settles through a global custodian may have difficulty in assessing the degree of custody risk created by the sub-custodian's involvement in holding its securities and settling its trades.

A variety of services provided by global custodians significantly affect the risks in settling trades through this channel. As noted earlier, a global custodian enables its customers to access multiple local markets through a single gateway featuring standardised communications channels and standardised reports. By eliminating the need to master the use of multiple communications channels and message formats, this tends to mitigate operational risks involved in settling trades. Also, like other settlement service providers, global custodians extend credit to their customers to facilitate their efforts to minimise opportunity costs and related risks. In particular, global custodians offer integrated cash management and foreign exchange services. On the securities side, the institutional investors that form the customer base at global custodians seldom need to settle back-to-back trades, and most global custodians apparently do not provide the intraday securities loans that are required to efficiently settle such trades. However, in recent years institutional investors have been attaching increasing importance to earning income from lending securities from their portfolio, which may eventually force global custodians to enhance their capabilities to turn securities around.

As part of their efforts to permit efficient cash management by their customers, many global custodians offer special services designed to reduce liquidity pressures on their customers from failed trades or delays in receiving interest, dividends or tax refunds. These services - contractual settlement date accounting (CSDA) and contractual income collection respectively - reduce a customer's uncertainty about positions in particular currencies and, in some cases, eliminate its need to engage in complex multi-currency cash management. There is a danger, however, that customers and global custodians could misunderstand the nature and risks of these services. Any credits to the investor's cash account that reflect payments that were not actually received by the custodian on the settlement date are usually provisional credits. If payment is not received within a timeframe established by the custodian, the provisional credits will usually be reversed. If the investor fails to understand the provisional nature of these credits, it may underestimate its credit exposures to its counterparties or to the securities issuers. Also, the reversal of provisional credits might lead to substantial, unanticipated demands for liquidity. This is especially true in instances where the custodian does not establish an explicit provisional credit period, but rather provides for a "reasonable period" to be determined by itself on a case-by-case basis.

The effective management of this risk depends on the information provided to its customer by the custodian and the customer's use of that information. The custodian's systems must be capable of distinguishing and monitoring customer funds and securities balances on an available and final basis, as well as transactions that have failed to settle. Such a capability depends largely on the amount a global custodian invests in systems and administrative processes. Customers, in turn, must use the information provided by the custodian to actively reconcile contractual and actual records of securities positions.

These services also entail risks to the global custodians that provide them. In essence, the custodian temporarily absorbs an investor's liquidity pressures from failed trades and delayed income payments by granting provisional credits. The reversal of any provisional credits, however, may create an overdraft in an investor's account. The custodian could suffer a credit loss if the investor fails to cover the overdraft. To control such exposures, a global custodian needs to have in place effective control and administrative processes to track failed settlements and delayed payments, to age such transactions, to follow up on outstanding transactions, and to reverse transactions that have been outstanding over a certain period. Ideally, a custodian should also have explicit credit limits for each customer concerning the amount of outstanding failures to deliver securities or funds receivable that it may incur. It does not appear, however, that global custodians generally institute such credit controls, but rather rely on their ability to track and resolve outstanding transactions in order to keep the risks within acceptable levels.