OFFSHORE CUSTODY SERVICES

Foreword:
For the reader / client attention, some banks and financial institutions also provide custody services. These are either provided to their clients as an addition to their discretionary investment management package or offered as a separate service to individuals. Often, institutions only require assistance with their custody requirements.

Custody services will generally comprise the following:

Registered Ownership
The client's investments will be registered in the name of the offshore custodian who will act as nominee for the beneficial owner of those securities.

It is for the offshore custodian to appoint agents in a number of onshore locations to act as sub-custodians in respect of securities which are registered or traded in those locations. Having the securities held by these sub-custodians in the country of origin of the securities or within the market where they are traded creates efficiencies with regard to the purchases and sales of those investments.

Settlement
The settlement of purchases and sales would be handed by the offshore custodian, usually through its network of correspondent banks, settlement would usually be arranged in any currency bit with the facility to convert the funds to another currency if require.

Income Collection
The custodian would receive dividends and other income payments on the client's securities on the due date and then credit the amounts received in accordance with the client's instructions. Once again, income would usually be collected in any currency although there would be the choice of having the income converted to another currency upon receipt.

Corporate Actions
Companies sometimes notify their shareholders that they will be carrying out a rights issue, or they may decide to offer shares instead of paying a dividend, the offshore custodian will receive notification of these and other such corporate actions and will either notify the client or his agent for instructions.

Reporting
The custodian will provide the client or his adviser with full accounting details as well as notification of trades, income receipts and transactions which have affected the holdings, such as certain corporate actions. Some service providers will be able to provide this information electronically.

CURRENCY RISK REDUCTION

Those clients who choose to invest through an offshore centre will often have substantial sums under investment which will be purchased and held in a variety of different currencies. Fluctuations in exchange rates can therefore be a major concern and it is important that the adviser takes appropriate steps to mitigate those currency risks. Some of the main coursed of action available are outlined below.

Regular Reviews and Checks

However, even if all these precautions were taken, there is not guarantee that losses will not occur.

Currency Hedging
Capital gains which might build up following the purchase of a foreign stock could be eroded by a currency loss if the exchange rate fell between the client's 'home' country's currency and the foreign country which issued the stock.

This possible problem could be solved if the purchase of the foreign investment is financed by a loan taken out in the foreign country or at least in the foreign currency. If the exchange rate falls, the loan liability will also fall, whilst at the same time the client's funds are not affected and would be available for investment elsewhere.

Currency Swaps
This is an arrangement under which parties exchange sums of currency in different denominations which is backed by an agreement to re-exchange the currencies at the same exchange rate at a future date.

Back-to-Back loans
This is an arrangement under which a client might deposit funds with an offshore bank and these funds would then be used as security for a loan made by the bank to the client, perhaps to finance an investment purchase. This could create certain tax savings as well as avoid exposure to currency risk.

Currency Options
These enable a purchaser to acquire an option to buy currency at a specified rate against delivery of another type of currency at any time within a certain period or on a fixed date in the future.

Diversification is often the key to the mitigation of risk and as the saying goes; it is better not have all of your eggs in one basket!

There are a number of ways to achieve diversification and perhaps the most common are;

· Holding a range of fixed interest as well as equity investments in a portfolio to provide a spread of holdings which offer both capital growth and income return;

The standard and depth of the regulation financial services varies between different offshore centres and this is certainly the case when the reader / client consider the regulation of investment business which is carried out and provided from offshore centres.

Each centre is responsible for implementing its own regulatory requirements. Some centres, such as those in Europe, require agents involved in the provision of investments services to be licensed although the majority of centres do not have specific regulatory requirements in pace in relation to the provision on investment business.

In those centres where there is a system or regulation, the basic requirements which service providers must meet will be as follows;

As mentioned earlier in this Section, those centres which have implemented regulations will require those involved in the provisions of investments services to be licensed, the fee payable to the licensing body will not only vary between centres but also according to the type or activities to be undertaken.