In the market turmoil that followed Russia's invasion of Ukraine, institutional investors with exposure to the region relied on global custodians to help navigate the crisis and safeguard their assets.
Stephen Dokken-Isgar, Head of Global Network Management for the Americas at RBC Investor & Treasury Services (RBC I&TS), discusses how RBC I&TS is managing the ongoing challenges associated with this constantly-changing situation and why global custodians need to take a more proactive approach in identifying future geopolitical flare-ups.
Centralized risk management
The war in Ukraine and subsequent Western sanctions created significant challenges for network managers at global custodians. Following announcement of the sanctions against Russia, it was critical for custodians to understand their Russian exposures—and fast.
RBC I&TS utilizes two separate legal entities for contracting with our clients. The complexity of this legal arrangement, combined with the continuously-changing sanctions across the multiple jurisdictions in which we operate, made it particularly challenging for us to understand the full impact of the sanctions.
It was critical to understand Russian exposures—and fast
Network Management immediately took the lead in forming a cross-functional crisis management team to manage our cash and securities exposures to Russia across the legal entities, and to measure the effect of the multi-jurisdictional sanctions on our clients’ assets. It was vital to work closely with other parts of RBC and ensure alignment of our responses across the organization.
The RBC Global Economic Sanctions (GES) team, which played a key role in handling and providing guidance on the sanctions imposed on China in 2021, has been a critical resource in helping RBC enterprise functions navigate the Russian sanctions—and continues to play a vital role. We also engaged in close collaboration with RBC Legal, enterprise Group Risk Management and RBC I&TS’ Cash Management group as part of our centralized risk management approach. We adopted a “follow-the-sun” model for the timely updating of our crisis management deck, and this was key to managing the book of business for our investor clients.
The all-important pivot
An effective contingency plan is essential to the network management role and central to global custodians’ asset safekeeping duties on behalf of our clients. Such a plan must be at the ready in the event of a sub-custodian’s sudden default or market departure. This very much applied to the situation in Russia.
An effective contingency plan is esential to the network management role
The Russian assets of investors from “unfriendly” states were frozen by the Russian authorities. In addition, RBC I&TS’ local sub-custodian was acquired by a Russian oligarch, who was sanctioned by Canada. It was, therefore, necessary for RBC I&TS to pivot quickly and obtain the services of an alternate sub-custody provider, who could assume our Russian book of business.
As it turned out, we were able to leverage the Eastern European sub-custody hub provider that we had engaged through our Network 2.0 review back in 2018-19. This allowed us to transition the Russian assets to our new provider in a record timeframe.
All hands on deck
Network Management has experienced many tense moments—and long days—throughout the Russian crisis, which continues. While it may sound cliché, team work and internal collaboration have been essential to successfully managing this extremely difficult situation. It has very much been a matter of “all hands on deck.”
First and foremost, we needed to update our clients on the ever-changing environment and how it was impacting their assets, which we continue to do today. This has not been an easy feat. It is really hard to describe the uncertain atmosphere that has prevailed during this period.
Based on the continuous flow of information provided by our sub-custodians, complemented by the experience and expertise of the Network Management team and our partners across the RBC enterprise, we have been able to keep our clients informed of the ever-changing situation. While we have largely adapted to the “new norm” associated with the Russian market, the situation remains extremely challenging and a significant focus of our daily network management activities.
We have largely adapted to the “new norm” but the situation remains challenging
The next geopolitical risk
The recent conflict in Eastern Europe and a growing number of flashpoints across the globe—the current tension between China and Taiwan comes to mind—highlight the need for global custodians to be more proactive when dealing with potential geopolitical risks. To this end, RBC I&TS has a standing item on the agenda of our monthly Network Management Steering Committee meeting for the Head of Group Risk Management to discuss current red-flag markets and exposures.
Growing geopolitical risk also supports the case for real- or near real-time network monitoring, which can be facilitated through new technologies such as blockchain and artificial intelligence (AI). By combing social media and scraping the internet, AI software offers the potential to identify risks in local markets—before an emergency materializes. Although still in the nascent stages, such predictive analytics is likely to be increasingly leveraged by custodians going forward. It’s all part of ongoing efforts to spot geopolitical risks and implement contingency plans in a timely manner, serving as a vital tool when looking to insulate clients from potentially catastrophic outcomes.
Predictive analytics is likely to be increasingly leveraged by custodians
As geopolitical tensions continue to rise, it is critical for network managers at global custodians to have a high level of awareness around the impact of these risks on the operations of their agent banks. If custodians are to weather the ongoing challenges and continue to protect their investor clients, a proactive, collaborative approach to market risk management will be essential. And new technology is likely to play a growing role in effectively monitoring these conditions.