HIGHLY publicised derivative losses around the globe have sent some major institutional investors into a paranoiac stupor about their own exposure to derivatives.
At times global custodians found themselves inundated with calls from worried clients concerned at the level of their exposure to derivatives and extremely unhappy at being told of losses they had incurred in derivative-linked services.
What surprised institutions, many of which prided themselves as being steeped in conservatism, was to find they had sometimes large exposure to derivatives through the cash-management services offered by their custodians.
At the heart of the matter, the issue is not derivatives at all. The issue is leverage.
Only five years ago, global custody was merely a case of competition between providers in trade execution, safekeeping and custodial services.
Now, clients are asking their custodians to undertake a whole new raft of services.
The most controversial of these services is derivative-exposure testing.
