AS Asian markets brace for a river of investment funds from the US and Europe, the custodians who ensure the deals go smoothly are rolling up their sleeves. Hongkong and Shanghai Banking Corporation, Standard Chartered's Equitor division, and Citibank are preparing to take on the increased business - and each other. In the process, they will strengthen Hong Kong's position as the leading Asian custodial centre outside of Japan. Acting as guardian for shareholdings of clients has become a wonder business for banks. It provides a steady flow of fees, without tying up huge amounts of capital in loans, some of which inevitably go wrong. Hong Kong has long been a key provider of custody services to local investors. But its growing role is as a provider of services to the global custodians - US and European houses who look after international funds. The global custodians tap into local banks, which act as sub-custodians, become their agents, and their eyes and ears in their own markets. Hong Kong's custodians have followed the demand from increasingly adventurous investors and moved far out into the region, from China and South Korea to Pakistan and Sri Lanka. If someone wants to invest in Mongolian equities, the chances are that one of the Hong Kong players will be ready to set up the back room services required. ''If customers want to open up somewhere, we would have a look. Unless there are some strong factors against it, we will do it,'' said Jeremy Davies, regional securities manager of Hongkong Bank. All the players now cover 14 or more markets in the region, and their investment in technology and networks means that a broker in New York, acting on behalf of an emerging market fund in Boston, can place orders in Pakistan, knowing that the cheque will clear at one end, and the shares be delivered at the other. The Hong Kong players are currently enjoying the limelight. The growth rates of Southeast Asian nations, the economic revolution in China, and the opening of a growing number of markets to outside investors, is providing them with the opportunities to attract new clients. In the territory, Hongkong Bank is the clear leader in terms of the assets it has under custody - US$70 billion (HK$542 billion) compared to Standard Chartered's $US$40 billion - and it pips its smaller rival in the number of a regional centres covered, with 17 against 14. The two banks are strictly local and regional custodians - they supply their services to the big foreign global houses. The other top player in the territory, Citibank, is a global custodian, but prefers to set up its own services in each market. It does not release figures on its regional assets. There are signs that the gap is closing between the top two local players. Last month, Global Custodian magazine promoted Standard Chartered from ''commended'' to ''top-rated'' in its annual survey of standards. Hong Kong Bank has been top-rated by the magazine for five years, but, as recently as 1991, Standard Chartered did not figure. ''Standard Chartered cannot match the market share of HSBC, but it clearly serviced its existing clients to their satisfaction,'' said the magazine. Global Custodian' s scores are based on responses from users of custody services throughout the world and, in the six categories on which final judgment was made, Standard Chartered out-scored HSBC in two, equalled in three, and lagged in only one.IN Singapore - the only other regional market covered by the survey - HSBC and Standard Chartered both remained top-rated, but were joined for the first time by the Development Bank of Singapore. This is evidence that local banks are now ready to take on the regional specialists in their own markets. The missing name from the magazine's survey was Citibank. This was as much a surprise to Andrew Au, Hong Kong manger for World Wide Equities Services, as it was a relief to his rivals, and he questioned the basis on which it was made - given that honourable mention was given to banks which had little or no real presence in Hong Kong or the region's custody industry. The merger of HSBC and Midland Bank has raised some serious questions in Exchange Square about the position of the bank as sub-custodian, for the UK group is an ambitious player in the global custody market. All eyes were on HSBC to see if it would try to expand from its regional role into a global custodian, and start looking for clients' money round the world - but, said HSBC's Mr Davies, the strategy was to keep the two businesses apart. ''If we were to set up as a global custodian, we would be competing with our own clients, and we have been at pains to explain this to the world,'' he said. Demand has rarely been higher, as overseas institutional money flows into the region, attracted by the above-average growth rates, and the rapid development of equity markets. But with the flow of funds from overseas, comes demands for higher standards of service, and the fight for customers is being fought on more than one front. ''Competition is much tougher now, and not only in terms of pricing, but also in service,'' said Citibank's Mr Au. In some markets, the services provided by custodians have become so standardised that they are treated almost as a commodity, and priced accordingly. That is not the case in Asia - yet. Custody has come a long way since it was basic vault keeping. Custodians now also have to act as the two-way door between buyers and sellers of stock, ensuring that trades are matched, and ''failed trades'' reported to clients. Dividends must be collected and passed on, in the right currencies, scrip issues accounted for, portfolio information updated and tax taken care of. In addition, the US institutions in particular want increasing amounts of information about corporate actions - rights issues, takeover bids and board changes. They must also, by US law, use their proxy votes - another job for the custodian. CLIENTS want all this information continuously and instantly and, to meet that demand, hugely sophisticated networks and databases have been set up. Hong-kong Bank has its Hexagon system, while, two years ago, Standard Chartered re-organised its fragmentedsystem into the Equitor grouping. The investment in state-of-the-art technology is extremely expensive - a fact which the established players hope will make the cost of entry too high for most outsiders. Recouping the costs from the clients can take some strong arguments. However, the global custodians are recognising that their demands have to be paid for, and are ready to pay reasonable amounts while the systems are changed. Nevertheless, pricing is keen and margins are being scraped. Even in markets where costs are controlled, there is some backdoor price cutting going on, according to insiders. It may be against the regulations, but it puts custodians in a dilemma. If they continue charging at the official rate, they risk losing clients. If they sidestep the rules by, say, paying interest on clients' current balances, which is illegal in Hong Kong, they could find themselves on the carpet. The answer could be negotiated fees, but this would put more pressure on margins. The other answer is for a wider range of services. This, especially, means stock lending. The practice of lending stock to cover failed trades is accepted in most markets. Institutions lend shares from their portfolio, for a fee, to someone who cannot deliver stock for a variety of reasons. But the big business is in the derivatives' markets and where short selling is possible. In most regional markets, short selling, and, therefore, stock lending, is banned, so it is being done offshore, between brokers, according to market men. In Hong Kong, stock lending is allowed, but is subject to stamp duty, and players want to see this cost waived for about one year to reduce costs. Upgrading markets, so that a wider range of services is possible, is regarded as an inevitable outcome of pressure from overseas investors. Regional governments looking for development funds for their corporate sector know the foreigners have the funds, and the more bells and whistles they can play on the markets, the more they will invest. That will, inevitably, mean opportunities for the men in the middle.