Publica stands by JP Morgan as custodian, amid potential political risk

Publica, one of Switzerland’s largest pension funds with CHF42.5bn (€44.1bn) in assets, is standing firm on its decision to keep JP Morgan as its custodian, aware that risks remain for international relations becoming increasingly tense, and as the US administration becomes increasingly aggressive.

A spokesperson for Publica told IPE the scheme is not considering reviewing JP Morgan’s custodian mandate, but this would not resolve issues relating to political risk. The spokesperson underlined that the question of what exactly would happen in the event of possible US sanctions would be difficult to answer.

Custodian banks set up securities accounts for clients holding securities including equities, bonds or fund units, with the depositories for securities located in the country of origin of the corresponding securities.

“A connection to banks domiciled in the US, or where their parent company is based, cannot be avoided, unless you exclude entire countries or regions from the investment universe,” the spokesperson said.

Publica’s custody bank is subject to Swiss law, but it belongs to an American parent company, she added.

The pension fund’s comments come as the mandates of US custody banks are raising concerns of security risk for various Swiss pension funds.

BVK, the Swiss pension fund for the employees of the canton of Zurich, has also entrusted the Swiss branch of JP Morgan in Geneva as custody bank holding assets amounting to CHF32bn on behalf of the scheme.

Like Publica, BVK believes that JP Morgan in Geneva is subject to Swiss law and regulated by the Financial Markets Supervisory Authority (FINMA), a set up relieving the pension scheme from risks should the new US administration decide to enforce tariffs against Switzerland.

The Economic Affairs and Taxation Committee of the National Council (WAK-N), the lower house of the Swiss parliament, has approved a motion instructing the government (Federal Council) to nudge Compenswiss, the public institution managing Switzerland’s first pillar social security funds AHV, IV and EO, with total assets worth CHF46.1bn, to axe its custodian mandate with State Street.

Compenswiss fears retaliation from the US if the Swiss government proceeds with the decision to strip State Street of its custodian mandate in favour of a Swiss bank.

Asked whether it would make sense to have a Swiss bank as a custodian in this new international environment, the spokesperson for Publica pointed at systems and human resources as important factors to consider when choosing a custodian bank.

“Large custodian banks have the greatest [amount of] resources in terms of systems and teams of specialists. Publica receives many additional services from its custodian bank, such as reporting, performance accounting, compliance audits and risk analyses,” the spokesperson said, adding that Swiss banks are not among the largest global custodian banks, as of the end of 2022.

Publica applies a careful process to select its global custodian, and it compares potential candidates in depth, looking at criteria such as financial stability, access to the securities markets, the ability to reclaim withholding taxes even in difficult markets, technology, reporting and the quality and range of functions of performance and securities accounting services.

The bank chosen as custodian is the one that is most attractive in terms of setup, services and costs, the spokesperson said.

“The two largest Swiss banks (Credit Suisse and UBS) have gone through serious financial crises and government bailouts over the past 17 years. Our custodian JP Morgan, which has a default guarantee from its parent company JP Morgan Chase N.A., has not,” the spokesperson added.

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