Brenda Bol, chair of the Depositary & Custodian Banking cluster at the Association of Banks and Bankers, Luxembourg (ABBL), and Bob Schamine, its vice-chair, emphasise the importance of ensuring the security of the financial centre, thanks to its experts. (Photos: Paperjam; layout: Paperjam)
Custodian banks, which are essential to the operation of investment funds, safeguard assets and ensure compliance with the rules agreed with investors. Their assets under management total €8,210bn, up 10 per cent. This little-known sector must now cope with more complex assets, the move to T+1 settlement and potential competition from Europe.
A regulated Luxembourg fund cannot operate without a custodian. Yet the role of this bank remains largely unknown outside the fund industry. It acts as the final line of control, when the investor’s money or assets are already at stake. The custodian bank holds the assets, monitors cash flows and checks that the fund manager complies with the rules set out in the prospectus. It acts independently of the management company, the fund administrator and other delegated functions.
“It is independent of asset management and the functions that asset management may delegate, such as the valuation of assets, redemptions and subscriptions, and capital flows within the fund,” explains Bob Schaminé, global head of custodian banking entities at Caceis and vice-chair of the custodian banking cluster at the ABBL, on the occasion of the publication of the banking lobby’s annual survey. “Its sole and exclusive role is to protect end investors and their assets.”
This review may require a fund manager to sell an asset that does not comply with the fund’s restrictions and to make good any resulting loss. 
A merger involving five companies
Given the volumes involved, this role takes on a national dimension. The study presented by the ABBL puts assets under custodian mandate at €8,210bn at the end of 2025, compared with €7,460bn a year earlier. This represents an increase of 10%. The analysis aggregates data from 40 banks. The ABBL notes that the concentration is mainly amongst the five largest, without specifying their exact share.
Assets under custody totalled €4.166bn, compared with €3.860bn in 2024, representing an increase of 8%. This section of the survey covers 41 banks. An institution may hold securities without acting as a custodian. A custodian bank must organise the safekeeping of the assets it oversees.
“The security that Luxembourg provides to international investors would be absolutely vital for the country,” says Bob Schaminé. Through this oversight, the custodian bank contributes to the credibility of a fund domiciled in Luxembourg. A failure would therefore not only affect a single institution and its clients; it could also damage the reputation on which the financial centre relies to sell its funds abroad.
Collective investment schemes in transferable securities remain the main source of business. Their assets under management totalled €5,016bn, up 9%. Reserved alternative investment funds (Raif) rose by 22% to €851bn. Part II funds gained 23 per cent. Conversely, specialised investment funds (Sif) fell by 6% to €647bn.
The Rise of the Raifs
Bob Schaminé attributes this shift to the speed with which RAIFs can be launched, as they do not require prior approval from the CSSF. “The RAIF is becoming a credible alternative to the SIF. For custodian banks, this does not alter our responsibilities regarding investor protection.” The task becomes more demanding, however, when funds hold unlisted companies, private loans or assets held through multiple vehicles. The custodian must then trace the chain of ownership in accordance with the investment structure and the applicable control rules.
Exchange-traded funds (ETFs) illustrate another area of growth. Assets under management in ETFs have risen by 41.3% over the past year, from €389bn to €550bn. Eltifs, designed to finance long-term investments, have risen from €12bn to €19.2bn. However, the study does not measure the proportion allocated to retail investors.
Digital assets are also broadening the scope of regulation. Crypto-assets falling within the scope of MiCA total €354m, compared with €164m a year earlier. Tokenised instruments remain at around €80m. Their custody and proof of ownership introduce new areas of expertise to the profession.
Increasing complexity, stable workforce
This complexity is growing faster than local teams can keep up with. The study records 3,938 full-time equivalents in Luxembourg, compared with 3,923 a year earlier. The increase amounts to just 15 posts, or 0.4%, whilst the number of staff working under mandate has risen by 10%. At the same time, roles carried out by delegated staff outside Luxembourg rose from 2,757 to 2,882 full-time equivalents. This represents an increase of 125 posts, or 4.5%.
According to the cluster, these delegations mainly relate to administrative tasks. The Luxembourg-based teams focus more on the monitoring and analysis of complex structures. The presentation shows an increase in roles dedicated to custodian supervision in Luxembourg, whilst custody functions are declining there. Artificial intelligence is also beginning to assist with the review of documents under human supervision.
At the same time, the ABBL is developing a 40-hour certificate programme for junior and intermediate-level professionals. The programme is set to cover the custodian’s responsibilities, regulatory requirements, risks, net asset value errors and the valuation of private assets. This initiative responds to the shift in the profession towards more specialised control tasks, whilst its administrative functions are being automated or relocated outside Luxembourg.
However, growth in outstanding balances does not provide a measure of the economic value retained within the country. Income may derive from custody services, foreign exchange transactions or cash deposits held on behalf of the funds. The study does not collect data on turnover or profit margins. The ABBL cites the difficulty of comparing a local bank with an international group that spreads its operations and revenue across several countries. It also acknowledges that several institutions would be reluctant to disclose such data.
T+1: the first challenge ahead
“Compared with 20 years ago, the margins between custodian banks are smaller,” says Brenda Bol. A sophisticated alternative fund may command a higher fee than a largely automated traditional fund. It also requires more specialists. The rise in assets under management is therefore not enough to prove that the sector is generating higher returns for the financial centre.
The first operational test will take place when the European settlement cycle changes from two days to one day on 11 October 2027. Allocations, confirmations, payment instructions and foreign exchange requirements will need to be processed earlier. An error that is still corrected manually on D+2 may become a settlement failure on D+1. An ABBL survey conducted in March indicated that more than 70 per cent of banks considered themselves to be well advanced in their preparations, according to Brenda Bol.
For Bob Schaminé, the deadline will leave no room for improvisation. “Any player who is not ready will be excluded from the market.” This does not describe an automatic exclusion procedure imposed by the regulator. Banks unable to process instructions and finance transactions within the new deadlines risk, above all, being unable to serve their customers under acceptable conditions.
The European passport: a strategic change
CRD VI extends another area of responsibility. Banks must incorporate their environmental, social and governance risks into their prudential management. For a custodian, this exercise is not limited to its balance sheet. It also covers the resilience of service providers, client concentration, the environmental characteristics declared by funds, and the reputational risk associated with allegations of greenwashing. The timetable set out by the ABBL provides for implementation in January 2027 for the relevant Luxembourg institutions.
The proposed European custodian passport ultimately raises a strategic question. At present, a fund must, in principle, choose a custodian established in its country of domicile. The European market integration package would allow for cross-border mandates. The position adopted by the Council of the European Union on 9 October would make this passport optional for each Member State. The text still needs to be negotiated with the European Parliament.
For Luxembourg-based institutions, the passport could open up foreign markets and expose local mandates to new competition. The cluster emphasises the differences in supervision and legislation between countries. “If a French asset manager launches a Luxembourg fund with a German custodian bank, which jurisdiction has jurisdiction in the event of a dispute? Is this really beneficial in terms of costs and protection for the end investor?”, asks Bob Schaminé.
