As some Chinese banks are looking to expand into regional and then global custodian services – notably Bank of China and ICBC – they now face competition at home from their domestic brokerage firms.

The China funds management research house Z-Ben Advisors reports in its client newsletter that China Merchants Securities (CMS) has become the first brokerage firm to qualify to become a custodian.

“This opens up new opportunities for brokerages to work with private funds and ends banks’ exclusive control over the custodian business,” Z-Ben says.

According to Qin Xiang, deputy general manager of the Clearing Centre in CMS, CMS will provide comprehensive custodian services to private funds. In addition to providing clients traditional bank services – asset custody, NAV calculation an investment clearing – CMS will include investment monitoring, information servicing and risk assessment and management.

Interestingly, Z-Ben Advisors comments that it expects many brokerages to establish their own custodian arms in China because “the segment has low operating costs and provides a steady flow of income”. We’re not sure the major custodians would agree with this observation on their businesses.