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JPMorgan, State Street, May Face Standard Chartered Fallout

Stocks in this article: JPM STT STAN.L

NEW YORK ( TheStreet) -- JPMorgan Chase (JPM) and State Street Corp. (STT) could face collateral damage from their relationship with Standard Chartered Plc (STAN.L), according to a report published Tuesday from Bernstein Research analyst Brad Hintz.

Standard Chartered was accused on Monday by New York State's top banking regulator of scheming with Iran's government and hiding some 60,000 transactions worth at least $250 billion over 10 years. It faces the revocation of its license to provide banking services in New York state.

London-based Standard Chartered "has over 1,700 offices in seventy markets around the world and is a very powerful force in mainland Asia and Africa," according to Hintz's report. It plays a crucial role in back office transactions across the globe through what is known as the custody business.

It acts as a "sub-custodian" for many global custodians, providing "feet on the ground in local markets," according to Hintz.

That relationship potentially poses risks.

"If a sub-custodian were to be found guilty of an internal conspiracy to hide prohibited transactions from U.S. regulators, U.S. global custodial banks exposed to that sub-custodian may fall under increased scrutiny from their fiduciary clients," Hintz contends.

There is limited publicly available information about global custodian exposure to an individual sub-custodian, Hintz writes, though the analyst did find a regulatory filing from Fidelity Investments showing that both JPMorgan and State Street have the most extensive operating reliance on Standard Chartered--by number of countries.

According to the filing cited by Hintz, Standard Chartered acts as sub-custodian for both JPMorgan and State Street in 10 different countries, including--in the case of both institutions--Bangladesh, Botswana, Kenya, Ghana, Thailand, Uganda and Zambia. JPMorgan also acts as sub-custodian for JPMorgan in India, Pakistan and South Korea and for State Street in Malasia, Taiwan and Hong Kong.

Hintz is careful to note that because the disclosure is from a single fund company, "it is likely not exhaustive." He also points out that the disclosure "does not quantify by other important criteria, such as the absolute amount or percentages of global custody assets."

Furthermore, Hintz writes that "in every market where there are credible alternatives, global custodians typically maintain arrangements with more than one agent bank," citing a conversation with British custody consultant Richard Greensted.

Calls to spokespeople for State Street and JPMorgan were not returned.

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