If you run or invest in a managed fund that farms out its execution to a third-party algorithmic provider, the question of who actually holds the assets at night is not a back-office footnote. It is the architecture of your entire risk exposure. This question trips up more sophisticated operators than you'd expect, and for good reason — the rules sit across three separate legal frameworks simultaneously.

The direct answer is this: under Australia's trio custody model, a managed investment scheme must keep three distinct parties separated — the responsible entity (RE), the custodian, and the investment manager or execution provider. The whole point is that no single party controls both the assets and the decision to move them. When you introduce a third-party algorithmic execution service, that execution layer slots into a very specific part of this structure, and where it slots matters enormously.

CONCEPTThe trio model separates control of assets from the authority to direct them — a structural safeguard, not a paperwork exercise.
WARNINGLetting an algorithmic execution provider touch custody arrangements — even indirectly — can breach Corporations Act Part 5C obligations for the RE.
KEY IDEAASIC RG 133 treats the RE's oversight duty as non-delegable, regardless of how automated the execution chain becomes.

Think of it like a restaurant kitchen. The head chef (RE) is legally responsible for every dish that leaves the pass. The cool-room operator (custodian) holds all the ingredients under lock and key. A contracted prep kitchen down the road (algorithmic execution provider) can chop, season, and portion — but they cannot walk into the cool room themselves. The head chef signs off on every order in and out. Automate the prep kitchen with robots? Still the same chain of authority.

Responsible Entity (RE) Oversight duty Custodian Holds Assets Independent Algo Execution Provider No custody access ✕ Authorised direction Blocked access Trio Custody Structure — Algo Execution Layer

Where funds get into trouble is assuming that because execution is automated and instructions flow electronically, the oversight obligation softens. It does not. ASIC RG 133 is explicit that the RE's custodial oversight duties are non-delegable. The RE must be able to independently verify that assets held by the custodian reconcile with positions the algo system reports — continuously, not quarterly. Practically, this means the service agreement with any algorithmic provider must include reconciliation reporting, audit rights, and clear boundaries preventing that provider from issuing settlement instructions directly to the custodian. For broader grounding, the custodian role in fund structures explains why independence is the entire point of the arrangement, and the managed investment scheme framework under Australian law sets the compliance perimeter every RE operates within. Funds exploring how execution technology interacts with fiduciary structure should also review the mechanics of algorithmic trading against their specific delegation agreements.

The practical takeaway is simple: map your algo provider's touchpoints against the custody chain before you sign anything. If their system can instruct settlement without an RE-authorised step in between, your trio model has a hole in it.

Custody structure is not where you discover design flaws — it is where regulators do.

This content is for educational purposes only and does not constitute financial product advice. Past performance is not indicative of future results. Profit Logic Ltd (ACN 688 669 936) accepts no responsibility for errors or omissions in this content or anywhere on this website. Always seek advice from a licensed financial adviser before making investment decisions.