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A custodian bank, or simply custodian, is a specialized financial institution responsible for providing securities services. It safeguards assets of asset managers, insurance companies, hedge funds, and is not engaged in "traditional" commercial or consumer/retail banking like lending. The role of a custodian in such a case would be to:
- hold in safekeeping assets/securities such as stocks, bonds, commodities such as precious metals and currency (cash), domestic and foreign
- arrange settlement of any purchases and sales and deliveries in/out of such securities and currency
- collect information on and income from such assets (dividends in the case of stocks/equities and coupons (interest payments) in the case of bonds) and administer related tax withholding documents and foreign tax reclamation
- administer voluntary and involuntary corporate actions on securities held such as stock dividends, stock splits, business combinations (mergers), tender offers, bond calls, etc.
- provide information on the securities and their issuers such as annual general meetings and related proxies
- maintain currency/cash bank accounts, effect deposits and withdrawals and manage other cash transactions
- perform foreign exchange transactions
- often perform additional services for particular clients such as mutual funds; examples include fund accounting, administration, legal, compliance and tax support services
Using US definitions, a person who owns street name securities and who is not a member of an exchange, holds the securities through a registration chain which involves one or more custodians. This is due to the perceived impracticality of registering traded securities in the name of each individual holder; instead, the custodian or custodians are registered as the holders and hold the securities in a fiduciary arrangement for the ultimate security holders. However, the ultimate security holders are still the legal owners of the securities. They are not merely beneficiaries of the custodian as a trustee. The custodian does not become at any point the owner of the securities, but is only a part of the registration chain linking the owners to the securities. Global securities safekeeping practices vary substantially with markets such as the UK, Australia and South Africa encouraging designated securities accounts in order to permit shareholder identification by companies.
The definition of "shareholder" is generally upheld by corporate law rather than securities law. One role of custodians (which may or may not be enforced by securities regulation) is to facilitate the exercise of share ownership rights, for example and processing dividends and other payments, corporate actions, the proceeds of a stock split or a reverse stock split, the ability to vote in the company's annual general meeting (AGM), information and reports sent from the company and so forth. The extent to which such services are offered are a function of the client agreement together with relevant market rules, regulations and laws.
Custodian banks are often referred to as global custodians if they safe keep assets for their clients in multiple jurisdictions around the world, using their own local branches or other local custodian banks ("sub-custodian" or "agent banks") with which they contract to be in their "global network" in each market to hold accounts for their respective clients. Assets held in such a manner are typically owned by larger institutional firms with a considerable number of investments such as banks, insurance companies, mutual funds, hedge funds and pension funds.
History
In 1961, U.S. President John F Kennedy establish a Committee on Corporate Pension Plans. 2 years later, Studebaker Auto Manufacturer, shuttered its business and operations, and it failed to provide pensions to the affected approximately 7,000 employees. Hence, in 1974, U.S. President Gerald Ford proposed an Employee Retirement Income Security Act (ERISA Act), protecting the employee benefit plans' standards.
Since the Act has become effective, employers could not hold and keep their pension fund assets. Instead, they are obligated to appoint external custodians to safekeep the assets. Also, they are required to appoint trustees and depositories to ensure the pension funds are operated in the best interest of the pension holders and aligned to the investment mandates.
And now, more banks have developed a wealth range of custody and related services (securities services), and have been keen on developing new technologies and aligning with the fast-moving regulatory requirement.
Client Segments & Products
The securities services industry mainly serves two types of clients: 1) Asset Owners & Managers and 2) Banks, Brokers & Dealers.
Asset Owners & Managers
For the client segment of Asset Owners & Managers, it includes asset managers, alternative asset managers, insurance companies, pension funds, sovereign funds, central banks, pension funds, family offices, prime brokers.
The bank may offer products & services below:
- Global Custody
- Fund Services (Accounting & Valuation)
- Transfer Agency
- Collateral Management & Segregation
- Middle Office Outsourcing
- Securities Lending & Borrowing
- Treasury Services (Cash Management & FX)
- Trustee Services
Banks, Brokers & Dealers
The client segment of Banks, Brokers & Dealers includes global custodians, banks, brokers and dealers.
The bank may offer products & services below:
- Direct Custody & Clearing
- Third Party Clearing
- Account Operators
Global Custody & Direct Custody
Global Custody
A global custodian is responsible for the safekeeping and administration of assets of clients, for instance, asset managers & owners, in multiple markets. They serve as the first point of contact for their global clients. However, they may not have such a strong network in every jurisdictions in which the clients want to invest. Therefore, the global custodian needs to appoint and manage direct custodians which have existing securities services infrastructure in some individual markets.
Direct Custody
A Direct custodian offers custody services in their local markets. Global custodians are their focused clients as direct custodians can offer knowledge and experience of the markets and industry and, close relationships with the local regulators in the local market, which the global custodian might lack but require. Therefore, it is responsible for the safekeeping and administration of assets of clients, for instance, asset managers & owners, in a local market.
Industry Players
Plenty of investment banks and banks offer securities services. Generally, the division of securities services is either grouped with Global Markets to form a larger umbrella of Markets & Securities Services (MSS) or falls under the umbrella of Corporate Banking.
According to alphabetical order:
- Barclays: Investment Solutions
- BNP Paribas: Securities Services
- BNY Mellon: Securities Services
- Citi: Markets & Securities Services
- Crédit Agricole/Santander: CACEIS Investor Services
- Credit Suisse: Transaction Banking
- Deutsche Bank: Corporate Banking
- Goldman Sachs: Global Markets
- HSBC: Markets & Securities Services
- J.P. Morgan: Securities Services
- Mizuho: Institutional Services
- MUFG: Investor Services
- Northern Trust: Asset Servicing
- Royal Bank of Canada: Investor & Treasury Services
- SMBC: Custody and Securities Services
- Société Générale: Securities Services
- Standard Chartered: Financial Markets
- State Street: Asset Servicing
- UBS: Asset Servicing
Industry Ranking
Global
As of 2019 the largest custodian banks in the world were:[1]
Rank | Bank name | Assets under Custody (2019) (US$) |
---|---|---|
1 | The Bank of New York Mellon | 25.08 trillion |
2 | State Street | 21.35 trillion |
3 | JPMorgan Chase | 20.5 trillion |
4 | Northern Trust | 14.8 trillion |
5 | Citi | 13 trillion |
6 | BNP Paribas | 11.8 trillion |
7 | HSBC | 8.5 trillion |
8 | MUFG | 6.3 trillion |
Regional
According to GICustody Survey, the top custody regional players are:[2]
Region | Bank name |
---|---|
Americas | The Bank of New York Mellon |
Asia-Pacific | HSBC |
EMEA | JPMorgan Chase |
Self-Directed Retirement Account Custodians (US)
According to the Internal Revenue Code (IRC) in the US, various retirement accounts such as: Traditional IRAs, Roth IRA, SEP IRA, or 401k plan accounts require that a qualified trustee, or custodian, hold IRA assets on behalf of the IRA owner. The trustee/custodian provides custody of the assets, processes all transactions, maintains other records pertaining to them, files the required IRS reports, issues client statements, helps clients understand the rules and regulations pertaining to certain prohibited transactions, and performs other administrative duties on behalf of the self-directed retirement account owner.
Self-directed retirement account custodians (also known as "self-directed IRA custodians" or "self-directed 401k custodians") should not be confused with a custodian bank, which strictly provides safekeeping for securities. While a self-directed retirement account custodian can provide custody for securities, typically it will specialize in non-security assets, or alternative investments. Examples of alternative investments would be: Real Estate, precious metals, private mortgages, private company stock, oil and gas LPs, horses, and intellectual property. These types of assets require a specialization on the part of the custodian due to the complexity of the documentation required to keep the alternative investments in compliance with the IRC.
Mutual Fund Custodian
A Mutual Fund Custodian refers typically to a custodian bank or trust company (a special type of financial institution regulated like a "bank"), or similar financial institution responsible for holding and safeguarding the securities owned by a mutual fund. A mutual fund's custodian may also act as one or more service agents for the mutual fund such as being the fund accountant, administrator and/or transfer agent which maintains shareholder records and disburses periodic dividends or capital gains, if any, distributed by the fund. The vast majority of funds use a third party custodian as required by SEC regulation to avoid complex rules and requirements about self-custody.
A mutual fund retirement account (IRA, SEP etc.) custodian, however, refers to the plan administrator and recordkeeper such as noted above, which may not necessarily be the same institution providing custody services to the investments of the overall fund.
See also
- Street name securities
- Central securities depository
- Escrow
- Custodial account
- Securities market participants (United States)
References
- ^ "Assets under Custody". June 15, 2019. Archived from the original on December 15, 2018. Retrieved June 15, 2019.
- ^ "Global Custody Survey 2019". July 4, 2019. Retrieved July 4, 2019.