The Role of Custodian Banks

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A custodian bank, or simply custodian, is a financial institution specializing in the safe-keeping of its clients’ financial assets be they corporate or individuals.

Unlike other banks it typically does not offer services such as mortgage lending, automatic teller machines or branch banking, etc. Instead custodians administer facilitative actions on securities (bond calls, stock dividends, splits, etc) in their possession on behalf of clients.

Even though they perform a variety of such services which also include foreign exchange transactions, their mainstay remains the safekeeping of securities such as commodities, bonds and hard currency among other things.

In the settlement of securities transactions, custodian banks accept the transfer of securities in the appropriate accounts. In the case of a transactions involving two customers of the same custodian, the transfer is effected directly. However, once customers act through two different custodians for one another, usually the CSD comes into play.

Custodian banks are sometimes known as global custodians in cases where they safe-keep securities for customers in different countries. Assets held in this way usually belong to larger firms with enormous investments such as mutual funds and pension funds, etc.

The custody services can be provided at different levels. For an investor with an international portfolio its hard to keep track of the regulations in all countries with respect to dividends or the payment of withholding tax on dividends. In such a case an investor can appoint a global custodian.

With a global custodian, international investors operating in each country where it operates can at least open one investment account. The global custodian regulates global custody services for all investors, this implies that a bank is designated to offer custody services to investors worldwide.

The bank itself can also outsource to regional custodians, but that is for the customer (investor) to decide. In any case it can use local sub-custodians, who will carry out actual operations.

The idea of a regional custodian is that the investor works with a number of custodians designated in different parts of the market. The regional custodian can have further sub-custodians in each country designated to process the transactions.

All custodians have expansive connections, through which business is conducted. This has the advantage that the custodians do not need any further contact points to other custodians, but only to a central depository. Typically, a single custodian plays this central role, thus functioning as a kind of custodian of all other custodians in a given jurisdiction.

 

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