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A custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm's or individual's financial assets and is not engaged in "traditional" commercial or consumer/retail banking such as mortgage or personal lending, branch banking, personal accounts, ATMs and so forth. 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
By definition, any 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 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. This is specifically dictated, for example, by the definition of "shareholder" in corporate law. Therefore, a central role of custodians (which in some cases is not strictly performed, either by mistake or by design) is to facilitate and ensure that security holders receive all the rights emanating from the security, such as dividends and other payments, 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.
Custodian banks are often referred to as global custodians if they safekeep assets for their clients in multiple jurisdictions around the world, using their own local branches or other local custodian 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 amount of investments such as banks, insurance companies, mutual funds, hedge funds and pension funds.
By far, the 4 largest custodian banks in the world are:
Local custodian bank
In relation to American depositary receipts (ADRs), a local custodian bank (also known as a sub-custodian or agent bank) is a bank in a country outside the United States that holds the corresponding amount of shares of stock trading on the home stock market represented by an ADR trading in the U.S, with each multiple representing some multiple of the underlying foreign share. This multiple allows the ADRs to possess a price per share conventional for the US market (typically between $20 and $50 per share) even if the price of the foreign share is unconventional when converted to US dollars directly. This bank acts as custodian bank for the company that issues the ADRs in the U.S stock.
The following companies also offer custodian bank services:
- Banco de Oro Unibank
- Bank of America
- Bank of China (Hong Kong) Limited
- Bank of Ireland Securities Services
- BBVA Compass
- BNP Paribas Securities Services
- Brown Brothers Harriman
- CIBC Mellon
- Comerica Bank
- Credit Suisse
- Deutsche Bank
- Estrategia Investimentos
- E.SUN Commercial Bank
- Fifth Third Bank
- Goldman Sachs
- HDFC Bank
- ICICI Bank
- Japan Trustee Services Bank
- Kasbank N.V.
- Mega International Commercial Bank
- Mitsubishi UFJ Trust and Banking Corporation
- Morgan Stanley Smith Barney
- National Bank of Abu Dhabi
- Northern Trust
- PT. Bank Central Asia, Tbk.
- RBC Investor Services
- Société Générale Securities Services
- Standard Bank
- Standard Chartered Bank
- State Bank of India
- The Kingdom Trust Company
- The Master Trust Bank of Japan
- U.S. Bank
- Union Bank N.A.
- Wells Fargo Bank
Self-directed retirement account custodians
Not to be confused with securities safekeeping custodians, in the U.S., various retirement plan investment accounts require "custodians" which have only a notion of safekeeping or possession in the concrete sense that securities or assets are custodied, but, rather, this arrangement is more about recordkeeping and administration than holding of invested assets. True, a custodian bank could also happen to be a retirement account administrator/"custodian", though a commercial bank could also be such a "custodian" and not be a "custodian bank". Such financial institutions specialize in the administration and 'custody' of individual or self-directed retirement plan such as IRAs, Roth IRAs, SEP IRAs, Rollover IRAs and Solo 401(k)s. Such institutions provide required legal custody services for the assets associated with self-directed retirement plans and administrative services such as investment execution, recordkeeping, accounting, and IRS and client reporting, while the actual account investments are held or custodied in accounts elsewhere.
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.
- "Assets under Custody, worldwide - globalcustody.net"
- "Bank of China (Hong Kong) Ltd". Bochk.com. Retrieved 2012-09-28.
- "Estrategia Investimentos". Estrategia Investimentos. Retrieved 2012-09-28.
- "KAS BANK – European Specialist in Securities Servicing". Kasbank.com. 2012-08-30. Retrieved 2012-09-28.
- "Kingdom Trust-Institutional Custody for RIAs/Investment Sponsors". Kingdomtrustco.com. Retrieved 2012-09-28.