Custodian bank

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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, automated teller machines (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

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. 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 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:[1]

  1. The Bank of New York Mellon
  2. JPMorgan Chase
  3. State Street Bank and Trust Company
  4. Citigroup

Depository Instruments[edit]

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 USA, 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 US stock.

Other Examples[edit]

The following companies also offer custodian bank services:

Self-directed retirement account custodians[edit]

Not to be confused with securities safekeeping custodians, in the US, 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 record keeping 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, record keeping, accounting, and IRS and client reporting, while the actual account investments are held or custodied in accounts elsewhere.

Mutual Fund Custodian[edit]

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[edit]

References[edit]

  1. ^ "Assets under Custody, worldwide - globalcustody.net"
  2. ^ "Bank of China (Hong Kong) Ltd". Bochk.com. Retrieved 2012-09-28. 
  3. ^ "Estrategia Investimentos". Estrategia Investimentos. Retrieved 2012-09-28. 
  4. ^ "KAS BANK – European Specialist in Securities Servicing". Kasbank.com. 2012-08-30. Retrieved 2012-09-28. 
  5. ^ "Kingdom Trust-Institutional Custody for RIAs/Investment Sponsors". Kingdomtrustco.com. Retrieved 2012-09-28. 

External links[edit]