When we speak about the financial services we can frequently come across a term ‘custodian’. This typically refers to a custodian bank, which serves a very different purpose when compared to commercial or merchant banks.

The main goal of a custodian bank is to protect the assets protection to the rightful owners of the assets. This institution holds the customers’ securities in its safekeeping to protect them from being stolen or lost. Stocks or bonds are the most typical financial assets that are held with the custodians.

Custody industry has developed over the last decades and nowadays a typical custodian provide more than just asset protection. It can manage accounts administration, matching and settlement of financial transactions, value the assets, account for dividends and interest, provide tax reclamation and foreign exchange (FX) overlay services, outsource parts of middle and back office for other financial services firms such as asset managers (such services would include fund administration and transfer agency).

Some of the custodian banks also handle investment activities on behalf of its customers. This could involve placing orders to buy or sell securities via the clients’ preferred brokerage, transferring funds to and from accounts, overseeing investment account activities, and reporting. Custodians may also prepare the necessary tax filings related to investment activities for customers. The fees for their services depend on exactly what they provide and can be based on the value of assets held.

Given the broad range of services, in many cases the largest custodian banks are the ones we commonly consider the largest and most famous banks in the world such as:

• Bank of New York (BNY) Mellon (US)
• JPMorgan Chase (US)
• Citigroup (US)
• Bank of China (China, who could’ve guessed)
• Credit Suisse (Switzerland)
• UBS (Switzerland)
• Deutsche Bank (Germany)
• Barclays (England)
• BNP Paribas (France)

There are also some more custody focused firms such as State Street and Northern Trust.

A custodian serves an important purpose since financial securities must be cleared and settled properly, with various regulatory and accounting procedures met. These are often far too complex or time consuming for investors or traders.

Please note, none of the information on this blog represents the opinion of my employer and all information does not represent a financial advice.