Definition
Custody is the service of holding and safekeeping financial assets on behalf of an investor. A **custodian bank** (or simply, custodian) is a specialized financial institution responsible for protecting a client's securities and performing various administrative tasks related to those assets. Think of them as the "vault" and "accountant" for large-scale investors.
Who Uses Custodians?
Institutional investors such as mutual funds, pension funds, insurance companies, hedge funds, and sovereign wealth funds are legally required to use custodians to protect their assets from theft or loss.
Key Global Custodians
The market is dominated by a few large players, including BNY Mellon, State Street, J.P. Morgan, and Citigroup.
The Network Model
For cross-border investments, custodians operate on a network model to provide global coverage.
| Role | Description | Responsibilities |
|---|---|---|
| Global Custodian | The primary custodian that has the direct relationship with the client (e.g., an asset manager). | Consolidated reporting, client service, global oversight. |
| Sub-Custodian | A local bank in a foreign market, appointed by the global custodian to hold assets in that specific country. | Local settlement, regulatory compliance, corporate action processing on the ground. |
Example
A UK-based pension fund wants to invest in the Indian stock market. They appoint BNY Mellon as their **Global Custodian**. BNY Mellon, in turn, appoints a local Indian bank like ICICI Bank as its **Sub-Custodian** in India. The shares of the Indian companies are held in an account at ICICI Bank, but BNY Mellon provides the UK fund with a single, consolidated view of all its global holdings.
Safekeeping & Settlement
- Safekeeping: Holding securities in electronic (dematerialized) form at the CSD.
- Trade Settlement: Executing the final transfer of securities and cash on behalf of the client for all their trades.
Income Collection
Collecting all income generated by the securities, such as dividends from stocks and coupon payments from bonds, and crediting it to the client's cash account.
Corporate Action Processing
Managing all corporate actions. This includes notifying the client of the event, processing mandatory events (like stock splits), and managing elections for voluntary events (like tender offers).
Tax Services
Managing tax-related activities, including withholding tax on income payments and filing for tax reclaims based on double-taxation treaties to ensure the client receives the most favorable tax rate.
Proxy Voting
Facilitating shareholder voting by notifying clients of upcoming annual general meetings (AGMs), providing the voting materials, and submitting the client's votes on their behalf.
Reporting
Providing comprehensive reporting on holdings, transactions, cash flows, and corporate action events.
Definition
This refers to how a custodian holds client assets at a CSD or with a sub-custodian.
| Account Type | Description | Pros & Cons |
|---|---|---|
| Omnibus Account | A single account where the assets of multiple clients are pooled together. The custodian maintains its own internal records to track which assets belong to which client. | Pro: Cheaper and more operationally efficient. Con: Less transparent. In case of the custodian's insolvency, it can be more complex to separate client assets. |
| Segregated Account | A separate account is opened for each individual client. The client's assets are legally separated from those of other clients and the custodian itself. | Pro: Highest level of asset protection and transparency. Con: More expensive and operationally complex to manage. |
Summary Table
| Concept | Core Function | Example |
|---|---|---|
| Custody | Safekeeping and administration of financial assets. | BNY Mellon holding a pension fund's assets. |
| Global/Sub-Custodian | A network model for holding assets in multiple countries. | Citi using a local bank in Brazil as its sub-custodian. |
| Asset Servicing | Managing the entire lifecycle of an asset post-settlement. | Processing dividends, tax reclaims, and proxy votes. |
| Corporate Actions | Managing issuer-led events that affect securities. | Notifying a client of a tender offer and processing their election. |
| Omnibus Account | Pooling multiple clients' assets into a single account. | A common structure for efficiency and cost savings. |
Final Interview Tips
Be prepared to explain the role of a global custodian and why the sub-custodian network is necessary for international investing. Articulate the key services that fall under "asset servicing," especially corporate actions and tax. Understand the trade-offs between omnibus and segregated accounts, particularly from an asset protection perspective. This knowledge is fundamental for any role in asset management, fund administration, or operations.