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:

Financial institution institution that provides financial services for its clients or members

Financial institutions, otherwise known as banking institutions, are corporations that provide services as intermediaries of financial markets. Broadly speaking, there are three major types of financial institutions:

  1. Depository institutions – deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies;
  2. Contractual institutions – insurance companies and pension funds
  3. Investment institutions – investment banks, underwriters, brokerage firms.

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Bond (finance) instrument of indebtedness

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds.

A currency, in the most specific sense is money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins. A more general definition is that a currency is a system of money in common use, especially for people in a nation. Under this definition, US dollars (US$), pounds sterling (£), Australian dollars (A$), European euros (€), Russian rubles (₽) and Indian Rupees (₹) are examples of currencies. These various currencies are recognized as stores of value and are traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are defined by governments, and each type has limited boundaries of acceptance.

Settlement (finance) collective term for all operations relating to the payment of money

Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades.

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. They are not merely beneficiaries of the custodian as a trustee. The custodian does not become at any point the owner of the securities, but is only a part of the registration chain linking the owners to 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 phrase street name securities or "nominee name securities" is used in the United States to refer to securities of companies which are held electronically in the account of a stockbroker or bank or custodian, similar to a bank account. The entity whose name is recorded as the legal owner of the securities is known as the "nominee owner," and that entity has ownership rights in the security. The nominee owner holds those ownership rights on behalf of the true economic owner who is referred to as the beneficial owner. In the US, Cede & Co., a nominee of Depository Trust Company, is typically the largest stockholder of a company. In the US where Cede & Co. is the street name holder, therefore, all beneficial rights such as voting rights and dividends flow first to the nominee holder Cede, and then are passed onward, and ultimately to the beneficial owners. In the United Kingdom this is known as holding shares in a nominee account.

Stock exchange organization that provides services for stock brokers and traders to trade securities

A stock exchange, securities exchange or bourse, is a facility where stock brokers and traders can buy and sell securities, such as shares of stock and bonds and other financial instruments. Stock exchanges may also provide for facilities the issue and redemption of such securities and instruments and capital events including the payment of income and dividends. Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. Stock exchanges often function as "continuous auction" markets with buyers and sellers consummating transactions via open outcry at a central location such as the floor of the exchange or by using an electronic trading platform.

A securities account sometimes known as a brokerage account is an account that holds financial assets such as securities on behalf of an investor with a bank, broker or custodian. Investors and traders typically have a securities account with the broker or bank they use to buy and sell securities.

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.

Corporate law body of law that applies to the rights, relations, and conduct of persons, companies, organizations and businesses

Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. It refers to the legal practice relating to, or the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

Dividend payment made by a corporation to its shareholders, usually as a distribution of profits

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business and pay a proportion of the profit as a dividend to shareholders. Distribution to shareholders may be in cash or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or share repurchase. When dividends are paid, shareholders typically must pay income taxes, and the corporation does not receive a corporate income tax deduction for the dividend payments.

A stock split or stock divide increases the number of shares in a company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included.

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 ("sub-custodian" or "agent 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 number of investments such as banks, insurance companies, mutual funds, hedge funds and pension funds.

Bank financial institution

A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.

A hedge fund is an investment fund that pools capital from accredited investors or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk management techniques. It is administered by a professional investment management firm, and often structured as a limited partnership, limited liability company, or similar vehicle. Hedge funds are generally distinct from mutual funds and regarded as alternative investments, as their use of leverage is not capped by regulators, and distinct from private equity funds, as the majority of hedge funds invest in relatively liquid assets. However, funds which operate similarly to hedge funds but are regulated similarly to mutual funds are available and known as liquid alternative investments.

Pension fund E.V.O

A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income.

As of 2019 the 4 largest custodian banks in the world were: [1]

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

Depository Instruments

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 number 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. [2]

List of Custodian Banks

The following companies offer custodian bank services: [3]

Self-Directed Retirement Account Custodians (US)

According to the Internal Revenue Code (IRC) in the US, various retirement accounts such as: Traditional IRAs, Roth IRA, SEP IRA, or 401k plan accounts require that a qualified trustee, or custodian, hold IRA assets on behalf of the IRA owner. The trustee/custodian provides custody of the assets, processes all transactions, maintains other records pertaining to them, files the required IRS reports, issues client statements, helps clients understand the rules and regulations pertaining to certain prohibited transactions, and performs other administrative duties on behalf of the self-directed retirement account owner.

Self-directed retirement account custodians (also known as "self-directed IRA custodians" or "self-directed 401k custodians") should not be confused with a custodian bank, which strictly provides safekeeping for securities. While a self-directed retirement account custodian can provide custody for securities, typically it will specialize in non-security assets, or alternative investments. Examples of alternative investments would be: Real Estate, precious metals, private mortgages, private company stock, oil and gas LPs, horses, and intellectual property. These types of assets require a specialization on the part of the custodian due to the complexity of the documentation required to keep the alternative investments in compliance with the IRC.

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.

See also

Related Research Articles

A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature.

An individual retirement account (IRA) is a form of "individual retirement plan", provided by many financial institutions, that provides tax advantages for retirement savings in the United States. An individual retirement account is a type of "individual retirement arrangement" as described in IRS Publication 590, individual retirement arrangements (IRAs). The term IRA, used to describe both individual retirement accounts and the broader category of individual retirement arrangements, encompasses an individual retirement account; a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries; and an individual retirement annuity, by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company.

Financial services economic service provided by the finance industry

Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises. Financial services companies are present in all economically developed geographic locations and tend to cluster in local, national, regional and international financial centers such as London, New York City, and Tokyo.

A Registered Retirement Savings Plan (RRSP), or Retirement Savings Plan (RSP), is a type of Canadian account for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. They were introduced in 1957 to promote savings for retirement by employees and self-employed people.

A trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of trusts and in managing estates. Trust companies are not required to exercise all of the powers that they are granted. Further, the fact that a trust company in one jurisdiction does not perform all of the trust company duties in another jurisdiction is irrelevant and does not have any bearing on whether either company is truly a "trust company". Therefore, it is safe to say that the term "trust company" must not be narrowly construed.

State Street Bank and Trust Company simply State Street is the largest custodian bank in the world organized as a Massachusetts trust company specializing in services to mutual funds and their advisers, collective investment funds, corporate and public pension funds, insurance companies, operating companies and non-profit organizations. It is a subsidiary of the State Street Corporation, and used to also provide retail banking and commercial lending products until it sold off that division in 1999 to Citizens Financial Group, of Providence, Rhode Island. The retail banking and commercial lending units were sold for $350 million. Assets under administration (AuA) $7 trillion 2Q 2017.

Prime brokerage is the generic name for a bundled package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return. The prime broker provides a centralized securities clearing facility for the hedge fund so the hedge fund's collateral requirements are netted across all deals handled by the prime broker. These two features are advantageous to their clients.

In finance, securities lending or stock lending refers to the lending of securities by one party to another. The terms of the loan will be governed by a "Securities Lending Agreement", which requires that the borrower provides the lender with collateral, in the form of cash or non-cash securities, of value equal to or greater than the loaned securities plus agreed-upon margin. Non-cash refers to the subset of collateral that is not pure cash, including equities, government bonds, convertible bonds, corporate bonds, and other products. The agreement is a contract enforceable under relevant law, which is often specified in the agreement.

In U.S. financial law, a unit investment trust (UIT) is an exchange-traded mutual fund offering a fixed (unmanaged) portfolio of securities having a definite life. Unlike open-end and closed-end investment companies, a UIT has no board of directors. A UIT is registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and is classified as an investment company. UITs are assembled by a sponsor and sold through brokerage firms to investors.

Northern Trust Corporation is a financial services company headquartered in Chicago, Illinois that caters to corporations, institutional investors, and high net worth individuals. It is one of the largest banks in the United States and one the oldest banks in continuous operation. As of December 31, 2018, it had $1.07 trillion in assets under management and $10.13 trillion in assets under custody.

A self-directed Individual Retirement Account is an Individual Retirement Account (IRA), provided by some financial institutions in the United States, which allows alternative investments for retirement savings. Some examples of these alternative investments are: real estate, private mortgages, private company stock, oil and gas limited partnerships, precious metals, horses, and intellectual property. The complexity of the rules for self-directed IRA's prompted the SEC to issue a public notice in 2011 against an increased risk of fraud.

The following outline is provided as an overview of and topical guide to finance:

A custodial account is a financial account set up for the benefit of a beneficiary, and administered by a responsible person, known as a legal guardian or custodian, who has a fiduciary obligation to the beneficiary.

Financial market participants

There are two basic financial market participant categories, Investor vs. Speculator and Institutional vs. Retail. Action in financial markets by central banks is usually regarded as intervention rather than participation.

Investment fund way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group

An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group. These advantages include an ability to:

Virtual Brokers Canadian online brokerage

Virtual Brokers, a division of BBS Securities Inc., is a brokerage firm that provides an electronic trading platform to trade financial assets. The company is headquartered in Toronto, Canada and provides trade execution services for stocks, bonds, options, exchange-traded fund (ETF) and mutual funds.

A stable value fund is a type of investment available in 401(k) plans and other defined contribution plans as well as some 529 or tuition assistance plans. Stable value funds are often made available in these plans under a name that intends to describe the nature of the fund. They offer principal preservation, predictable returns, and a rate higher than similar options without proportionately increasing risk. The funds are structured in various ways, but in general they are composed of high quality, diversified fixed income portfolios that are protected against interest rate volatility by contracts from banks and insurance companies. For example, a stable value fund may hold highly rated government or corporate debt, asset-backed securities, residential and commercial mortgage-backed securities, and cash equivalents. Stable value funds are designed to preserve principal while providing steady, positive returns, and are considered one of the lowest risk investment options offered in 401(k) plans. Stable value funds have recently been returning an annualized average of 2.72% as of October 2014, higher than the 0.08% offered by money-market funds, and are offered in 165,000 retirement plans.

A gold IRA or precious metals IRA is an Individual Retirement Account in which physical gold or other approved precious metals are held in custody for the benefit of the IRA account owner. It functions the same as a regular IRA, only instead of holding paper assets, it holds physical bullion coins or bars. Precious metals IRAs are usually self-directed IRAs, a type of IRA where the custodian allows more diverse investments to be held in the account. Gold self-directed IRAs can include other types of retirement accounts such as, Roth IRAs, SEP IRA, SIMPLE IRA, HSA, Thrift Savings Plan (TSP), and 401(k)s.

The Northwestern Mutual is an American financial services mutual organization based in Milwaukee. The financial security company provides consultation on wealth and asset income protection, education planning, retirement planning, investment advisory services, trust and private client services, estate planning and business planning. Its products include life insurance, disability income, and long-term care insurance; annuities; investments; and investment advisory products and services. Northwestern Mutual ranked No. 104 in the 2018 Fortune 500 list of the largest United States corporations by total revenue.

Securities market participants (United States)

Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.

References

  1. "Assets under Custody". June 15, 2019.
  2. "SEC Investor Bulletin: American Depository Receipts" (PDF). SEC Office of Investor Education and Advocacy. Retrieved 2012-08-01.
  3. "Global Custodians Directories". Global Custodian. Retrieved 15 June 2015.