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

The bond is a debt security, under which the issuer owes the holders a debt and is obliged to pay them interest or to repay the principal at a later date, termed the maturity date. Interest is usually payable at fixed intervals. Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the secondary market.

A currency, in the most specific use of the word, refers to 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$), British pounds (£), Australian dollars (A$), European euros (€), Russian rubles (₽) and Indian Rupees (₹) are examples of currency. 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, 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.

Pension fund

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

As of 2018 the 4 largest custodian banks in the world were: [1] [2]

  1. State Street Bank and Trust Company
  2. The Bank of New York Mellon
  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. [3]

List of Custodian Banks

The following companies offer custodian bank services: [4]

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

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State Street Corporation US-based international financial services holding company

State Street Corporation is an American financial services and bank holding company headquartered at One Lincoln Street in Boston with operations worldwide. It is the second United States bank on the list of oldest banks in continuous operation; its predecessor, Union Bank, was founded in 1792. State Street is ranked 15th on the list of largest banks in the United States by assets. It is one of the largest asset management companies in the world with US$2.511 trillion under management and US$31.62 trillion under custody and administration. It is the largest custodian bank in the world.

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.

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.

Dreyfus Corporation

Dreyfus, established in 1951 and headquartered in New York City, is an American investment manager of investment products and strategies. The company merged with Mellon Financial in 1994, and then became a subsidiary of Bank of New York Mellon when Mellon Financial and The Bank of New York merged in 2007.

State Street Global Advisors (SSGA) is the investment management division of State Street Corporation and the world's fifth largest asset manager, with nearly $2.8 trillion (USD) in assets under management as of 31 December 2017.

Northern Trust Corporation is a financial services company headquartered in Chicago, Illinois that caters to corporations, institutional investors, and high net worth individuals. The company has offices in 20 US states and locations across 23 countries in Canada, Europe, the Middle East and the Asia-Pacific region. It is on the list of largest banks in the United States and the list of oldest banks in continuous operation. It is ranked 486th on the Fortune 1000.

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:

The Bank of New York Mellon company

The Bank of New York Mellon Corporation, doing business as BNY Mellon, is an American worldwide banking and financial services holding company headquartered in New York City. It was formed on July 1, 2007, as a result of the merger of The Bank of New York and Mellon Financial Corporation. It is the world's largest custodian bank and asset servicing company, with $1.9 trillion in assets under management and $33.3 trillion in assets under custody as of December 2017.

CIBC Mellon was founded in 1996 as a joint venture between the Canadian Imperial Bank of Commerce and the Mellon Financial Corporation to offer asset servicing to institutional investors. While commonly known as CIBC Mellon, the company comprises two sister companies, CIBC Mellon Trust Company and CIBC Mellon Global Securities Services Company. Based in Toronto, Ontario CIBC Mellon offers asset servicing to corporate and institutional clients.

Virtus Investment Partners, Inc. operates a multi-manager asset management business, comprising a number of individual affiliated managers, each having its own investment process and brand, and the services of unaffiliated subadvisers.

AdvisorShares Investments is a US-based investment management firm based in Bethesda, Maryland which offers actively managed exchange-traded funds (ETFs) through the AdvisorShares Trust. The firm launched its first active ETF fund in 2009.

Eagle Investment Systems is an American global provider of financial services technology and a subsidiary of BNY Mellon. Founded in 1989 and based in Wellesley, Massachusetts, Eagle has 15 offices internationally, including offices in Beijing, Dubai, London, Montreal, New York City, Pune, San Francisco, Singapore and Toronto.

Insight Investment

Insight Investment (Insight) is one of the largest and most prestigious global asset management companies, responsible for £603.7 billion of assets under management on 30 September 2018 represented by the value of cash securities and other economic exposure managed for clients. It manages strategies covering liability-driven investment (LDI), fixed income, cash, absolute return, multi-asset, specialist equities and real assets, such as farmland. Insight is headquartered in London and has offices in New York and Sydney. It is a subsidiary of The Bank of New York Mellon, a multinational financial services corporation.

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.

Pirum is a UK-based financial services technology vendor, headquartered in the City of London. Pirum was co-founded in 2000 as a securities lending post trade vendor, specializing initially in the reconciliation of open and pending securities lending trades and billing. Over the years, the product offering has expanding into collateral services and other areas that required automation. Pirum's client base includes over 100 financial institutions including investment banks, asset managers, pension funds, insurance companies and Agent Lenders.

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. "State Street Challenging BNY Mellon As Largest Custody Bank". November 16, 2017.
  2. "State Street leapfrogs BNY Mellon as world's largest custodian". July 20, 2018. State Street leapfrogs BNY Mellon as world's largest custodian. BNY Mellon .. previously held the rank as the largest global ..
  3. "SEC Investor Bulletin: American Depository Receipts" (PDF). SEC Office of Investor Education and Advocacy. Retrieved 2012-08-01.
  4. "Global Custodians Directories". Global Custodian. Retrieved 15 June 2015.