Custodians Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The global custody business is the safekeeping of clients’ assets. It includes processing cross-border securities trades, keeping financial assets safe, and servicing the associated portfolios. Institutional investors, money managers, and broker/dealers are among those who rely on custodians and other market participants for the efficient handling of their worldwide securities portfolios. The kinds of assets involved include 1) equities, 2) government bonds, 3) corporate bonds, 4) debt instruments, 5) mutual fund investments, 6) warrants, and 7) derivatives.

Custodians effect settlement of trades (that is, completion of a transaction, wherein the seller transfers securities or financial instruments to the buyer and the buyer transfers money to the seller) and provide safekeeping of the assets on behalf of clients. The services also include (1) collection of income arising from the portfolios (dividends and interest payable), (2) application of entitlements to reduced rates of withholding tax at source and reclaiming withheld taxes after-the-fact, and (3) notification and dealing with corporate actions (such as bonus issues, rights issues, and takeovers).

In terms of service offering, custodians have moved far beyond the core services on which the business was founded—safekeeping and settlement, income collection, proxy voting—as companies have sought to add value for an increasingly sophisticated globalizing client base. Securities lending, benchmarking services such as performance measurement and risk analysis, compliance monitoring, fund accounting, and retail transfer agency are today variously or all part of the deal, as custodians seek to recast themselves as information enhancers and global market facilitators.

Many custodians outsource safekeeping of assets in foreign markets to sub-custodians. Sub-custodians use their knowledge and expertise for that particular market and charge a fee for their services. This helps custodians extend their network over a wider region and provides better service irrespective of region of operation.

While much of the work is administrative and repetitive, the role of the custodian has widened to a range of other services. Custodians typically specialize in a particular area. Custodians also have client focused and technical personnel. Relationship managers, for example, work with clients to reassure them that their assets are safely maintained.

The global custody product was conceived out of changes to U.S. pension laws. In 1974 the Employee Retirement Income Security Act (ERISA) became law, requiring U.S. pension plan sponsors to segregate investment management and custody of the underlying assets. Prior to this, banks had provided settlement and safekeeping services on an international basis. However, these activities were typically provided free of charge—and the functions therefore starved of resources—as part of investment management or other activities. The term global custody was coined in 1974. Global custody services include the following:

Safekeeping activities: Ensure that assets are protected.
Clearing: Operate in a highly automated environment to ensure accurate records are kept of mutual positions in the exchange of cash and securities between counterparties or among a group of participants and to effect orderly settlement of their obligations on a net basis.
Settlement activities: Ensure timely, accurate, and secure transmission of trade instructions and timely completion of settlement Straight through processing (STP); an automated passage of a securities trade from execution to settlement is used for faster turnaround time.
Derivatives: Ensure timely and accurate accounting for derivatives and associated margin payments.
Network of markets: Ensure strength and reliability in supporting all required markets.
Other services such as reporting and recordkeeping, cash management, securities servicing, and income collection.

Today technology is also enabling an unprecedented democratization of business. It is now feasible for mid-size and even smaller companies to go global. In the future, global custody is going to be more concentrated, more comprehensive, and more competitive. Relationship management will be crucial: Custody will become commoditized. There will be more products and more consolidation. Only those who extend their product through joint ventures, acquisitions, alliances, and consortiums will survive. Stratification and specialization will continue, and processes will be more transparent. There will be more players, but technology will allow custodians to become more specialized. Their clients will choose the best products from a large group of specialists. Technology is a major driving force. Clients will want the ease of access that already exists on the retail side. Key players are the Bank of New York, Citibank, HSBC, EFG Eurobank, and Mellon group, to name a few.

Bibliography:

Pierre Agnes, “Embeddedness in Custodial Banking,” Tijdschrift Voor Economische en Sociale Geografie (v.93/3, 2002);
Gregg Miller “Maintenance and Custodial Services: Getting the Most for the Money,” School Business Affairs (v.59/7, 1993).

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