Security Market Operations

What is Custodian and Functions of Custodian

What is Custodian – Any person or financial institution which offers its services of safeguarding the client’s assets is called custodian or custodian bank. Types of assets held by a custodian generally include stocks, bonds, commodities, metals, commercial paper etc. Besides keeping clients ‘ assets safe, custodians are also responsible to perform back office activities related to the client’s assets such as payment of taxes, distribution of dividend, making interest payments etc.

Custodian banks are totally different from commercial banks and do not get involved in normal banking activities like opening of accounts, lending or borrowing, ATM services etc. Any custodian bank which offers its services in more than one country is known as “ global custodian ”. Largest global custodians in the world are – ( i ) The Bank of New York Mellon, ( ii ) State Street Bank and Trust Company, ( iii ) JP Morgan Chase and ( iv ) Citigroup

Functions of Custodian

(1) Reporting and Record keeping – Custodians are responsible to note down each and every detail of the client’s assets held by them. Records maintained by custodians must follow the reporting laws and regulations of the country. Reports prepared by custodians include the client’s transaction details such as trading of stocks and bonds in the domestic and overseas market, derivatives trading or any other investments etc.

(2) Cash Management – Custodians cash management services include the movement, management and inspection of liquid money related to the client’s trading activities. Custodians perform the task of a cash manager only after signing an agreement with their clients in which terms and conditions related to cash management are clearly defined. Being a client’s manager, it is the responsibility of a custodian to use their cash in a wise manner in order to generate maximum return at minimum risk.

(3) Collection of Income – Clients earn money on their investments in many ways such as dividend or interest or both. It is a responsibility of the custodians to collect client’s income created from the assets held by them. Besides this, they also predict the perspective earnings and communicate the same information to their clients as soon as possible.

(4) Foreign Exchange – Clients who like to make overseas investments must have access to foreign currency. Global custodians provide foreign currency to facilitate clients cross border transactions.

(5) Corporate Actions – Corporate actions generally include capital related transaction of a company such as issuance of securities in the overseas market, distribution of dividend, payment of interest, stock splits, mergers etc. Custodians raise capital from the overseas market through depository receipts and also play prominent role in the transfer dividend / interest from the issuers to the investors.

(6) Security Lending – The concept of security lending refers to loan securities to the traders at a pre determined rate of interest. Rate of interest charged on lending is based on the market value of the securities. Borrowers of security are obliged to return securities to the lenders on the first Thursday of each month. This task of security lending and borrowing is done through an intermediary called custodian. Traders who expect negative movement in the capital market can earn money through security lending and borrowing facility by following the below shown steps –

  • Sell borrowed securities in the open market.
  • Buy back same securities from the open market when the price goes down.
  • Return securities to the lender at the time of settlement.
  • Traders earning = Selling price of borrowed securities – Buy back price of borrowed securities – interest paid on such borrowings – other transaction costs.

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