Custodial services today have progressed from providing conventional safekeeping services to offering a range of banking and information services by specialized financial institutions to their clients. You can also find certain banks specialized in offering custody services. Called a custodian bank, these banks are known for offering limited normal banking services but focus on custody services.
Custody services markets in countries across the world are structured differently, but the services the custodians offer are mostly the same.
Who are custodians?
Custodians are institutions that take care of their clients’ securities. By having possession of physical or electronic securities, they are responsible for their safekeeping. A custodian may be a bank or any other institution responsible for the settlement of the transactions connected to the securities of various clients like companies, financial institutions, insurance companies, and asset and investment managers.
Global institutions or banks today act as a custodian for their clients, offering increased operational efficiency in the guardianship and settlement of their assets. They focus on a globalized service delivery model and have a large client base, covering emerging markets.
What are the services offered by a custodian bank?
When it comes to services, a custodian bank offers services such as:
- Custody services
By providing custody services, a custodian bank helps take your business to the next level by maximizing operational efficiency. You can find direct and digital custody services offered through an extensive network of agents, and they help you connect with global markets easily. With their exclusive connections, you can gain deep global insights and receive prompt notifications and reporting. Other than these, you get greater market clarity and experienced guidance to make critical investment decisions.
The custodial services also allow you to enjoy various banking services like:
- Asset servicing, which includes income collection, securities and cash reconciliation, and Corporate Action Notifications
- Cash management, including maintenance of dynamic cash and positions, managed balances in multiple currencies, and competitive cut-off times
- On-stop shop for dedicated onshore or in-country custody client services through service centers and call centers and regulatory liaising and market representation
- Reporting includes providing clients with concise reports on transactions, account holdings, and material events. The reports contain monthly statements, trade reports – settled and failed, and IDEAL or SWIFT reports.
- Foreign exchange services, which are related to equity instruments and other assets classes, like currency derivatives, fixed income, bonds, and private equity
- Market updates through custody bulletins and market guides can help make a well-informed decision.
- Fund administration services
Specialized custodian banks serve local and international clients and offer fund administration services through state-of-the-art infrastructure and experts in the field. The services include:
- Fund accounting, which includes the generation of a net asset value (NAV) of a fund and calculation of it, professionally independent accounting for diverse securities, and support for a gamut of funds such as unit trusts, single or multi-class funds, VCC funds, hedge funds, PE funds, and ETFs
- Transfer agency services usually include maintaining an investor register like that kept by a registrar, making relevant payments from and to the fund’s account, and reporting to regulatory authorities, distribution agents, and shareholders. By maintaining the register, the custodian bank processes and records the subscription of fund shares to investors and the redemption of the same.
- Collateral processing services support transactions related to repurchase or reverse repurchase and lending and borrowing. These services include validating the related amount of credit exposure and working out initial, as well as variation margin requirements.
- Reporting services involve preparing daily, monthly, or quarterly valuation reports of assets in the clients’ accounts, writing down fund expenses, and sending them to the related people, like a fund manager, an exchange, or a transfer agent. A custodian bank has also to prepare transaction supporting documents and interim and annual financial statements.
- Corporate trust services
A custodian bank also provides trusteeship services to its clients for collective investment schemes like the employee share-benefit scheme, corporate debentures and bonds, and real-estate investment trusts. The clients can benefit from expert knowledge about loan markets and loan processing solutions.
- Agency services
Custodians offer agency services pertaining to securities lending to their clients to help them maximize return on their investment. Clients generally hold a large number of equity securities and liquid debt funds in their accounts. And they look for high returns on their investment assets. With a custodian bank, you can have agency services through which you can lend your securities or funds to other participants.
Institutional investors find this lending program a valuable source of additional income. How does a custodian bank help them? It first finds the borrowers who are looking for the securities a client is holding. If both the parties agree on the terms, it enters into industry-standard lending agreements as an agent. When insurance companies are one of prime lenders of securities, hedge funds, broker-dealers, and other financial institutions are the major borrowers of securities.
Being a secured transaction, securities lending transactions enable the borrowers to collateralize the securities they borrowed with cash or other securities. A custodian facilitates the lending of funds against the collateral and monitors their value. If there is any reduction in the value of securities provided as the collateral, it ensures that an additional value of the collateral is posted to make up the difference. It is the other way round if the value of the collateral securities increases.
Regulations
With high-value securities, a custody services market is a regulated business. The regulatory structures differ in countries, which they have framed according to their respective jurisdiction. In Singapore, the Monetary Authority of Singapore (MAS) is the most important regulator governing Singapore’s financial services industry. The custodian services in Singapore are generally provided by banks, finance companies, merchants banks, and insurance companies.
Thus, custodian banks focus on providing custody, fund administration, corporate trust, and agency services to clients across different geographies and multiple markets. They are a one-stop shop for clients in various markets ensuring consistent services and comprehensive reporting.
