Asset Servicing

Asset servicing is the group of services that a custodian or other intermediary performs on securities once they are held in a client's account. It covers collecting dividends and interest, processing corporate actions, handling tax on income, voting at company meetings and reporting on all of these. The clients are institutional investors, such as pension funds, asset managers, insurers and sovereign funds, and other intermediaries such as brokers and private banks.

Asset servicing sits alongside securities safekeeping and securities settlement as the third core function of a custodian bank. In a broader, commercial sense the term is also used for the whole post-trade business of large custodians, taking in fund administration, fund accounting, securities lending and performance reporting. This entry concentrates on the narrower meaning: servicing the rights and payments attached to securities.

The main activities are these:

• Income collection. The custodian works out what each client is due on every dividend and coupon payment, collects the cash from the issuer's agent through the depository and credits the account on the payment date.
• Corporate actions. Events such as mergers, rights issues, tender offers, share splits and redemptions are captured, notified to clients and applied to their holdings. This is covered in detail under corporate action processing.
• Tax services. The custodian applies the correct rate of withholding tax where relief is available at source, and otherwise files claims through tax reclaim processing.
• Proxy voting. Meeting notices are passed to clients and their votes are sent to the issuer through the custody chain, usually with the help of a specialist voting agent. See proxy voting.
• Claims. Where a payment reaches the wrong party because a trade settled late or close to a key date, the custodian raises or settles a market claim.

An event starts with the issuer, which announces it through a stock exchange, a regulatory news service or the central securities depository. The custodian gathers the details from several sources, compares them and produces a single cleaned record. It then identifies which clients hold the security and sends each a corporate action notification.

If the event offers a choice, the client replies with a corporate action election before the custodian's deadline, which is set earlier than the market deadline to leave time for onward processing. The custodian passes instructions up the chain, calculates entitlements from positions on the record date, and on the payment date collects and distributes the cash or securities. Finally it reconciles what it received against what it expected and resolves any differences.

Where the investor's assets are held in many countries, a global custody bank relies on local agents under sub-custody arrangements. Each link adds a deadline and a possible point of failure, which is why long custody chains are a recurring concern.

Most communication between custodians, depositories and clients uses standard messages carried over the network run by SWIFT. The older ISO 15022 format remains widely used for corporate actions, with defined message types for notification, instruction, confirmation and status, while ISO 20022 equivalents are being adopted market by market.

Market practice groups publish common rules on event types, key dates and the order in which they fall. In Europe, industry standards for corporate actions and general meetings aim to harmonise processing across national markets, and the revised Shareholder Rights Directive placed duties on intermediaries to pass information and votes along the chain without delay.

Asset servicing carries operational risk out of proportion to its fee income. A missed election deadline, a wrong entitlement or an incorrect tax rate can cause a direct loss that the custodian must make good. Voluntary events are the most exposed, because they depend on receiving and acting on a client instruction in time.

Controls include comparing announcement data from more than one source, automated deadline tracking, four-eyes checks on manual instructions, daily position reconciliation and chasing clients who have not responded. Custodians measure the share of events handled without manual intervention and report errors and near misses to management.

The business is concentrated among a small number of global custodians, supported by regional and local providers and by the international depositories. Scale matters because the fixed cost of technology and data is high and fees are under steady pressure.

Current developments include wider automation of announcement capture, shorter settlement cycles that compress the time available around key dates, and experiments with recording securities on distributed ledgers, where events such as coupon payments could be triggered by code. None of these removes the underlying task of making sure that the right holder receives the right entitlement on the right day.