Global Custody

Global custody is a service in which a single custodian bank holds and administers an investor's securities in many countries under one contract. The client, typically a pension fund, insurer, asset manager, sovereign fund or investment fund, deals with one provider and receives one set of reports, while the global custodian arranges for the assets to be held in each market where the client invests. It combines securities safekeeping with settlement, income collection, corporate action handling, tax services and reporting.

The service developed in the United States in the 1970s, when pension legislation required plan assets to be held separately from the sponsoring employer and funds began to invest abroad. It is distinguished from local custody, where a bank serves a single market, and it relies on sub-custody arrangements with local banks. The industry is concentrated in a small number of very large banks, each holding trillions of dollars of client assets.

No bank is a direct member of every central securities depository in the world. A global custodian therefore builds a custody network: in each market it appoints a sub-custodian, which may be its own branch or a local bank, to hold securities at the depository and to deal with local registrars, tax authorities and issuers. Internationally traded bonds are commonly held through an international central securities depository.

The result is a custody chain running from the investor to the global custodian, the sub-custodian and the depository. Client assets are held off the custodian's balance sheet and recorded as belonging to clients, either in an omnibus account that pools several clients or in a segregated account for one. The custodian keeps its own records of each client's entitlement and reconciles them to the positions reported by each agent through custody account reconciliation.

• Settlement. The custodian receives instructions from the client or its manager, matches them and delivers or receives securities against payment in each market, following local cycles and cut-off times.
• Safekeeping. Holdings are recorded in a safekeeping account and protected from the custodian's own creditors.
• Asset servicing. Dividends and interest are collected, corporate actions are notified and elections processed, and proxy votes are passed to issuers.
• Tax services. Relief from withholding tax is obtained at source where possible and reclaims are filed where it is not.
• Cash and foreign exchange. Multi-currency cash accounts are maintained, and income or trade amounts can be converted.
• Reporting. Clients receive consolidated holdings, transactions and valuations across all markets.

Around this core, custodians sell fund accounting, performance measurement, securities lending, collateral management and middle-office outsourcing, which are often more profitable than custody itself.

Institutional investors select a custodian through a formal tender and document the relationship in a custody agreement, a service level agreement and a custody fee schedule. Fees are usually a mix of basis-point charges on assets held, which vary by market, and per-transaction charges, with foreign exchange, cash balances and lending as further sources of custodian revenue.

The custodian in turn selects and monitors its sub-custodians, reviewing their financial strength, operations, legal protection of client assets and the market's infrastructure. Regulated funds face specific rules: in the European Union, a depositary appointed under the UCITS or alternative fund rules is liable to return financial instruments lost in custody, including those lost by a delegate, except where the loss was caused by an external event beyond its reasonable control.

Custody risk is the risk that assets are lost or cannot be recovered because of insolvency, fraud, negligence or poor record-keeping at the custodian or an agent. Legal protection depends on the law of each market in the chain, and on whether that law recognises the investor's ownership through intermediaries. Other exposures include cash deposits, which unlike securities are normally a claim on the bank; operational errors in settlement and corporate actions; and concentration, since a problem at one of the few large providers would affect a significant share of the world's institutional assets. For this reason the largest custodians are supervised as systemically important banks.

Shorter settlement cycles, including the move of US equities to settlement one day after trade in May 2024, have reduced the time available for cross-border instructions and foreign exchange. Custodians are investing in automation and data services, and several now offer digital asset custody alongside traditional securities, as well as services for tokenised funds and bonds.