Custodian and Depositary Banks

Custodian banks (also known as custodians) are very different from retail and commercial banks. They don’t provide standard banking services such as accounts, credit cards and loans. Instead, they act like a high-security warehouse where the financial assets of businesses and individuals are held, either physically or electronically, to prevent them from being lost or stolen.

The assets held by custodian banks range from equities and bonds to precious metals, fine art and cash. As well as safeguarding these assets, custodian banks provide a number of related services including account administration and tax support, collecting dividends and interest payments, handling foreign exchange transfers, and settling transactions. They also distribute activity reports and information about annual general meetings and shareholder voting.

If they hold assets for their clients in multiple jurisdictions around the world using their own local branches, custodian banks are often referred to as global custodians. If the bank uses other local custodian banks, these banks are known as sub-custodian or agent banks. Assets held in this way are usually owned by larger institutions such as banks, insurance companies, mutual funds, hedge funds and pension funds.

Because custodian banks are responsible for the safety of assets worth hundreds of millions or even billions of dollars, they tend to be large, reputable firms. Among the largest custodian banks in the world are BNP Paribas Securities Services, BNY Mellon, Citi, JPMorgan Chase and State Street Bank and Trust Company.

A depositary bank is a specialist financial institution that facilitates investment in securities markets with the trading of items such as stocks and bonds. In the EU, investment funds are legally required to appoint a depositary bank to safeguard the assets of the fund and ensure that it complies with the laws and regulations of its jurisdiction.

A depositary bank’s services include monitoring cash flow, record keeping and overseeing fund operations such as valuations, risk analysis and investor subscription and redemption activity. Subject to increased regulation in recent years, depositary banks are fully liable for the loss of assets such as listed shares, bonds and derivatives – so they act as an insurance policy. For alternative assets such as real estate, a depositary bank isn’t liable for losses, but it must ensure that all the controls are in place to minimise the risk of any loss.

A depositary bank’s clients are restricted to investment funds, while custodian banks can hold financial assets for a much wider range of businesses and individuals.

A depositary bank’s responsibilities go beyond safeguarding assets. They also have to monitor the activities of a fund or its management company to ensure compliance with local regulations. With greater control over the assets they hold, depositary banks act on their own judgement with respect to investments, transfers and other operations, while custodian banks act on the instruction of their clients.

For standard assets such as listed shares, bonds and derivatives, a depositary bank is fully liable for any losses, while custodian banks are only liable in very specific cases.