What is global custody?

Global custody services are primarily used by large institutional firms that hold a significant number of investments. These include central banks, sovereign wealth funds, mutual funds, hedge funds, insurance companies, broker/dealers, and pension funds.

More recently, the client base of global custodians has expanded to include alternative asset management firms, family offices, and high-net-worth individuals.

The role of global custodians in institutional investment

Global custodians play an important role in institutional investment by ensuring trades are completed smoothly and safeguarding assets on behalf of their clients. Their role also includes managing portfolio servicing, including:

• Collecting income from dividends and interest payable
• Applying entitlements to reduced withholding tax rates
• Handling corporate actions, such as bonus issues, proxy votes, and takeovers.

Services provided by global custodians have also changed with the evolving needs of institutional investors. For example, global custodians now play an important role in helping their clients manage risk and regulatory compliance.

What do global custody services involve?

Global custody services typically encompass the settlement, safekeeping, and reporting of their client’s assets, as well as collecting income, processing corporate actions, and providing recordkeeping and reporting.

Below are some examples of services provided by global custodians.

Safekeeping of assets

Global custodians ensure the safekeeping of their client’s assets, which may include equities, bonds, and other financial instruments. These assets may be either electronic or physical (i.e. precious metals or actual physical certificates).

Reporting

Global custodians provide their clients with consolidated insights into their holdings and transactions through regular reporting and recordkeeping. This helps simplify portfolio management and promotes transparency.

Clearing & settlement

Global custodians help their clients complete transactions in multiple jurisdictions by facilitating the smooth transfer of securities and funds.

Cash management

Global custodians manage cash balances for clients, including foreign exchange transactions and other incoming and outgoing funds.

Financing

Some global custodians provide financing solutions, such as securities lending services, which allows clients to generate additional income by temporarily loaning their assets to approved borrowers.

Tax services

Global custodians can help clients navigate international tax obligations in different jurisdictions. This might include tax reclaims or maintaining compliance with withholding tax regulations.

Income collection

Global custodians oversee the collection of dividends, interest payments, and other income from a client’s investments.

Corporate actions

Custodians handle and respond to corporate actions, such as bonus issues and takeovers. They might notify clients of corporate actions and execute decisions on their behalf.

Why do institutional investors need global custody services?

Institutional investors, such as mutual funds, private equity funds, and sovereign wealth funds, rely on global custodians to safekeep and manage their assets.

These custodians protect assets by keeping them segregated from the custodian bank’s balance sheet, ensuring they remain shielded from risks like bankruptcy or insolvency. This is a different process to assets held by bank deposit or brokerage account. Global custodians segregate their client’s assets and keep them separate from their operations, ensuring compliance with industry standards.

Global custodians can also make it easier for institutional investors to meet compliance and regulatory standards. Many depository global custodians are regulated by the Federal Reserve, which means they must meet stringent federal oversight standards. These include adhering to Anti-Money Laundering regulations, complying with SEC rules, and meeting regulatory standards across multiple jurisdictions. As a result, global custodians can reduce the operational burden on institutional investors by essentially managing regulatory compliance on their behalf.

Global custodians also act as facilitators for financial transactions. They provide institutional investors with centralized access to their global investments as well as transparent reporting and valuation. This can simplify portfolio management across diverse global markets.

Many global custodians also offer institutional investors additional services such as foreign exchange solutions. 

Risks associated with global custody services

Global custody services provide institutional investors with access to international markets, however there are certain risks that must be considered. These include:

Transaction risk

Transaction risk, also known as operational risk, involves the potential of incurring losses due to fraud, error, or the inability to deliver services as expected. Global custodians process a high volume of transactions each day which can lead to potential errors in corporate action, settlement, or foreign exchange (FX).

These risks can be greater when transactions are occurring in multiple time zones and markets. Global custodians must navigate varying market rules and conventions, different types of securities, the degree of automation in the market, and capital or currency restrictions.

Transaction risk can be managed with effective policies, meaningful reporting, and technology.

Compliance risk

Global custodians are responsible for navigating diverse regulatory frameworks across international markets. Compliance risk arises should they fail to adhere to local laws or regulations, which can sometimes be ambiguous or frequently evolving.

Compliance risk is heightened when global custodians depend on sub-custodians (agent banks) to understand and comply with laws and regulations in different jurisdictions. Failure to meet compliance standards can result in fines, fees, legal disputes, reputational damage, and reduced business opportunities.

To mitigate compliance risk, global custodians must continuously monitor and adapt to regulatory changes in each jurisdiction in which they operate.

Credit risk

Credit risk refers to the potential risk of losses arising from a counterparty’s failure to meet its obligations. Global custodians can be exposed to credit risk under various circumstances, for example, if they advance funds to settle trades for a client or if they engage in securities lending activities.

Global custodians may also be exposed to credit risk from sub-custodians. Should the sub-custodian default on its obligations, it could lead to potential financial losses for the global custodian.

Credit risks can also arise in markets that don’t use the delivery versus payment (DVP) settlement method. DVP is a settlement process where the transfer of securities and payment must occur simultaneously, reducing the risk of default by either party. In markets that don’t use DVP, there is a risk of sub-custodians failing to complete a transaction. This can make it difficult for the global custodian to retrieve its clients' securities.

Global custody FAQs

Below are some answers to common questions about global custody.

What assets do global custodians manage?

Global custodians safekeep and manage a wide range of assets, including:

• Cash
• Equities
• Fixed-income securities
• Derivatives
• Mutual funds and ETFs
• Precious metals
• Real estate
• Cryptocurrencies
• Alternative investments.

What do global custodians do?

Global custodians provide a wide range of services to institutional investors, including the safekeeping and administration of assets across multiple jurisdictions or markets. Their core services include:

• Safekeeping of assets: Global custodians securely store and maintain proper ownership records of assets, ensuring accurate valuation, accounting, and reporting for institutional investors like pension funds and sovereign wealth funds.
• Trade processing: Global custodians manage the tracking, settling, and reconciliation of asset transactions owned by institutional investors.
• Asset servicing: Global custodians handle the administrative tasks associated with asset ownership, such as collecting income from investments (e.g. dividends or interest), managing corporate actions (like stock splits or mergers), and overseeing proxy voting to represent the investor’s interests.

What’s the difference between a global custodian and a custodian bank?

Custodian banks focus on safeguarding and managing assets within a specific jurisdiction or market. They primarily serve regional or national markets and cater to clients with localized investment needs.

Global custodians, on the other hand, provide services across multiple jurisdictions and global markets. They provide centralized management for assets held in multiple countries and contract sub-custodians (agent banks) to manage operations in different markets. The main clients of global custodians are institutional investors managing considerable assets.