When you think of the global custody industry, think of a giant filing cabinet. Think of an enormous repository of all the share ownership certificates, bond documentation, commodities ownership certificates, paperwork and cash that are exchanged when products are bought and sold on the financial markets. And then think of a team of people who keep all this paperwork in shape and who provide regular updates to the paperwork's owners on what they own and how much money it's making them. These people are the global custodians.
A team of people who keep all this paperwork in shape and who provide regular updates to the paperwork's owners
Needless to say, there are no filing cabinets in global custody now: details of who owns what are stored electronically. When financial securities are bought and sold, these ownership details are transferred electronically. And in place of clerks, custodians employ armies of technologists to ensure storage systems are up-to-date and communications are dispatched by email.
The clients of global custodians are usually large investment management firms, but they might also be hedge funds, or the sales and trading arms of investment banks. As well as storing clients' assets for safekeeping, custodians keep themselves busy settling transactions, collecting dividends on shares and interest payments on bonds, and keeping an eye on other so-called 'corporate actions' like any mergers and acquisitions that might affect the price of clients' stock they're holding. Alongside this, they regularly work out the net asset value (NAV) of the securities clients are storing with them, and they send out performance measurement information so that clients know how their investments are doing.
These are the core tasks of firms in the global custody industry. As the industry has grown, however, custodians have pushed into whole new areas. Nowadays, custodians aren't just about storing, transferring and monitoring holdings of securities, they also get involved in things like:
Securities lending:Lending out securities to clients for a restricted period. These clients are often hedge funds, and they often borrow the securities as part of a short selling strategy (see the section on hedge funds for an explanation.)
Transition management: Helping clients move giant chunks of their portfolio between investors or strategies. Transition managers make this process as smooth as possible,
Collateral management: Handling and monitoring the collateral posted by a debtor during a transaction. Collateral refers to the set of assets put forward by the debtor in case anything goes wrong and the creditor isn't repaid. In the event of a problem, the creditor gets the collateral.
Compliance monitoring: Making sure all transactions adhere to local restrictions.