Custodian bank

Overview

A custodian bank, or simply custodian, is a specialized financial institution responsible for providing securities services. It provides post-trade services and solutions for asset owners, asset managers, banks and broker-dealers. Custodial banks do not engage in traditional commercial or retail banking services like lending. Custodian banks provides a wide range of value-adding or cost-saving financial services, such as fund administration, transfer agency, securities lending, and trustee services.

Definition

Custodian banks are often referred to as global custodians if they safe keep assets for their clients in multiple jurisdictions around the world, using their own local branches or other local custodian banks ("sub-custodian" or "agent banks") with which they contract to be in their "global network" in each market to hold accounts for their respective clients. Assets held in such a manner are typically owned by larger institutional firms with a considerable number of investments such as banks, insurance companies, mutual funds, hedge funds and pension funds.

Early history

In 1961, U.S. President John F. Kennedy established a Committee on Corporate Pension Plans. Two years later, Studebaker Auto Manufacturer shuttered its business and operations, and it failed to provide pensions to the approximately 7,000 employees affected. Hence, in 1974, U.S. President Gerald Ford proposed an Employee Retirement Income Security Act (ERISA Act), protecting the employee benefit plans' standards. Since the Act has become effective, employers could not hold and keep their pension fund assets. Instead, they are obligated to appoint external custodians to safekeep the assets. Also, they are required to appoint trustees and depositories to ensure the pension funds are operated in the best interest of the pension holders and aligned to the investment mandates.

Further developments

Banks have developed a wide range of custody and related services (securities services), and have been developing new technologies (e.g. blockchain, API, distributed ledger) and aligning with the fast-moving regulatory requirement, such as digital assets.

Client segments and products

The securities services industry mainly serves two types of clients: 1) Asset Owners & Managers and 2) Banks, Brokers & Dealers.

Asset owners and managers

The client segment of Asset Owners & Managers includes asset management companies, alternative asset managers, insurance companies, pension funds, sovereign wealth funds, central banks, family offices and prime brokers. The bank may offer the following products & services:

Banks, brokers and dealers

The client segment of banks, brokers and dealers includes global custodians, banks, brokers and dealers. The bank may offer the following products and services:

Importance of custodian

Using US definitions, a person who owns street name securities and who is not a member of an exchange holds the securities through a registration chain which involves one or more custodians. This is due to the perceived impracticality of registering traded securities in the name of each individual holder; instead, the custodian or custodians are registered as the holders and hold the securities in a fiduciary arrangement for the ultimate security holders. However, the ultimate security holders are still the legal owners of the securities. They are not merely beneficiaries of the custodian as a trustee. The custodian does not become at any point the owner of the securities, but is only a part of the registration chain linking the owners to the securities. Global securities safekeeping practices vary substantially, with markets such as the UK, Australia and South Africa encouraging designated securities accounts in order to permit shareholder identification by companies. The definition of shareholder is generally upheld by corporate law rather than securities law. One role of custodians (which may or may not be enforced by securities regulation) is to facilitate the exercise of share ownership rights, for example and processing dividends and other payments, corporate actions, the proceeds of a stock split or a reverse stock split, the ability to vote in the company's annual general meeting (AGM), information and reports sent from the company and so forth. The extent to which such services are offered are a function of the client agreement together with relevant market rules, regulations and laws.

Industry size

As of end-2023, the market size (as measured by worldwide client assets under custody and/or administration) amounted to some $230 trillion. The market share of the largest global custodians has varied quite dramatically over the past 25 years As of 2022, the market size (as measured by revenue) of the Custody, Asset & Securities Services industry in the US is $32.5bn, with a YoY 2.9% growth between 2017 and 2022.

Industry players

Many investment banks and banks offer securities services. Generally, the division of securities services is either grouped with Global Markets to form a larger umbrella of Markets & Securities Services (MSS) or falls under the umbrella of Corporate Banking or Transaction Banking. For instance, Citi and HSBC restructured and combined their Global Markets and Securities Services divisions in 2019 and 2020 respectively. Players include (in alphabetical order):

BNP Paribas: Securities Services BNY: Securities Services Citi: Markets & Securities Services Crédit Agricole: CACEIS Investor Services Deutsche Bank: Corporate Banking HSBC: Markets & Securities Services J.P. Morgan: Markets & Securities Services Mizuho: Institutional Services Morgan Stanley: Fund Services MUFG: Investor Services Northern Trust: Asset Servicing Royal Bank of Canada: Investor & Treasury Services SMBC: Custody and Securities Services Société Générale: Global Markets and Investor Services Standard Chartered: Financial Markets State Street: Asset Servicing

Global

According to the Asset under Custody League Table as of Q4 2025 by Global Custodian, custodian banks' assets under custody and/or administration (AUC/AUA) are:

Regional

According to the Global Custody Survey 2020 by Global Investor Group, the top custody regional players are: