Custodian | B2B Finance Glossary

What is a Custodian?

A custodian is a financial institution that holds assets for customers for safekeeping and to minimize the risk of theft or loss. Custodians can hold funds, stocks, bonds, cryptocurrency, and other digital assets; all of these different types of assets are typically held at one of the custodian’s premises, a sub-custodian facility, or an outside depository. On top of that, custodians can manage customers’ accounts and transactions, handle settlements, and ensure that all financial activity complies with the IRS and regulators. All of these services are provided by custodians for a fee.

Bank custodians are regulated by the Office of the Comptroller of the Currency (OCC).

Why are Custodians Important?

The number one value add that custodian banks offer is that they provide security services to individuals and institutions. They are also important for holders who don’t have the time or ability to manage their accounts daily.

Custodians are also critical in managing assets, handling reporting, and ensuring financial securities are cleared and settled in compliance with regulations – a process that’s usually too complex for asset holders to do independently. Custodians perform actions in the names of their clients, so the Securities and Exchange Commission (SEC) ensures that custodians notify their customers when certain activities are carried out on their behalf.

Additionally, custodians can be used to manage financial accounts held by minors or adults who cannot manage their assets due to their age, well-being, or limits to their physical ability.

What is the Difference Between a Custodian Bank and a Traditional Bank?

The number one job of a custodian bank is to ensure that all of the financial assets that belong to individuals and institutions are kept safe at all times. Custodian banks do offer other services on top of this, such as asset servicing (maintaining all economic benefits of ownership, including corporate actions and income collection) and trade processing (this includes tracking, settling, and reconciling assets that are acquired and disposed of by the investor through delegated authority with an asset manager). However, custodian banks do not have the same responsibilities as traditional banks.

Traditional banks are primarily in charge of taking and holding deposits for customers and giving them loans if they qualify. Through a traditional bank, customers can get checking and savings accounts, money market accounts, certificate of deposit accounts (CDs), debit cards, checks, car loans, personal loans, and mortgage loans. Similarly, businesses can get checking and savings accounts, certificate of deposit accounts (CDs), debit cards, checks, and business loans from traditional banks. However, traditional banks have the ability also to offer custodian services.

What is the Difference Between a Custodian Bank and a Mutual Fund Custodian?

A mutual fund custodian is a financial institution such as a trust company (a legal entity that operates on behalf of a person or business for a trust) in charge of safeguarding the securities owned within a mutual fund.

A mutual fund is a company that aggregates money from multiple investors and invests that money into many different securities (such as bonds, stocks, money market instruments, and more). These funds are managed by professional money managers who allocate the fund’s assets and aim to create income or capital gains for investors.

Mutual funds give individual investors access to these portfolios, which means that each shareholder participates in the gains or losses of the fund in proportion to what was originally invested. Most mutual funds are part of larger investment companies.

A mutual fund custodian is usually a custodian bank, but this kind of custodian is solely focused on safeguarding mutual fund company assets. Similarly to a regular custodian bank, mutual fund custodians can track investors’ transactions, handle settlements, and ensure funds are deposited in the custodial account. Mutual fund custodians are sometimes responsible for maintaining transaction records and making required reports for the SEC.

It is important for there to be a separation between the mutual fund and the mutual fund custodian. This is because if a mutual fund’s manager declares bankruptcy, the fund custodian will return the investments to the shareholders (since the fund custodian maintains control over the fund’s assets).

What are Some of the Most Well-Known Custodian Banks?

The largest custodian banks in the US include State Street, Citigroup, Bank of New York (BNY) Mellon, and JPMorgan Chase. Some of the most well-known custodian banks outside the US include the Bank of China in China, Credit Suisse and UBS in Switzerland, Barclays in the UK, BNP Paribas in France, and Deutsche Bank in Germany.