Custodian service is a specialized service offered by a custodian bank for safeguarding the financial securities of individual and institutional investors. Stocks (including ETFs), bonds, foreign currencies, etc., are common types of financial securities that may make use of custodian service.
Most retail investors buy stocks via stock brokerage firms as well as retail banks. After the sale and purchase is completed, the stocks are kept by the designated custodian of the stock brokerage firm / bank. Many stock brokerage firms will waive the custodian charge if the customer has reached a certain amount of trading activity over the measuring period but most banks do charge a fee from the customers irrespective of their trading activities.
Institutional investors employ professional custodians that will bring additional benefits over that of buying and safekeeping the securities. The University did the same for its endowment and retirement investments.
Trading activities in connection with the endowment and retirement investments of the University are carried out by the professional investment managers engaged by the University for the purposes. How well these managers are doing their job is monitored by the custodians employed by the University. The investment managers are required to communicate frequently with the custodian about the detailed transactions so that the interests of the University are always their priorities. The custodian will also keep the physical securities on behalf of the beneficial owner (the University) until there is a sell instruction from the investment managers. The auditor also relies on the custodian reports for their monitoring and reporting of the University’s finances.
New services are being offered by custodian banks. Many are providing performance measurements and report generations, risk analysis, whether the transactions from the investment managers comply with the investment management agreement, etc. For better management of their funds in terms of efficiency and transparency, many local higher education institutions including CUHK are planning to review the custodian service they procure in an increasingly complex and developing market.
For institutional investors including sovereign funds, family funds and hedge funds, there are other important considerations or benefits of using custodian banks or multiple custodian banks, to which we will return in a later issue.
This article was originally published in No. 496, Newsletter in Apr 2017.