Characteristics of custodian banks

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A custodian bank, or simply custodian, is a financial institution specializing in the safe-keeping
of its clients' financial assets be they corporate or individuals.

Unlike other banks it typically does not offer services such as mortgage lending, automatic teller
machines or branch banking, etc. Instead custodians administer facilitative actions on securities
(bond calls, stock dividends, splits, etc) in their possession on behalf of clients.

Even though they perform a variety of such services which also include foreign exchange
transactions, their mainstay remains the safekeeping of securities such as commodities, bonds
and hard currency among other things.

In the settlement of securities transactions, custodian banks accept the transfer of securities in
the appropriate accounts. In the case of a transactions involving two customers of the same
custodian, the transfer is effected directly. However, once customers act through two different
custodians for one another, usually the CSD comes into play.

Custodian banks are sometimes known as global custodians in cases where they safe-keep
securities for customers in different countries. Assets held in this way usually belong to larger
firms with enormous investments such as mutual funds and pension funds, etc.

The custody services can be provided at different levels. For an investor with an international
portfolio its hard to keep track of the regulations in all countries with respect to dividends or the
payment of withholding tax on dividends. In such a case an investor can appoint a global

With a global custodian, international investors operating in each country where it operates can
at least open one investment account. The global custodian regulates global custody services
for all investors, this implies that a bank is designated to offer custody services to investors
worldwide. The bank itself can also outsource to regional custodians, but that is for the
customer (investor) to decide. In any case it can use local sub-custodians, who will carry out
actual operations.

The idea of a regional custodian is that the investor works with a number of custodians
designated in different parts of the market. The regional custodian can have further
sub-custodians in each country designated to process the transactions.

All custodians have expansive connections, through which business is conducted. This has the
advantage that the custodians do not need any further contact points to other custodians, but
only to a central depository. Typically, a single custodian plays this central role, thus functioning
as a kind of custodian of all other custodians in a given jurisdiction.

An aggregate deposit consists of two different repositories: the entry deposit includes all
documents deposited, and are thus transferred to the relevant CSD. And part of the aggregate
deposit is housed in the individual banks.

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