Understanding custody

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         To many people in the financial services industry custodial
         services remain a mystery. So, what do custodians do?
         What value do they add to the investment chain?

         ThE work oF CusTodIANs has been described                    assets and settle transactions on those assets
         as ‘the oil that keeps the great financial engines           (e.g. cash, securities) on behalf of their clients,
         working – without us the industry would grind to             based on the clients’ instructions.
         a halt’. 1
              Custodians are an integral part of Australia’s          Why financial organisations
         financial infrastructure and play a critical role in         use custodians
         administering and safekeeping Australia’s investment         Investors use custodians for a number of reasons.
         and superannuation sector.                                        Under superannuation legislation and ASIC
                                                                      licensing requirements, custodial arrangements are
         Custodians – yesterday and today                             required to protect investors.
         Whereas, traditionally, custodians held and                       Investment managers make investment decisions,
         safeguarded financial assets on behalf of third parties,     but do not control the underlying assets. A client,
         as financial markets have become more sophisticated,         such as a superannuation fund, can remove a
         custody is ‘no longer characterised by physical              particular investment manager without any delay in
         safekeeping (of financial assets) but by a range of          gaining access to the assets for which the investment
         information and banking services’.2                          manager was previously responsible.
              Today, the primary work of the custodian is about            Custodians ensure that assets are held securely
         managing information – information about investors’          and will only be released or exchanged for value with
         financial assets and the rights attached to those            proper client instructions. They can generally provide
         financial assets. Financial assets are not solely            their services at a lower cost than what investors
         physical assets or listed securities; they range from        would have to pay to undertake these activities
         unlisted securities to alternative investments.              themselves.
                                                                           Investors can benefit from the specialised
         Non-discretionary power                                      expertise of custodians in market practices and the
         Custodians do not make investment decisions on               management of investors’ rights and entitlements.
         the investment assets. They act only on the proper                Because they hold the securities for investors,
         instructions of the owners of the assets, or their           custodians can also provide access efficiently to a
         agents such as investment managers. They hold                range of specialised reporting (e.g. for investment
                                                                      funds) and banking services (e.g. securities financing
                                                                      and providing liquidity, by making short-term loans).




                                              JEAN-MArC
				
DOCUMENT INFO
Description: Custodians are an integral part of Australia's financial infrastructure and play a critical role in administering and safekeeping Australia's investment and superannuation sector. Today, the primary work of the custodian is about managing information -- information about investors' financial assets and the rights attached to those financial assets. Financial assets are not solely physical assets or listed securities; they range from unlisted securities to alternative investments. Under superannuation legislation and ASIC licensing requirements, custodial arrangements are required to protect investors. According to the Australian Custodial Services Association, as at the end of 2008, there were US$108 trillion in total assets under custody globally, and over A$1.5 trillion in Australian and foreign assets held under custody for Australian investors. General services provided by custodians, typically fall into six areas: 1. safekeeping, 2. settlement, 3. asset servicing or corporate actions, 4. fund services, 5. banking, and 6. paying agent.
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