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Who is a Custodian Bank and How They Run the Business?

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Who is a Custodian Bank and How They Run the Business?

A custodian bank is a specialized financial institution responsible for the safekeeping and administration of financial assets on behalf of clients like mutual funds, pension funds, insurance companies, and hedge funds.

Unlike commercial banks, custodian banks don’t lend money or deal with individual customers. Their core function is to protect client assets and manage post-trade activities.

How They Run Their Business:

Custodian banks generate revenue by offering value-added services and charging fees. They operate through direct custody in major markets and sub-custodian networks in emerging ones. They ensure asset safety, trade settlement, and regulatory compliance.

Example – Citigroup (Citi) Custodian Business

Citi Securities Services provides custody in over 60 markets and handles more than $27 trillion in assets.

  • Direct custody in major countries
  • Sub-custodians in niche markets
  • Serves mutual funds, sovereign funds, pension funds, and hedge funds
  • Charges custody, transaction, fund service fees, and earns from securities lending

Global vs. Local Custodian Services

Global Custodians:

  • Citi, BNY Mellon, JPMorgan Chase, State Street

Local Custodians:

  • HDFC Bank – India
  • BNP Paribas – France
  • Nomura – Japan
  • CaixaBank – Spain

All Services Provided by Custodian Banks

Service Description Example
Asset Safekeeping Holding securities securely Citi holds Apple shares for a pension fund
Trade Settlement Ensures delivery of securities and cash JPMorgan settles a bond trade for BlackRock
Corporate Actions Handles dividends, splits, rights, etc. BNY Mellon processes Apple’s dividend
Income Collection Collects interest and dividends State Street collects T-Bill interest
Fund Accounting & NAV Daily NAV calculation and reports Citi calculates NAV for an Indian mutual fund
Tax Services Tax filing and reclaim support Nomura reclaims tax for an investor in the UK
Proxy Voting Votes in shareholder meetings Citi votes in Amazon’s AGM
Securities Lending Lends securities for fee income BlackRock lends Apple stock via Citi
Foreign Exchange Currency conversion for trading Citi converts USD to EUR
Cash Management Short-term investment of idle funds State Street manages ETF cash
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