One of the most important protections and a control against fraud is the addition of safekeeping from the investment portfolio. If necessary, investment policies should include a section regarding safekeeping and custody that defines how the holding institution should have its securities held by an independent third-party for safekeeping to minimise the risk of a fraudulent transaction.
Kofi Pianim, Head of Global Markets at First National Bank, explained custody as when an investor—whether a retail investor, an employee pension fund, a mutual fund or any other kind of institutional investor – invests in a financial asset, such as an equity or debt security; they need someone to hold and safely keep the asset on its behalf.
“That is where a custodian comes in to receive any dividends or interest payments made by the company that issued the security; alert the investor of any votes or other actions the investor needs to take with respect to the security – such as responding to an offer by the issuer to exchange the security for another security,” Kofi said.
Custodians provide all of these custody services to investors by contracting with the investor either directly or with an agent of the investor, such as an investment manager. In short, a custodian provides custody and related services to investors—broadly characterised as the safekeeping and servicing of an investor’s assets. They play a critical role in helping investors to build and maintain wealth. “Usually, if the investor wishes to sell the security or purchase another security, the custodian processes the transaction on the investor’s behalf,” affirmed Kofi.
Although custodians may have separate commercial or consumer lending relationships with certain custody clients, such lending relationships do not generally extend to the financing of clients’ custodied investment positions through loans or long-dated credit facilities.
“Generally, the only lending custodians engage in as principal as part of their custody services business involves the provision of short-term credit – generally intra-day or overnight – to facilitate efficient settlement across different payment and settlement systems and time zones, cover overdrafts, facilitate client redemptions, enable the payment of management fees and other expenses, and allow their clients to manage liquidity,” Kofi suggested.
On whether the custodian faces credit, market, liquidity, and operational risk, Kofi emphasised that the nature of risk with custody and related activities in which custodians engage are presented often differently in scale from those presented by other banking activities.
“At First National Bank, we have world-class and robust systems/platforms in place to provide quality services to our clients. These include our fast trade settlement, secure cash interface, and easy-to-use self-service platform for clients to instruct electronically, which feeds into our processing system.” First National Bank also offer Global Custody offering and efficient market information gathering.
“We leverage our expertise for custody and clearing solutions across our proprietary network to help grow our clients’ businesses and investments through efficient market access,” he ended.
