CustodyMedium

3 min read · 469 words

What the seat actually does

Somebody has to actually hold the securities an investor owns, record whose they are, collect what they pay, and be able to show a court whose they were if the holder fails. That is custody.

Segregation is the entire product. Assets held in the client's name and separated from the custodian's own are not available to the custodian's creditors; assets pooled or lent without clear title may be. Almost nothing about a custody statement tells a reader which of those they have, and the difference only ever appears once.

• Safekeeping — the records, and the chain of sub-custodians in every market the client holds in.
• Asset servicing — dividends, coupons and elections. See corporate actions.
• Fund administration and valuation, which is where the published price of a fund actually comes from.
• Securities lending, often run as an agent for the holder. See securities lending.

A day, and where it goes

• Reconciliation — the custodian's records against the client's and against the market's.
• Corporate action deadlines, in every time zone the client holds in.
• Failed settlements, chased with the market rather than with the client.
• Valuations, struck for funds whose published price depends on them.

What it is measured on

• Assets under custody, which is the commercial measure and a very thin one — the fee per unit is tiny.
• Accuracy, which is the real one: a wrong holding or a missed election is an error with a client's money in it.
• Timeliness of valuations, since a fund cannot publish without them.
• Losses from operational error, which should be vanishing.

What it touches on this site

• What protection exists — investor protection and what happens if a broker fails.
• The seats it serves — fund operations, operations and prime services.
• What it services — corporate actions and the notice itself.
• When it goes wrong — 2020, where cash reported as held in trust accounts was not there.

How it goes wrong

• A chain nobody has mapped. A global custodian holds through sub-custodians, and the local link is where the legal protection actually lives or does not.
• Assets pooled without clear title, which is fine until an insolvency asks who owns what.
• Lending the client's securities and taking collateral that falls when the borrower does.
• A missed election, which cannot be undone and belongs to the client rather than to the custodian's balance sheet.

Concepts to master

• Legal title and beneficial ownership are different, and which one a statement records decides the insolvency outcome.
• Segregation is a legal arrangement, not a filing convention.
• A valuation is somebody's output — see valuation.
• Operational risk is the family that decides here — see which risk decides.