The role of a custodian

March 27, 2024

Explore the aspects and attributes of different types of custody accounts. Then use this insight to make well-informed decisions when determining the appropriate account structures for your business.

The primary role of a custodian is to hold and safekeep client assets. Custody banks and brokerage firms have different responsibilities.

Using a custody bank or a brokerage firm are both viable options for holding assets; however, different rules and standards apply regarding how the assets are treated. Understanding these differences is a critical step in determining whether using a custodian or broker is more appropriate for your portfolio. A custodian is responsible for the safekeeping of your assets. A broker, by contrast, is primarily focused on accessing the financial markets on your behalf.

A custodial agreement defines the relationship between the client and a custodian. It covers all of the assets held in custody, including non-securities and assets not held at a depository or sub-custodian. Custody banks cannot lend securities held in custodial accounts without specific client consent. They’re responsible for transparent reporting and have no beneficial interest in the securities.

Securities

In accordance with federal banking law, a national bank must keep securities in bank-managed custody accounts segregated. It’s the practice of U.S. Bank to segregate custody client securities, regardless of whether the account is bank managed or non-bank managed. When securities in custody accounts are kept separate, it means the securities held in a custody account are the sole property of the client and aren’t commingled with the proprietary assets of the bank or the assets of other custody clients. The custodied securities aren’t treated as assets of the bank, don’t appear on the bank balance sheet and aren’t subject to claims made by the custodian bank’s creditors. Securities may be transferred in the bank’s name to streamline transaction processing, but clients remain the legal owners of those securities.

At U.S. Bank, global securities are held in a similar manner. They’re held through direct depository memberships or through a network of sub-custodian banks in which securities (but not cash) are held in segregated accounts. Such segregation supports an account structure designed to meet the segregation requirements of applicable regulations and aims to shield client assets in the event of a sub-custodian’s insolvency.

Cash

Unlike securities, uninvested U.S. dollar (cash) balances in custody accounts (as well as the custody bank’s own deposit products held in custody accounts) are held on deposit with the custody bank. As deposits, these funds are FDIC insured to applicable coverage limits. Uninvested foreign currency balances are held either on the bank’s balance sheet or on the balance sheets of banks within the global sub-custodian network. At U.S. Bank, non-USD currencies aren’t maintained on the books of the custodian as an amount owing as a liability by the custodian to the customer and are not FDIC insured. The treatment of these foreign currency balances varies based on the specific sub-custodian and applicable local law, but generally, they aren’t considered on deposit with the custody bank. Should there be a default, the client would be considered a non-secured creditor, although the custodian would assist in trying to recover any cash that is lost by the client.

Depository memberships

A depository is an organization that safekeeps securities and assists in the trading or transfer of securities. They provide security and liquidity in the market and offer additional transparency and access to where assets are ultimately held at the end of the custody chain. Custodians with direct depository memberships provide clients with the added benefit and assurance that their securities are safe and accessible. U.S. Bank is a direct member or participant in domestic and global depositories including:

  • Direct participant in the Depository Trust & Clearing Corporation (DTCC)
  • Direct participant in the Depository Trust Company (DTC)
  • Direct participant in the National Securities Clearing Corporation (NSCC)
  • Member of the Federal Reserve Bank – Cleveland; Cincinnati branch
  • Escrow bank member of the Options Clearing Corporation (OCC)
  • Euroclear (for eligible foreign assets)

Understanding account types

There are different types of accounts offered by financial institutions, each with unique characteristics. Below, we highlight and compare the benefits and considerations of the most common account types, including demand deposit accounts, brokerage accounts, traditional custody accounts and sub-custody accounts.

Deposits

A demand deposit account (DDA) is a type of bank account that offers access to cash without requiring advance notice. DDAs may be held directly in the name of a client or used as a cash sweep vehicle within a custody account. DDAs are not securities, even if they are held within a custody account. Any funds in the form of uninvested cash that qualify as U.S. deposits, or any deposit accounts used as part of a cash sweep vehicle, are insured by the FDIC for up to the maximum insured amount per depositor for each ownership category.

Brokerage accounts

A brokerage account is an investment account held at a licensed brokerage firm. An investor deposits funds into their brokerage account, and the brokerage firm transacts orders for investments such as stocks, bonds, mutual funds and exchange-traded funds (ETFs) on their behalf. The assets in brokerage accounts belong to the investors. The Securities and Exchange Commission (SEC) Customer Protection Rule requires brokerage firms to maintain secure accounts and ensures that brokerage clients can withdraw assets at any time.

Custody accounts

Custody accounts are safekeeping accounts containing client investment assets held with the custodian banks. Custodians hold and transact client assets according to client instructions. Custodied securities are separated from the bank’s balance sheet, shielding them from a custodian’s creditors. If a custodian bank becomes insolvent, custodied securities generally will be returned to each investor. Many types of assets, with the exception of physical securities that are often held in a custodian’s vault, are held directly with depositories in the name of the bank for its clients. Custodians are regulated entities and must comply with the regulatory framework in which they operate.

Sub-custody accounts

In certain global custody models where a custodian doesn’t have a presence in each of the local markets where their clients invest, the custodian may use an international central securities depository (ICSD) or sub-custodians. To use sub-custodians, the custodian signs a sub-custody agreement with each of its appointed sub-custodians. Under these agreements, securities are held for the benefit of the clients, and the sub-custodian is generally required to segregate securities (but not cash) from the sub-custodian’s own proprietary assets. Such segregation supports an account structure designed to meet the segregation requirements of applicable regulations and shield client assets in the event of a sub-custodian’s insolvency.

Account type

Description

Insurance

Withdrawls

Demand deposit accounts

Held in a bank account separate from custody accounts and custody-related activity

FDIC insured

No advance notice required to access funds

Brokerage accounts

Investment account held at a licensed brokerage firm

The Securities Investor Protection Corporation (SIPC) may apply to brokerage customers, insuring up to $500,000 in cash and securities per account at SIPC-member firms should the firm fail. It also protects customers from unauthorized trading or theft

Securities movements follow standard settlement cycles in each market
 

Cash disbursements require an instruction from the client

Custody accounts

Safekeeping and transaction securities accounts that may be segregated and not commingled with the proprietary assets of the custodian

Not applicable for securities; U.S. cash deposits are FDIC insured

Securities movements follow standard settlement cycles in each market
 

Cash disbursements require an instruction from the client

Sub-custody accounts

Safekeeping and transaction securities accounts that may be segregated and not commingled with the proprietary assets of the sub-custodian

Not applicable; clients' securities are recoverable per the custody agreement, and cash is subject to the laws and regulations of the specific jurisdiction

Securities movements follow standard settlement cycles in each market
 

Cash disbursements require an instruction from the client

Account type

Demand deposit accounts

Description

Held in a bank account separate from custody accounts and custody-related activity

Insurance

FDIC insured

Withdrawls

No advance notice required to access funds

Account type

Brokerage accounts

Description

Investment account held at a licensed brokerage firm

Insurance

The Securities Investor Protection Corporation (SIPC) may apply to brokerage customers, insuring up to $500,000 in cash and securities per account at SIPC-member firms should the firm fail. It also protects customers from unauthorized trading or theft

Withdrawls

Securities movements follow standard settlement cycles in each market
 

Cash disbursements require an instruction from the client

Account type

Custody accounts

Description

Safekeeping and transaction securities accounts that may be segregated and not commingled with the proprietary assets of the custodian

Insurance

Not applicable for securities; U.S. cash deposits are FDIC insured

Withdrawls

Securities movements follow standard settlement cycles in each market
 

Cash disbursements require an instruction from the client

Account type

Sub-custody accounts

Description

Safekeeping and transaction securities accounts that may be segregated and not commingled with the proprietary assets of the sub-custodian

Insurance

Not applicable; clients' securities are recoverable per the custody agreement, and cash is subject to the laws and regulations of the specific jurisdiction

Withdrawls

Securities movements follow standard settlement cycles in each market
 

Cash disbursements require an instruction from the client

Deposit insurance

The Federal Deposit Insurance Corporation (FDIC) is an independent government insurance agency created by Congress to maintain stability and public confidence in the U.S. financial system. The FDIC provides deposit insurance, which is one of the significant benefits of having an account at an FDIC-insured bank – it’s how the FDIC protects customer money in the unlikely event of a bank failure. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

Best practices for your accounts

At U.S. Bank, we’ve made it a priority to ensure you have the tools to access what you need when you need it. Here are several considerations for making sure your assets are accessible and available with any of your custodian relationships.

Access your online holdings tools regularly.

Keep your information up to date.

Know your authorized signers.

Review your standing instructions.

Engage with your relationship manager.

At U.S. Bank, our experts have the knowledge and experience to safeguard your assets and offer comprehensive solutions that are tailored to your needs. Contact us to learn more about the custody services we offer.

Explore deeper into these relevant custody-related topics:

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Disclosures

Investment products and services are:
Not a deposit • Not FDIC insured • May lose value • Not bank guaranteed • Not insured by any federal government agency

U.S. Bank Global Fund Services is a wholly owned subsidiary of U.S. Bank, N. A. 

U.S. Bank Global Fund Services (Ireland) Limited is registered in Ireland, Company Number 413707. Registered Office at 24 - 26 City Quay, Dublin 2, Ireland. Directors: Eimear Cowhey, Ken Somerville, Hosni Shadid (USA). U.S. Bank Global Fund Services (Ireland) Limited is regulated by the Central Bank of Ireland.

U.S. Bank Global Fund Services (Guernsey) Limited is licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 2020, as amended, by the Guernsey Financial Services Commission to conduct controlled investment business in the Bailiwick of Guernsey.

U.S. Bank Global Fund Services (Luxembourg) S.a.r.l. is registered in Luxembourg with RCS number B238278 and Registered Office: Floor 3, K2 Ballade, 4, rue Albert Borschette, L-1246 Luxembourg. U.S. Bank Global Fund Services (Luxembourg) S.a.r.l. is authorised and regulated by the Commission de Surveillance du Secteur Financier.

U.S. Bank does not guarantee products, services or performance of its affiliates and third-party providers.