Clearing, Settlement and Custody

Chapter 6

Custody services

I

n this chapter we will look at the role of custodians and the services

they provide to their clients. With sophisticated computer systems

and a worldwide network of sub-custodians, global custodians are in

a position to deliver a growing portfolio of services to their clients.

Referred to by global custodians as either core services or value-added

services, the range offered includes:

䊏 The safekeeping of securities

䊏 The maintenance of multi-currency securities and funds

accounts

䊏 The settlement of securities trades in domestic and foreign

markets, on a free of payment or delivery versus against payment

basis

䊏 The collection of dividends, interest and principal amounts due for

redemption on due date

䊏 The exercising or selling of subscription rights and attending to

other corporate actions

䊏 The reporting of transactions completed and the periodical

delivery of hardcopy statements of account

䊏 Contractual or actual settlement date accounting

䊏 Contractual or actual income collection

䊏 Terminal or computer-to-computer links to pass on instructions

and retrieve client information from the custodian’s database

䊏 Customized multi-currency reporting and performance

information

䊏 Securities borrowing and lending

䊏 Assistance with withholding tax claims

䊏 Handling/settlement of derivatives

䊏 Briefings on specific countries, in particular on emerging

markets

䊏 Cash projection and cash management

䊏 Ensuring that physical certificates and associated documentation

are in good order.

From a global custodian’s perspective, core services are those which

are so standardized that there is not a great deal of scope for any

particular global custodian to differentiate its service from that of

another global custodian. Any fundamental changes and improve-

ments will affect the industry as a whole.

Value-added services, on the other hand, provide the global

custodians with the opportunity to offer a broader and different

service to their clients, and in so doing, enhance the global

custodians’ standing within the marketplace and improve their fee-

earning capabilities.

Settlement is, as we know, the final transfer of cash from the

purchaser to the seller in exchange for the delivery of the securities to

the purchaser. However, settlement conventions vary widely from

country to country and especially in the areas of physical delivery and

book entry transfer.

To illustrate the difference we can look at the situation for an equity

transaction prior to the introduction of CREST in the UK and at

how the ICSDs settle Eurobonds. In the UK prior to CREST an

investor had to physically lodge the share certificate together with

relevant transfer documentation with a London Stock Exchange

processing office prior to settlement (Figure 6.1).

Eurobonds, held in electronic book entry form by Euroclear and

Clearstream, are settled by Book Entry Transfer (BET). The securities

Clearing, Settlement and Custody128