What is a custodian bank?
A custodian bank is an institute that provides a safeguarding and control service to asset management companies. It protects the financial instruments, cash and cash equivalents of an investment fund.
The functions of a custodian bank
A custodian bank is an institute with which an asset management company deposits all the money and holdings owned by the funds it administrates. It also is responsible for verifying:
- the validity of operations for the issuing and repayment of the shares belonging to the fund, as well as the destination of fund profits;
- the accuracy of the calculation of the value of the fund’s holdings, when the custodian bank itself is not making that calculation itself (on the request of an asset management company);
- the legitimacy of operations relating to the fund;
- compliance with laws, regulations, and rulings from asset management supervisory bodies.
Custodian bank requirements
In order to carry out its functions, a custodian bank must first obtain authorization from the relevant Central Bank, which – in accordance with the supervisory body (CONSOB in Italy) – regulates the conditions for acceptance of the role and the modalities for depositing fund assets.
Given the importance and the delicate nature of the role of custodian banks, the European Central Bank has produced a list of requirements necessary for custodian banks:
- the custodian bank must be Italian or have registered offices in another European Member State plus a local branch;
- the total value of assets being safeguarded must not be less than €100 million;
- the bank must have sufficient experience of the role;
- the organization of the bank must be sufficient to guarantee the efficient and correct handling of the tasks with which it is entrusted.
Method of assignment
The role of a custodian bank is assigned either permanently or for a set period of time. In any case, an asset management company can remove the role at any time. Custodian banks can also give up the role with a simple notification including notice of no less than six months as standard.
Once the role has been withdrawn or given up, this process is suspended until the following conditions have been met:
- another bank which complies with the legal requirements accepts the role of the custodian bank, replacing the former bank;
- the subsequent modification to the regulation is approved by the asset management company’s board of directors and the supervisory body;
- the holdings and liquidity of the fund are transferred to and accredited at the new bank.
Main international custodian banks
In the USA, leading custodian banks include:
- Bank of New York Mellon
- JPMorgan Chase
- State Street Bank & Trust Co.
Some of the main custodian banks from other countries include:
- Bank of China (Hong Kong),
- Credit Suisse and UBS (Switzerland)
- Deutsche Bank (Germany)
- Barclays (UK)
- BNP Paribas (France).
Below is a list of custodian banks authorized to operate in Italy, in order of assets (source: Funds People):
- State Street Bank
- BNP Paribas Securities Services
- Société Générale Securities Services
- RBC Investor Services
- Banco BPM
- Istituto Centrale delle BPI
- Banco Popolare Soc Coop
- Caceis Bank Italy Branch
- Banca Popolare Di Sondrio
Notice: This article is mainly focused on the Italian market and on other leading markets. We advise that readers check the data and regulations pertaining to their countries.