Choosing the Right Custodian for Your Firm

Choosing reliable custodian and related services is key element of corporate financial accounting and securities servicing infrastructure. Choosing wrong depositary partner can lead to delays in operations, errors in reporting, reduced investor confidence and increased operational risks. In today’s environment, companies are faced with wide range of custodians and services, which requires systematic approach to evaluation and decision-making.

Custodian: role and basic functions

Custodian is financial organization or institutional market participant that provides accounting and storage of securities, registration of rights to them, settlement of transactions and processing of corporate actions. It plays fundamental role in functioning of stock market, ensuring liquidity of instruments and security of firm assets.

Assets are recorded in special depository accounts, which reflect rights of securities owners, their movements and changes in composition of portfolio. This infrastructure supports processes of settlements, income payments and notification of issuer events.

Custodians can act as central, brokerage or specialized platforms depending on volume and type of assets to be serviced. Central depository provides accounting for key markets and is often linked to national exchange system. Specialized depositories service highly specialized assets or structures.

Key criteria for selecting custodian

When selecting custodian, priority should be given to issues relating to protection of client assets. Assets should be held separately from depositary’s own funds and protected from creditors’ claims in event of financial difficulties on part of intermediary. This reduces risk of losing company’s assets in adverse market conditions or in event of problems with intermediaries.

Different depository platforms provide varying levels of detail in accounting and reporting. It is important to ensure that selected depository is capable of providing accounting at position and lot level, correctly reflecting tax parameters and providing reports that meet company’s requirements. The availability of advanced software for calculation and reporting is prerequisite for clients with complex asset structure.

Companies with diversified investment structures or development plans involving alternative assets should consider whether depositary supports working with such instruments. Not all depositaries provide same level of service for private funds, international securities, derivatives or other specialized instruments. Chosen partner should meet current and future needs of business.

Criterion	What to Evaluate	Why it matters
Financial Stability	Capital strength, credit ratings, balance sheet size	Reduces counterparty risk and ensures long-term reliability
Regulatory Oversight	Jurisdictions regulated, compliance history	Confirms adherence to legal and supervisory standards
Asset Protection	Segregation of client assets, insolvency protection	Protect client assets if custodian faces financial stress
Market Coverage	Supported markets, currencies, asset classes	Enables efficient management of domestic and cross-border assets
Operational Efficiency	Settlement speed, error rates, automation level	Impacts transaction accuracy and operational risk
Service Model	Dedicated relationship managers, response time	Improves issue resolution and ongoing cooperation
Fee Structure	Transparency, hidden charges, pricing flexibility	Help control total cost of custody services
Scalability	Ability to support growth and complex structures	Ensures custodian remains suitable as business evolves
Experience & Reputation	Track record with similar clients	Indicates practical expertise and market credibility

Important but often underestimated factor is level of customer service. Custodians with personalized support, rapid assistance and ready-made solutions for resolving non-standard situations increase efficiency of companies’ interaction with market infrastructure. Companies often prefer to work with partners who offer direct contact with professional managers, rather than just automated systems.

Cost and transparency of terms and conditions

Costs of custodian services include not only direct commissions, but also hidden fees, impact on transaction speeds, and additional accounting support costs. It is important for firms to assess all potential costs in advance, as well as minimum asset requirements that may be necessary to start cooperation. Transparency of fees and terms is sign of mature and professional depositary.

In practice, cost structure is often more complex than it appears from basic fee schedule. In addition to asset custody fees, commissions may be charged for transaction settlements, corporate actions, dividend and coupon processing, foreign exchange transactions, transfers between accounts, and provision of enhanced reporting. Special attention should be paid to commissions for non-standard operations that are not included in standard list of services but arise in course of actual portfolio management.

Custodians’ approach to pricing is of significant importance. Fixed rates simplify planning but may be disadvantageous when volume of transactions increases. Interest-based fees are sensitive to changes in asset value and require constant monitoring. It is important to understand how conditions change when volume of assets increases or decreases, and whether individual rates are provided for corporate clients with non-standard account structures.

Transparency of terms and conditions is evident not only in detail of fees, but also in accessibility of information about them. A professional depositary discloses full cost of services in advance, describes all additional charges, and does not hide key pricing parameters in fine print of contract appendices. Lack of clear explanations regarding cost of individual operations usually leads to increased operating expenses and conflicts during active work phase.

Practical aspects for corporate valuation

Organization undertakes to conduct a comprehensive check of partners when selecting custodian. Such check involves analyzing its market position, customer reviews, compliance with regulatory requirements and financial stability. In some cases, it is possible to compare offers of several custodians in terms of basic parameters, which makes it possible to select the optimal configuration of services for specific tasks of firm.

Corporate accounting standards can evolve. For example, some organizations only need basic services that take into account standard portfolio of bonds and shares. For other companies, ability to work with international markets and complex account structures is critical. These differences should be reflected in tender documentation and service provider evaluation criteria.

Choice of custodian is strategic decision that affects operational stability of firm, not just technical choice of securities storage partner. It is very important to view custodian as element of corporate infrastructure that is integrated into accounting process and investor relations.

Firms must choose custodians that can provide them with support for complex operations, clear economic terms, sophisticated reporting systems, high level of service and asset security. Such systematic approach can increase business stability in long term and minimize risks associated with asset servicing.

FAQ

How to choose a custodian?

Choosing custodian starts with understanding your own needs. Custodians must be able to safeguard assets properly, segregate client assets from its own balance sheet, and operate under strong regulatory oversight. Beyond safety, it is important to assess operational capabilities: asset coverage, markets served, settlement efficiency, corporate actions processing, and reporting quality.

Who are the big 4 custodians?

The “big four” global custodians are generally considered to be:

•  BNY Mellon
•  State Street
•  JPMorgan
•  Citi

These institutions dominate global custody market by assets under custody and administration, offering broad geographic coverage, advanced infrastructure, and services for large institutional clients.

What are the big 3 custodian banks?

The “big three” custodian banks are typically:

•  BNY Mellon
•  State Street
•  JPMorgan

They represent core of global custody industry, particularly for institutional investors, asset managers, and large corporate clients, with Citi often grouped just outside this trio depending on classification used.