What is a Custodian Bank?

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A custodian bank is a separate entity that hold your stocks and bonds certificates on your behalf. Your custodian could represent you in the annual shareholder meeting, exercise any corporate action such as bonus issue and rights issue on your behalf and it will prevents your name from being disclose to the exchange as the major shareholder. In return, the custodian bank will charge you custodian fee for service rendered.

In the past, ownership of stocks and bonds were represented by a certificate. Most stock certificate are in denomination of 1000 shares. Therefore, if you own 2000 shares you would have 2 certificates. Imagine a pension fund owning 10 million shares of a company, there are a lot of certificates to handle. Most institutional investor uses custodian bank to manage and safe keep these stocks and bonds certificates.   Besides managing these physical certificates, custodian could exercise bonus issue or rights issue on behalf of investor since they have already handled the  stock certificates. For any trades made by the investor or their fund manager, instructions must be given to the custodian bank so that they can deliver the physical certificates to the counter party for a sell trade and expect to receive physical shares for a buy trade. 

In present day where physical stocks and bonds certificates were almost gone, custodian bank still performs the function of keeping records of investors' portfolio. Custodian bank could still exercise any corporate actions on behalf of an investor. In addition, most investor also ask the custodian bank to manage the cash account in the portfolio, provides portfolio valuation and fund accounting services.

Custodian also provides securities lending services for people who wanted to sell short certain stocks. Some stock exchanges requires hedge fund manager to borrow stock before selling short.

Since most of the institutional investors use their own custodian to safe keep the investment, a custodian bank is an important partner for the fund manager. All daily trade instructions, cash instructions are sent to the custodian bank. Actual trade settlement is handle by the custodian bank. 

This arrangement is widely encourage by the regulatory authority because it prevents rogue fund manager from misusing investors' fund. The custodian bank has the responsibility to inform the investor for any unusual activity such as large amount of cash withdrawal.

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