What is Global Custody?

Imagine losing your entire pension because of a bank error. This isn't fiction. It's a real risk that global custodians prevent every day. These unsung heroes guard over $100 trillion in assets. That's nearly as much as the world economy makes in a year. Yet few know how crucial they are to our financial safety.

What is Global Custody?

Global custody is a vital financial service. Big banks and firms provide it. These global custodians hold, protect, and manage assets for large investors. They work across many countries and currencies.

Think of global custodians as the world's financial safekeepers. Without them, today's complex web of global investments couldn't exist.

How Global Custody Started

Global custody began in the 1970s. More investors started looking abroad for opportunities. But investing in other countries was tough. Each nation had its own rules and systems. Global custody helped solve these problems. It offered one service to handle investments across borders. For example, a pension fund could go and invest in many countries and have one place to monitor its global portfolio.

What Global Custodians Do

1. Keep Assets Safe

Global custodians protect their clients' assets worldwide. They keep detailed records of all holdings and trades. There are strict regulations to protect investor assets in every country.

2. Handle Trades

They ensure buyers get their securities and sellers get paid, on time and correctly. For example, when a Canadian pension fund buys Spanish stocks, the global custodian manages the clearing, foreign exchange, settlement and servicing the asset when it pays a dividend.

3. Collect Income and Recover Taxes

Custodians gather dividends, interest, and other income from global investments. They also navigate tax rules to get refunds or credits on foreign investments for clients.

4. Report and Analyze

Custodians provide in-depth reports on what clients own, their trades, and how well investments perform. Some now use technology to offer predictive tools and better manage risk.

Global Custody in Numbers

The scale of global custody is huge. Tens of trillions of dollars in assets are held in custody around the world. Retail investors might know of this concept if their stocks are registered “in street name”. The industry itself earns tens of billions of dollars a year in revenue from fees, margins and net interest income on the deposits their customers hold with them.

Challenges and Opportunities

New Technology

Blockchain, AI, and cloud computing are big buzzwords. Blockchain could speed up trades from days to minutes. However, big global custodians are big banks - they have many different technology platforms and use the SWIFT network for most activity.

Cyber Threats

Global custodians are big targets for hackers. They all invest heavily in cybersecurity and protecting the data they hold. There are many rules that regulators demand to protect client assets.

Complex Rules

Custodians must follow many new, complex laws. Rules like CSDR in Europe and Dodd-Frank in the U.S. require more reporting and compliance. AML and CTF compliance presents an ongoing risk and investment spend.

ESG Investing Grows

As big investors focus more on environmental and social issues, custodians are creating tools to support sustainable investing.

The Future of Global Custody

The industry is set for big changes:

1. AI will make operations more efficient.

2. Digital assets are pushing custodians to offer new services.

3. Better data analysis will help custodians offer smarter insights.

4. The industry may shrink to fewer, but larger and more high-tech firms.

Concerns About Global Custody

Despite their key role, some commentators worry about global custodians. Critics say the industry has too few players, creating firms that are "too big to fail." This could increase risk in the financial system.

However, there are very high levels of regulation of custodians. Each country has different rules, but there are global standards like the Principles for Financial Market Infrastructures that help protect investors and customers who use central securities depositories and payment systems that custodians connect to.

Conclusion: The Unseen Pillars of Finance

Global custodians work behind the scenes, but they're vital to world finance. As finance gets more complex and technology advances, these hidden giants will become even more important.

Understanding global custody helps us grasp how our connected financial markets work. We all benefit from a stable financial system. Next time you hear about booming stocks or big global investments, remember the global custodians. They're working hard to keep the assets that support our global economy safe.