When you think of a custodian in layman’s terms, you think of someone who has responsibility for taking care of or protecting something. In the financial industry, this definition isn’t far from what companies who are into the business of custodianship do.
Custodianship is an arrangement whereby some financial institutions undertake to provide safekeeping and administration of financial assets on behalf of their clients who may or may not be the actual investors in those assets.
A custodian holds financial assets in trust for its client, and acts in accordance with the client’s instructions and service level agreement between them. The custodian provides custodial services at a fee and/or charges.
Functions of a Custodian
- Safekeeping of instruments on behalf of clients: The securities can be held in physical or electronic forms in the name of a nominee or in the beneficial name. The clients or investors can be individuals, corporate bodies, government, other institutional investors and the general public who do not maintain security portfolio with the CBN.
- Transaction settlement: Includes the collection of cash and securities on behalf of buyers and receiving payments on behalf of the sellers. Settlement shall be on the basis of delivery versus payment.
- Transaction statement: Includes providing clients with daily transaction statements, and where there is no transaction a nil statement shall be sent. The transaction statement shall include but not limited to trade date, settlement date, price, volume, types of securities, and counterparties.
- Position statement: Includes providing clients with daily statement of cash and security balances.
- Reporting: includes providing reports to clients, inquiry tracking, and records of clients’ cash and securities positions: settlement activity, performance measurement of the securities in the clients’ portfolio, valuation etc.
- Income and proceeds collection: includes acting as an agent for clients in corporate actions to collect on their behalf, interest, coupons, proceeds and any accrued benefits during the tenors of the securities, and at redemption.
- Securities lending: Custodians may deploy the instruments in their custody for securities lending with express permission of their clients.
- Remittances: Effect requisite remittances of settlement proceeds, interest, coupons and any accrued benefits in line with the clients’ mandates.
- Tax services: Custodians may provide tax services to clients in accordance with the provisions of the tax laws pertaining to the investment. Tax services shall include among others, filing requirements, accurate definition of the clients’ tax situation; arranging tax relief at source before interests or coupons are paid; preparation of tax documents for filing or submission to tax authorities for processing; and, monitoring of outstanding payments or claims relating to the securities in their custody.
- Other services: Custodians may offer other services to their clients including cash management services for clients’ cash balances for which the client can earn a return on the funds, foreign exchange.
Who can be a Custodian?
In Nigeria, to be eligible to be a custodian, the following qualifications must be fulfilled;
- A bank or discount house that has completed and submitted a prescribed application form to the CBN on behalf of its subsidiary to be appointed a custodian.
- A subsidiary of a bank or of a discount house set up with the sole purpose of carrying out custodial business, and has a minimum of N2.0 billion paid up capital.
- A duly licensed custodian by the National Pension Commission (Pencom) who may wish to carry out custodial business in money market and fixed income instruments.
Eligible Instruments for Custodianship:
- All government securities shall be eligible for custodianship including but not limited to, Nigerian Treasury Bills, FGN Bonds, FRN Bonds, Treasury Certificates etc
- All securities issued by the Central Bank of Nigeria for its monetary operation including OMO Bills, CBN Certificates etc.
- All securities approved by appropriate authorities issued by government at all levels, corporate organizations, government agencies and parastatals.