Custody Services - Advantages and Disadvantages

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1 Georgia Association of Public Pension Trustees Getting to Know Your Service Providers - Custodian September 22, 2015

2 What is a Custodian? A bank or other financial institution that provides safekeeping of assets for individuals or institutional clients. This includes providing receipt and disbursement of cash, account activity and balance reporting, and verification of storage of securities.

3 What are the responsibilities of the Custodian? As a custodian for clients, the primary mission is to safekeep and service all assets held for customers and process all security transactions that affect their holdings. Providing security and custody of cash Settling security and cash transactions Monitoring and processing income Filing and monitoring of class actions

4 Why is the Custodian Important? Protect, secure and maintain assets Master record keeper of activity related to investments Coordinate custody and settlement globally Access to security settlement system and relevant data Single source of accounting information Experience with all security types and settlement parameters Expert resource for decision support Access to technology and investment products

5 The Core of Custody Safekeeping of assets Monitor trade and settlement Monitor and collect income Monitor and process corporate actions File and monitor class actions Provide valuation of assets Prepare and deliver reports to clients

6 Safekeeping of Assets Track current day and historic activities and positions Reconcile share and currency positions Verify cash positions daily Match trade instructions with receipts and deliveries Verify share positions Process general ledger bookkeeping

7 Local/Domestic Types of Custody Investor located in one country, investing only in that country or market Direct Investor Located in one country, investing in one other country Multi-Direct Investor located in one country, investing in more than one other country

8 Regional Types of Custody (cont.) Investor located in one country, investing in countries within their same region Global Investor located in one country, investing in their own country as well as in other countries in different regions

9 Custodians Interact with the Following Organizations Clients Investment Managers Brokers Settlement Counterparties Other Custodians Sub-Custodians (Agents) Trustees

10 Custodians Interact with the Following Organizations Client Base: Investment Authorities Pension Funds Insurance Companies Large Corporations Multinational Corporations Investment Managers Banks Broker-Dealers Unit Trusts Charities/Endowments ERISA

11 Custodians Interact with the Following Organizations Domestic Custody Depository Trust Company DTC is a member of the U.S. Federal Reserve System and a registered clearing agency with the Securities and Exchange Commission. Additionally, major banks, broker/dealers, mutual fund firms and other companies within the financial services industry own DTC. Federal Reserve The Federal Reserve System, established by the Federal Reserve Act of 1913 was created to regulate the U.S. monetary and banking system. Congress founded the Federal Reserve System to provide the nation with a safer, more flexible, and stable monetary and financial system.

12 Custodians Interact with the Following Organizations International Custody Sub-Custodian A sub-custodian is the relationship between a custodian and another custodian bank outside of the United States that safekeeps foreign assets. Sub-custodians participate in the local markets, interact with the local clearing agencies, and hold accounts in the local depositories Euroclear Euroclear is the world's largest settlement system for international security transactions, covering both bonds and equities. Euroclear provides securities services to major financial institutions located in more than 80 countries worldwide.

13 Comprehensive Custody Services Market Data Services Pricing services Reference services Derivative servicing Data vendor management Proxy Voting Electronic voting instruction Tax Reclaims Withholding schemes where available Reclaims, reduction at source and exemptions Income Collection Corporate Actions Network Management Agent bank service management Market Intelligence Information products Industry involvement Global Custody Services Cash Management Automated sweeps Dedicated trading desks Choice of investment options Transaction Processing Account Opening Account openings and closings Safekeeping Clear policies and procedures Central depositories used where possible Daily reconciliation Settlement Instructions Registration Failed trades Foreign Exchange 24/7 operation

14 Custody & Accounting Core Services Accurate Valuation Facilitates Better Decisions Custody Support from dedicated market experts and specialists Full tax reclaim, proxy voting and corporate action support Access to a broad global custody network supporting investments in multiple markets Accounting Valuations and Reporting Daily valuation process Discipline centered around accuracy Standard operating procedures and controls across all clients and asset types supplemented by customized procedures where appropriate Systemic, exception-based audits

15 Custody & Accounting Core Services Accurate Valuation Facilitates Better Decisions Accounting Valuations and Reporting (cont.) Investment manager and vendor reconciliation process Comprehensive support for alternative investments including customized reporting options Support of client fund structures and reporting, including plan accounting and unitization Ability to support regulatory reporting Technology Single real-time, general ledger based multi-currency accounting system Access to summarized online data that is easy to access and use

16 Accounting & Valuations Accounting and Valuation Services provide Clients and Investment Managers with statutory account packages (balance sheets, transactions, gains/loss) as well as position or holdings showing value of assets Frequency of Accounting & Valuation Services Clients such as Pension Funds and Corporations commonly require monthly valuation services. Other Clients can require daily, or even multiple valuation points per day Differences in Custody vs Accounting Records As Accounting records are usually Trade Date based, it is normal for the Accounting and Custody records to reflect timing differences

17 U.S. Class Actions Notification Class action litigation notices, for U.S. securities, are received and forwarded to clients who wish to receive them Filing Complete an electronic Proof of Claim and forward it to the Claims Administrator on the client s behalf Monitoring / Collections Monitor the status of all claims through payment. Deposit any proceeds received into the appropriate account Reporting A database that tracks notices, filing status and collections is maintained. Reports are available on a monthly basis to those clients that request them

18 Corporate Actions One of a Custodian s primary responsibilities is to ensure that the Client receives, on a timely basis, all entitlements associated with the assets held on the Client s behalf Information is collected from the Sub-Custodian and from vendors The Custodian relays this information to Clients/Investment Managers The Custodian ensures all responses are received, and forwards the appropriate instructions to the Sub-Custodian Once the Sub-Custodian has confirmed receipt, the resulting stock/cash movements are processed across the Client accounts Market claims are processed by the Custodian If assets are unregistered at the Client s request, the Custodian may not be able to protect the Client s entitlement

19 Tax Services Custodians may offer a variety of tax services Exemption Reduced Withholding/Relief The Custodian will usually file for exemption or apply for tax relief at source wherever possible Tax Reclaims Statute of Limitations Factors in applying exemptions, reduced withholding or reclaims Client s tax domicile/country Type of entity Double Taxation Agreements (Tax Treaties) Type of Investment

20 Custody Information Flows Client Investment Manager/Client Broker Reports Custodian Sub-Custodian in Local Market Tax Reclaim Cash Reconciliation Corporate Actions/Income Security Reconciliation

21 Thank you! Questions? Contact Thomas Jaynes 801 Pennsylvania Avenue Kansas City, MO