Custody Overview

Introduction
• Need to Keep Securities in safe place
 Introduction Contd.

• Delivery and receipt of securities

Settlement: against the agreed amount of cash
• Exchange of Securities against
funds

Asset Services: • Collection of dividend

Custodian service to • Corporate Actions
ensure the Investor • Payment/ Reclaim of Tax
receives what he is • Proxy Voting Services
entitled to like
 Introduction to CSD
• High trading volumes can cause delayed
settlement transactions & thus liquidity problems
• Physical certificates also increase probability of
fraud & forgery
• Thus CSDs were set up to immobilize securities
for the whole market
• Shifted the focus from physical safekeeping to the
provision of information on customers’
transactions and securities holdings
 Contd.
• Economies of Scale where services efficiently
delivered by a central service provider
• Services provided were:
– income collection from issuers
– distribution to securities holders
– notification of corporate actions and tax reporting
– collection services for national authorities
– centralized securities lending service
 Contd.
• CSD was best placed to match demand with
supply
• Little or no Customization provided to client
 Banking Services
• Specialized Reporting
• Liquidity Provision & Securities Financing Specialized
• Economies of Scale & expertise in CSD procedures
• Professional in Management of Sec, Rights and Entitlements
Intermediation
• Helps to change Fixed Overheads to Variable costs
• To become a member of CSD
• CSD wants regulated, financially sound members Ineligibility
• Robust operational capabilities & ability to invest in
technology
Transformation of Custody in Electronic Age
Services Provided by Custodian
Safekeeping
• Customers securities maintained on the books
• Can be delivered to customer on order

Settlement
• Transmitting customers’ securities receipt and delivery orders
• Monitoring the associated payments

Asset Servicing
• Processing Rights and Obligations associated with securities
Services Provided by Custodian Contd.

Fund Services
• Investment accounting; Performance
measurement
• Net Asset Valuation; Compliance monitoring;
Regulatory Record Keeping

Banking
• Credit Exposure
• Collateral Management
Demand for Custody Services (Clients).
Retail

Pvt. Banking

Investors Corporations
Investment
Firms
Institutional
Clients Investors
Brokers
Global
Intermediaries Custodians
Asset managers
• Specific requirement is usually efficient cash
management that involves minimum opportunity costs.
Corporations
• investment advice, brokerage, custody, and tax and
estate planning advice.
Pvt. Banking
• Confirmation of Transaction; monthly statement; Asset
servicing
Retail
• Retail Bank a one stop service with many advantages
Investor Clients Contd.
• Focus is on returns; increase yield on securities & Investors
cash portfolio; track & benchmark their investment
performance; compliance with regulations Institutional
• Huge & Rapid turnover; need to be close to market; Firms
usually appoint CSD or Multi direct Custodian
• Main need is liquidity mgmt addressed via collateral Investment
mgmt, Inventory financing, intra day credit
Investor Clients Contd.
• Third party-to manage investment portfolio; able
to provide its institutional investor customer with
Managers
the information and reporting services that it
needs
Asset
• Sub custodians act as local custodians in markets
where GC lack presence or does not have CSD
Custodians
membership
• LC provide asset servicing & settlement services Global
while GC provides fund administration, securities
lending and tri-party repo services
• Broker needs to set up settlement arrangements in
the destination market; it can appoint local
custodian as settlement agent or become direct
Brokers
member of CSD
• Broker appoints Custodian for Asset servicing
requirements
Intermediaries Contd.
Comprehending Custody Scenario in India
 Market Regulations
• Post 1992, NEAT was introduced (which operated
on a strict price/time priority) to reduce
information asymmetry & High transaction cost
• At investor level, listed companies had to increase
the frequency of their account announcements
• To ensure transferability of securities with speed,
accuracy and security, the Depositories Act was
passed in 1996
 Regulations Contd.
• This provided for the establishment of
securities depositories and allowed securities
to be dematerialized & NSDL was launched
• Other measures to reduce Transaction Cost
– a movement toward electronic trading and
settlement
– streamlining of procedures with respect to
clearance of new issues
 Equity Reforms Results
• Modernization of market with increased
efficiency
• Trading has become more transparent
• Eliminate risks of bad delivery and counterfeit
shares due to depository available
• The two depositories that are in operation
now ensure faster, cleaner and cheaper
settlement
 Debt Market Regulations
• Classified into three segments:
a) the government securities market;
b) the public sector units (PSU) bond market
c) the corporate bond market
• The focus of debt market reforms has been
on government securities as it is dominant &
establishes benchmarks for the rest of the
market
 Debt Market Regulations Contd.
• Post 1992, there was establishment of a
primary market for government securities
• Followed by strengthening of legal, regulatory
and payments infrastructure which
contributed to the development of a
secondary market
 Debt Market Regulations Contd.
• Following are the reforms:
a) Auction of Treasury Bills with varying maturities
b) Entry of FIIs to Primary & Secondary Market
c) Introduction of DVP system to accelerate
settlement, enhance transparency, eliminate risk
d) Promotion of G-sec by RBI by providing liquidity
support
e) Active inter bank Repo market development to
boost liquidity
 Regulatory Issues
• Regulators:
a) SEBI
b) RBI
c) Department of Company Affairs
d) Department of Economic Affairs
• SEBI's mandate includes ensuring investor
protection; promoting orderly growth of
security market
 Regulatory Issues Contd.
• RBI is responsible for primary issues of
Government Securities
• Also includes the regulation of all contracts in
G- sec, gold related securities, money market
securities
• SEBI is mandated to regulate the trading of
these securities on recognized stock exchanges
in line with the guidelines issued by RBI
 Overview of NSDL
• Depository Act 1996 was passed to ensure transferability
of securities with speed, accuracy and security
• Post this NSDL was launched which allowed the
securities to be dematerialized
• It aims at synchronizing the settlement of trade and
transfer of securities irrespective of geographical
locations
• Eliminates the ills associated with paper-based securities
system such as delay in transfer, bad delivery, theft and
forgery
NSDL Contd.
NSDL Overview Contd.
 NSDL Overview Contd.
• Functions of a Depository:
a) Dematerialization
b) Account Transfer
c) Transfer Registration
d) Corporate Actions
e) Linkages with clearing system
NSDL Electronic Linkages
 Clearing Corporations
• Financial Settlements are guaranteed by CCIl
• Settlement guarantee fund ensures settlement
of trades irrespective of default by trading
members
• Eliminates counter party risk; thus boosts
investor confidence
 Role of NSE and Clearing Houses
• The transaction in secondary market pass through
3 distinct phases
– Trading: Stock exchange
– Clearing: Clearing Corporation determines the fund &
security obligation of trading members and ensures the
trade is settled through exchange of obligations
– Settlement
• Clearing corporation, clearing members,
custodians, clearing banks, depositories are
involved in the process of clearing
Role of NSE and Clearing Houses Contd.

• Clearing Corporation: responsible for post

trade activities like risk management &
clearing and settlement of trades executed on
a stock exchange
• Clearing Members: responsible for settling
their obligations as determined by the NSCCL
by making the funds/ securities available on
settlement day to the clearing bank/
depositories
Role of NSE and Clearing Houses Contd.

• Custodians: settle trades on behalf of trading

members; is required to confirm whether he is
going to settle that trade or not
Clearing and Settlement Process
Risks in Custody