Securities Custodian - ADX · Securities Custodian Securities Custodian is a legal person works in the financial sector, such as a commercial ... certificates saved on their computers

Securities Custodian

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Disclaimer

All information contained in the Companies Guide is for information purposes only. Nothing herein constitutes an offer, solicitation or recommendation to invest or conduct any transaction in any kind of securities listed on Abu Dhabi Securities Exchange (ADX).

ADX is not liable for any claims, losses, or damages of any nature, arising directly or indirectly from use of the data found in this report. ADX endeavors to ensure that the data and other materials found in this report are correct and complete, but does not accept liability or responsibility for any error made or omission in this report.

All materials contained in this guide, including all data, information and content are the property of the Abu Dhabi Securities Exchange (ADX).

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Securities Custodian is a legal person works in the financial sector, such as a commercial bank, an investment bank or a joint-stock company operating in the field of securities. Its basic job is to provide custody services for securities owned by others and follow up investment matters relating to these securities, such as dividend payments, rights related to initial public offerings (IPOs) and procedures of other companies. All these details are explained comprehensively in this booklet.

By and large, the concept of securities custodian covers the physical safeguarding of possessions such as jewelry, cash, paintings, paper copies along with electronic (digital) copies of securities. This booklet discusses the role of computers and sophisticated electronic technologies, which is more akin to

today’s custodian work carried out by some banks, in safeguarding jewelry and valuables in safe lockers under their supervision and protection.

However, fast-tracked technological and electronic developments worldwide contributed effectively in utilizing the electronic form together with the physical keeping of securities. Now, public joint-stock companies and financial markets rely on what is called a paperless environment for securities issuance and custody. Financial markets and companies opted for converting paper ownership certificates into electronic certificates saved on their computers. This process is called dematerialization.


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This procedure facilitated the work of custodian institutions and enabled them to do additional tasks beyond custody services along with other services such as securities clearing and settlement as well as management of all matters relating to securities on behalf of investors.

Many people, especially big investors, prefer to entrust experienced and trustworthy persons to custody their money because they do not have enough time to follow up on details. The custodian provide these services better, faster and in a way that less prone to errors.

Over the years, the demand for custodian services increased. This industry has grown and become global in its presence, relationships and contracts. Some statistics indicate that banks and institutions offering custodian services have equivalent of trillions of dollars of assets.

It is worth mentioning that services of Securities Custodian are fee bearing. Fees are paid to Securities Custodian and are normally agreed upon between the parties or may be determined by a regulatory authority. Fees are usually limited and may not exceed half percent of the value of securities.

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Securities Custodian: Classification of Banks and Institutions

Many of the world’s banks offer custodian services as an activity separate from the rest of other banking services. These banks are leaders in this field and enjoy a strong presence globally, top of which are Citi Group, HSBC, BNY-Mellon, and others.

Custodian banks and institutions can be classified, in terms of services and geographical presence, into three categories:

First: Global Custodian. Banks or institutions classified under this category enjoy a strong presence in different countries and financial markets, provide custodian services for foreign securities, supervise cross-border trading for its customers and perform many services for the benefit of those customers through unified templates for agreements.

Second: Sub-Custodian: Banks or institutions classified under this category are usually branches of a global Custodian in a certain country or regional group. They serve regional countries and cooperate with the global custodian to offer custodian services locally.

Third: Local-Custodian: Banks or institutions classified

under this category focus mainly on a specific country and offers custodian services to local customers, such as the National Bank of Abu Dhabi. They enjoy a significant advantage over their competitors by deeply understanding the local market. Global custodian banks may seek the assistance of local custodians if they have no sub-custodian in that country.

Services Provided By the Securities Custodian: Services provided by the securities custodian vary based on its classification, license and agreements signed with financial markets and regulatory authorities on one hand, and between with its customers on the other hand.

Services provided by the securities custodian may be limited to specific matters, such as procedures related securities custody services that include approving securities trading transactions, following-up corporate profits, voting in the general assembly and sending reports. If the custodian is of a global bank, services may exceed the aforementioned procedures because these banks offer multiple services that cover almost all aspects of what services needed by the investor.

It is important to remember that custody services are fee bearing and that fees are paid directly to the

securities custodian. In addition, it is important for the investor, if he wants to avoid surprises, to know these fees and carefully read the agreement signed with the custodian along with fees statements issued by the custodian.

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Key Services

• Safeguarding securities and documents electronically or physically in addition to monitoring these securities and trading transactions.

• Opening trading accounts on behalf of investors, especially if the investor is a resident of another country.

• Confirmation of trading transactions. Trading transactions done by customers are sent to the custodian from the Clearance Office for confirmation, after being executed by the brokerage company. Decisions of acceptance or rejection depend on the desire expressed or delegation granted by customers. This is the big advantage of dealing with custodians in trading markets, where any errors or potential manipulation in the customer accounts are avoided. This procedure form an additional safety valve to ensure that trading transactions are approved and acknowledged by customers.

• Providing clearing and settlement services in favor of customers, if required.

• Attending and voting in general assemblies of public shareholding companies on behalf of the customer, collecting share profits provided by companies, subscribing in IPOs at the time of share capital

increase, recording mortgages and bookings, and paying fees.

For profits and cash distributions, securities custodian

is supposed to inform customers early so that the customer can use these amounts appropriately.

• Bookkeeping and records related customers’ accounts, updating customers regularly and continuously on accounts, profits or losses, taxes and fees along with news, procedures or decisions taken by related companies, markets, or institutions.

The techniques of sending reports to customers and official bodies have developed with the use of technology. They may include SMSs, periodic reports or via email, fax, etc.

• With regards to Exchange-Traded Funds (ETFs), the securities custodian provides custody services to all shares issued in exchange for units and safeguarding units of funds because they play an instrumental role in the creation and redemption process jointly with makers market.

• Custodian banks, especially big banks offering custodian services, may provide services that focus on assets management, studies and research preparation and consultation related to securities. In these cases, banking services must be completely separated to avoid conflict in interests.

• For custodian services offered to investment funds, Securities custodian keeps securities and assets ownership documents in addition to following up stock trading transactions done by the fund.

• Large and global custodian banks provide additional services that may not relate to the services normally provided by custodians, such as exchange currencies, cash management and wealth management.

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Securities Custodian: the License Regulators and financial markets license securities custodians in accordance with specific obligations and conditions. These conditions mainly focus on the importance of having talented human resources that enjoy high efficiency and expertise in its field in addition to employing technical electronic and administrative systems necessary to accomplish the licensed services in a professional manner.

Employees of the Securities Custodian should abide by the ethics of the profession, avoid conflict of interest, and care for the interests of customers.

Securities Custodians must have a proper accounting system in accordance with international standards. In addition, they must use an internal control system and take into account separating the customer accounts.

Securities Custodian: Securities Trading and Settlement

One of the most popular services of securities custodian lies in its relationship with the equities settlement cycle, such as following trading transactions until completion and monitoring the final settlement and ownership transfer. Therefore, the securities custodian is considered to be a strategic partner for Central Securities Depositories (CSDs) as well as local and global payment systems.

The following is a review of the aforementioned settlement cycle, if executed via the Securities Custodian, which highlights the practices adopted in the UAE local markets, as the details may vary from one market to another:

• The investor open a trading account via the broker (the brokerage firm) and sign an agreement in this regard. Also, the investor open another account with the custodian bank to grant it the needed powers which may include custody of securities, confirmation of trading transactions based on the customer’s instructions, in addition to collecting profits, sending reports, etc.

• If the investor wishes to buy stock shares, he shall does so by submitting a request to the broker. In addition, he can mandate a custodian to complete all trading transactions according to agreed-upon conditions. Securities custodian shall then send his yes or no confirmation seven o’clock in the evening the next day or by the so-called T + 1. The final formal transfer of ownership (the settlement) is executed two days after the purchase transaction, or by the T+2. Local markets relay on the so-called Delivery Versus Payment (DVP) system, two days after the sale or purchase transaction. If the custodian sends a yes confirmation, the transaction is completed normally. If it sends a no confirmation, the transaction is stopped and no money is paid.

• If the investor wishes to sell a number of shares, the broker completes the action according to regulations. After the completion, the Clearance Office informs the custodian directly, whether electronically or via SMS, fax, etc. The custodian shall send his yes or no confirmation (based on the investor’s instructions) before seven o’clock the next day. If the custodian sends a yes confirmation, the transaction is completed normally. If it sends a no confirmation, no shares are sold, except the number of shares approved by the custodian.

• Two days after the trading date, the transaction is done in accordance with DVP system, a settlement system that stipulates that cash payment must be made simultaneously with the delivery of the security.

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Securities Custodian:the Agreement:

Any person wishes to take advantage of services offered by securities custodians must sign a written agreement with them to start receiving the desired services formally. Usually, there is a unified template for agreements covers all key elements in the agreement, especially if the custodian is operating globally. The Agreement must be clear and comprehensible. Some regulatory authorities may determine a standard form for agreements, or establish minimum requirements aimed at protecting investors.

Before signing, the investor should read all terms and conditions associated to the agreement carefully. The desired type of service should be determined while fees and commissions charged by custodian should be clearly noted and understood.

Usually, the agreement includes the customer name, address information, eligibility to contract, rights and obligations of the required services, fees for each service provided, dispute resolution mechanisms, etc..

Securities Custodian: Who Needs Custody Services?

There are many parties need the services offered by

securities custodians. These services may be offered voluntarily; by the free will of the natural or legal person. In addition, they may be offered mandatory when financial or regulatory bodies in some countries take part in providing custody services, such as the process of trading confirmation on behalf of customers before the settlement of trading transactions.

General elements of power enjoyed by securities custodians, such as experience, skilled cadres, technology use and reputation, commitment, cross-border services, reduction of the cost of investment for customers, mitigating risks, etc., are attracting individual and institutional investors.

The following are a number of parties who might be interested in the services offered by securities custodians:

1- Individual Investors:

Individual investors may want to get some services offered by securities custodians, especially investors who wish to invest in other countries where the custodian, by a mandate from the investor, can open accounts, coordinate with brokerage firms, confirm transactions, follow-up rates of foreign currencies and sent reports to the customer along with other services. However, the appetite of individual investors for services offered by the securities custodians is

relatively lower than institutional investors. Individual investors in the financial markets keep their securities at the CSDs.

2- Persons Looking for Wealth Management Services:

Many wealth holders look for services offered by securities custodians to follow up on their investments and manage their money because they do not have enough time for doing that themselves. At the same time, they want to get and investment advice along with services offered of knowledgeable and well-informed people.

Despite the fact that services offered by the Securities Custodian do not include money management, global custodian banks offer this service in the form of additional independent service. However, they must insure that services with potential conflict of interest are separated from each other.

3- Enterprises and Institutions:

Some companies may use services offered by securities custodian to insure the safety of its agreements, documents and some other precious assets. Companies with surplus cash can benefit from investing their surplus liquidity in securities to achieve profits that sometimes may outweigh the benefits of banking. These companies may resort to custodian banks to safeguard their securities and investments.

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Securities Custodian: Risks Like any other financial institution, securities custodians might be exposed to risks. Risks that normally affect the banking and financial sector applies to securities custodian. Risks should be studied to know the extent of their impact on the capital as and revenues of securities custodians.

Risks may relate to the type of business operations, financial aspects or legal affairs, which could affect the reputation and strategies of securities custodians, not to mention the size and type of their customers.

It should be noted here that types of risks are not independent of each other. For example, an operational failure of the custodian, may lead to a financial failure due to the correlation between the activities of custodian banks and institutions.

Large custodian banks that operate internationally, offer trading services around the clock, use currencies and work in different environments may be affect by potentially serious risks.

Subject-matter experts say that operational risks, such as trading risks, are the most common to the work of custodians due to the large volumes of daily operations related to trading transactions, settlements and foreign exchange as well as monitoring procedures of companies and following-up customer accounts.

Without doubt, technological developments prevent and mitigate this type of risk.

Another potential risk may arise from non-compliance. Non-compliance with laws, regulations, instructions, policies, standards and ethics of the profession may expose securities custodians to penalties and damage its reputation along with the loss of customers and the ability to attract new contracts.

In addition, another potential risk may arise from credit, such as the failure of the other parties to fulfill financial obligations. This kind of risk, in the case of securities custodians, may be less serious than other financial institutions, especially in light of the adoption of DVP system by financial markets, including local markets.

Securities Custodians, especially global ones, should avoid the aforementioned risks by applying preventive measures, such as understanding laws and regulations of different countries and legislative environments, taking into account the degree of technological development inside and outside their work environment.

They also should follow-up exchange rates, understand conditions of money transfers, use modern technological systems, develop contingency plans, monitor potential risks, and utilize rapid, accurate means of communication along with performance measurement techniques.

This is in addition to the importance of keeping abreast of developments in the custody sector as well as economic and political situation, etc.

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Global Securities Custodian: Factors to Be Taken Into Account When Choosing a Particular Business Environment:

Large global custodian banks do not take their decisions to invest in a certain country or environment at random. Normally, this is done based on in-depth study, taking into account their desire to expand and achieve more revenue, but at the same time fear of loss and potential risks.

Large global custodian banks applies the same methodology when selecting a local or regional custodian bank.

Key Factors:

• Political, economic and social risks in the country or the region.

• Factors related to financial and monetary markets, legislative environment, controls, existence of insider trading monitoring systems, fraud and money laundering. This is in addition to the application of laws, regulations, especially financial, economic and bankruptcy laws, if any.

• The existence of electronic settlements and modern payment systems.

• Restrictions on foreign investment, movement of money and property registration.

• Controls on currencies and taxes.

• The maturity, liquidity, depth and commitment of financial markets.

•The availability of sound financial information.


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Securities Custodian - ADX · Securities Custodian Securities Custodian is a legal person works in the financial sector, such as a commercial ... certificates saved on their computers