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Fintech Glossary

Custodian: What does it mean, and who is it?

What you will learn?

Who is a custodian?
What is custodian's role?
Real-life example of a custodian

A custodian can be a person, entity, or guardian whose role is to protect and care for something.

Custodians are often responsible for the care and maintenance of buildings, ensuring their cleanliness, safety, and overall upkeep. As the custodian of a building, their role is pivotal in maintaining the structural integrity and functionality of the premises. This role extends beyond just financial assets, as custodians may also be responsible for various property types, including real estate, collections, and more.

The term “custodian” encompasses a wide range of responsibilities across different contexts, from overseeing the maintenance of a golf course to safeguarding sacred objects in a church. A school custodian, for instance, plays a critical role in ensuring a safe and conducive learning environment for students and staff.

The Role of Custodian: Safeguarding Assets in the Financial World

The term “Custodian” can refer to different people or organizations depending on context. In the financial world, this custodian bank will play a crucial role in safeguarding assets and facilitating smooth financial transactions.

By passing assets to third-party trustees, investors minimize the risk of theft, loss, or unauthorized access. Those assets can be physical, such as commodities (they could be something traditional, such as gold), or electronic (for example, equities (stocks)). A custodian takes care of these assets, ensuring their safety and proper management.

Custodian banks, as financial entities, provide additional custody services

  • Tax assistance, reporting services, and as custodians, custodian banks provide comprehensive support, including managing tax-related matters for their clients.

  • Custodian banks, as a qualified person or entity, manage assets and financial transactions for their clients, ensuring efficient handling of account administrations and transaction settlements, including the administrative aspects of buying and selling securities.

  • They are responsible for safeguarding assets, highlighting the significant responsibility custodian banks have in protecting and managing their clients’ wealth.

  • Foreign exchange, currency conversion.

  • Income collection (dividends, interest).

Additionally, custodian banks play a crucial role in managing financial accounts held by minors, ensuring the safekeeping and appropriate management of funds until the minor reaches adulthood.

Real-world example

Custodians tend to be huge organizations; trustworthiness needs to be earned with time. For example, one of the oldest banking institutions is, in fact, one of the largest custodian banks in the U.S.: J.P. Morgan Chase & Co.

Custodians hold custody of assets to ensure their safety and proper management, being entrusted with guarding the assets they manage.

As guardians of financial assets, their job involves protecting assets and settling transactions. They play a crucial role in guarding against unauthorized access and taking care of the financial assets and transactions they oversee, ensuring the integrity and security of these processes.

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As for mutual funds, those are legally obligated (in most countries) to use custodian services, and the process of creating a new unit can look something like this (very illustrative and simplified example).

Let’s take a hypothetical mutual fund WCHS is investing in stocks of Authentic Company, and individual investor David wants to buy shares of that WCHS fund.

At first, David needs to find the distributor that offers shares of the WCHS fund. After the cut-off point, the distributor aggregates all of the transactions and sends them to the transfer agent. At this moment, the broker received information that the underlying assets (Authentic Company stocks) specified in the information from the transfer agent needed to be bought.

Brokers cannot just give assets to the fund manager even though they technically are the owners. The custodian is a significant actor who takes money from funds and assets from brokers and settles the transaction (brokers receive the cash, and the custodian keeps Authentic Company stocks).


Despite that, funds can be trusted, and organizations do everything in their power to be as secure and honest as possible. Additional parties ensuring that no one in this chain of responsibilities has any possibilities or access to perform suspicious actions raises overall trustworthiness.

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