As an essential aspect of the financial market, a global custody agreement has been designed to provide investors with a secure and efficient way of holding, managing, and safeguarding their financial assets across international borders. Here, in this article, we will explain in detail what a global custody agreement is and how it works.
What is a Global Custody Agreement?
In simple terms, a global custody agreement is a legal contract between an investor and a custodian bank which outlines the terms and conditions for the safekeeping and administration of securities and other financial instruments. The agreement specifies the duties and responsibilities of both parties, including the custodian bank`s role in maintaining the assets and providing various services, such as trade settlement, income collection, transaction reporting, and corporate actions processing.
The primary objective of a global custody agreement is to provide investors with a single point of contact for all their investment needs, regardless of where their assets are held. By appointing a custodian bank, investors can access a global network of sub-custodians and markets, reducing operational risks and increasing efficiency.
How Does a Global Custody Agreement Work?
A global custody agreement typically involves four major parties: the investor or asset manager, the custodian bank, the sub-custodian banks, and the markets where the assets are traded. The investor or asset manager appoints a custodian bank to hold and manage their assets, and the custodian bank delegates some of the operational tasks to sub-custodian banks in different countries.
The custodian bank is responsible for ensuring that all assets are held in safe custody, and all transactions are settled on time. They also provide various value-added services, such as performance reporting, proxy voting, and risk management. The sub-custodian banks` role is to provide local market expertise and complete the operational tasks delegated by the custodian bank.
The markets where the assets are held provide the settlement infrastructure, such as stock exchanges, central securities depositories, and clearinghouses. The custodian bank and sub-custodian banks use these infrastructures to settle the trades and hold the assets.
What Are the Benefits of a Global Custody Agreement?
The primary benefit of a global custody agreement is that it provides investors with a secure and efficient way to hold and manage their assets across international borders. Other benefits of a global custody agreement include:
1. Risk Management: Custodian banks offer a range of risk management tools and services, such as asset segregation, collateral management, and fraud detection, to minimize the operational risks associated with cross-border investments.
2. Cost Savings: By appointing a custodian bank, investors can benefit from economies of scale, reducing the cost of holding and managing assets across different markets.
3. Regulatory Compliance: Custodian banks are well-versed in the complex regulatory environment across different jurisdictions, ensuring that investors comply with all relevant regulations.
In Conclusion
In conclusion, a global custody agreement is a vital tool for investors looking to invest across international borders. By appointing a custodian bank, investors can access a global network of sub-custodian banks and markets, reducing operational risks and increasing efficiency. The custodian bank provides a range of services, including trade settlement, income collection, transaction reporting, and corporate actions processing, to ensure that all assets are held in safe custody. Overall, a global custody agreement is an essential aspect of the financial market that provides investors with a secure and efficient way to hold and manage their assets across international borders.