What Is a Mutual Fund Custodian?
A mutual fund custodian is a trust company, bank, or similar financial institution that holds and safeguards the securities owned by a mutual fund.
A mutual fund'scustodianmight help administer the fund or provide accounting, legal, compliance, tax, and transfer agency services.
Key Takeaways
- Mutual fund custodians are responsible for securing and managing the securities held by a mutual fund.
- While a fund's portfolio manager makes trading decisions, the securities owned by the fund are held by the custodian and not by the fund itself. This is done to cut the risk of fraud.
- In addition to holding securities and recordkeeping, a custodian also typically offers trade settlements, foreign exchange transactions, and tax services for clients.
Understanding Mutual Fund Custodians
Mutual fund custodians work with them as third parties. Since amutual fundis essentially a large pool of funds from many different investors, it requires another entity to hold and safeguard the securities the investors mutually own.
The Securities and Exchange Commission (SEC) has specific rules and requirements governing the custody of mutual funds, outlined primarily in Rule 206(4)-2 of the Investment Advisers Act of 1940. These regulations, revised in 2009 to improve transparency and investment safety, aim to mitigate the risks of fraud by investment companies and fund managers. As a result, most investment companies work with third-party custodians to follow these regulations.
$47.8 Trillion
The amount held in custody by BNY Mellon, the world's largest asset custodian, in 2023.
Mutual Fund Custodian Services
Mutual fund custodians work with mutual fund companies worldwide. Global custodians must adhere to the relevant regulations in which they operate.
Mutual fund custodians can offer a broad range of services. These typically include fund accounting, administration, legal, compliance, and tax services. Mutual fund custodians also work with transfer agents or provide their own transfer agency services to maintain records of shareholder transactions and balances. Mutual funds typically outsource most of their back-office operations to custodians to save on costs.
Fund accountants calculate daily fund net asset values, and administrators manage activities related to the fund's securities, including voting on corporate actions.
Examples of Mutual Fund Custodians
Many global financial firms offer custody services for all types of investments, including stocks, bonds, mutual funds, and exchange-traded funds. Vanguard uses several custodians, including J.P. Morgan, State Street Bank, and BNY Mellon. Fidelity, a federally regulated bank holding company, often acts as its own custodian.
The major players in the sector have been relatively stable over time, and we rank them by assets under custody (AUC) below. We've produced this list comparing the relevant releases from the custodian institutions and industry sheets like Global Custodian and Post Trade 360°.
| Custodian | AUC ($Trillions, 2022) | AUC ($ Trillions, 2023) |
| 1. BNY Mellon | $43.0 | $47.8 |
| 2. State Street | $38.2 | $41.8 |
| 3. Euroclear | $36.4 | $39.6 |
| 4. J.P. Morgan | $28.6 | $32.4 |
| 5. Citi | $26.8 | $25.1 |
| 6. Clearstream | $17.0 | $19.2 |
| 7. HSBC | $15.7 | $18.5 |
| 8. BNP Paribas | $13.9 | $14.9 |
| 9. Northern Trust | $13.7 | $15.4 |
| 10. CACEIS | $7.8 | $8.0 |
What Is the Difference Between a Custodian and a Fund Manager?
Mutual fund managers are tasked with decisions about the fund's investments and placing orders to buy or sell the fund's securities. The custodian for a fund handles the settlement of these trades and securely holding the fund's assets.
Who Chooses the Custodian for a Mutual Fund?
The board of directors for a mutual fund selects the custodian for the fund.
Do Mutual Funds Need to Use a Custodian?
Yes, regulators require that mutual funds place their securities with a custodian. Under SEC rules, custodians must segregate mutual fund portfolios and their securities from other bank assets.
The Bottom Line
Mutual fund custodians play a relatively unknown, but important role in the world of mutual fund investing. They serve as an additional layer of security, safely holding a mutual fund's portfolio, managing record-keeping, and helping reduce the possibility of fraud.
Article Sources
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M. Gerber."How to Create and Manage a Mutual Fund or Exchange-Traded Fund: A Professional's Guide," Pages 142-143, 335-336. John Wiley & Sons, 2017.
U.S. Securities and Exchange Commission. "Custody of Funds or Securities of Clients by Investment Advisers," Page 11.
HSBC Holdings PLC. "Annual Results 2023."
CASEIS. "CACEIS: Asset Servicing, Custody, Depositary, Fund Admin."
Post Trade 360. "Check the List: Custodian Revenue Inched Up on Rates and Asset Prices."
Jonathan Watkins. "Custodian Banks Can Now Measure Success By Revenues Rather Than Assets."Global Custodian. (Oct. 19, 2022.)
BNY Mellon. "Financial Supplement 4Q 2023."
Clearstream. "Annual Accounts as at 31 December 2023."
Investment Company Institute. "The Structure and Regulation of Mutual Funds."
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