JP Morgan Chase, BNP Paribas: What are custodian banks, how do they work?

Have you ever wondered what big firms such as JPMorgan Chase, Citigroup, BNP Paribas, etc which are always on investors' and traders' radar do? To understand that one needs to first understand the term 'custodian bank' as these firms fall under the category. 

Most of the large banks have been providing custodial services traditionally through their large branches. Some of the banks have separate custodial services departments handling such services in the settlement of securities for their clients. As per the market regulator Securities and Exchange Board of India (SEBI) registration list banks like Axis Bank, Kotak Mahindra Bank, HDFC Bank etc are providing such services. Among the foreign banks providing such services are BNP Pariba, and JP Morgan are many such firms.

What are custodian banks? 

As per Jyoti Prakash Gadia, Managing Director at Resurgent India, custodian banks are those commercial banks that provide custodial services to their clients or customers. 

Custody essentially means safe safekeeping of assets, in simple words, it is a financial institution that keeps customers' securities safe to prevent theft or loss.   

How do custodian banks function? 

Apart from providing custodial services as mentioned above, custodian banks are also clearing members not to confuse with trading members for securities they do the settlement work such as payment, custody, and exchange on behalf of their clients.

As per Gadia, large clients and institutional clients avail the services of custodial banks to enable them to settle the transactions in securities without operational or legal hassle and pay a fee to the custodian bank for each such transaction. 

Market regulator SEBI also has a provision for the registration of banks and institutions providing custodial services for securities.

How are custodian banks different from traditional bank? 

The difference between custodian banks and traditional banks is their primary roles.

Custodian banks are responsible for, above all, the safekeeping of financial assets belonging to individuals or institutions. They may also offer services related to that primary role. However, they don't offer the same types of services provided by traditional banks.

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