IN SHORT: Custodian services for securities, such as shares, are vital in the functioning of the investment markets.
The word custody means to keep safe, and invokes great responsibility. It demands that the custodian acts in the best interest of that which is placed in his or her care. This can be a child, an elderly or disabled person, or in the case of a retirement fund, all tradeable assets that represent the savings of its members.
Yes, transactions done by institutional investors, like retirement funds, usually involve assets, such as shares, bonds, or money-market instruments, worth millions of rands. This specialised service, called custody service, is usually provided by financial institutions like banks that hold these assets on behalf of the retirement fund.
The custodian service provider will ensure all buying and selling are done according to an exchange’s rules (like the JSE). Keeping another’s financial assets securely on their behalf is key for the proper functioning of the financial market.
A custodian also provides services such as collecting dividends or interest payments, informing the investor about corporate actions (such as takeovers or share splitting), administering any voting at a company’s annual general meeting, and reclaiming dividend taxes for those investors (such as retirement funds) who are exempt.
Furthermore, a custodian service can assist a retirement fund in managing its share lending and the interest receipts of such activities.
How safe are my shares and bonds at a custodian service?
Every financial service provider that offers custody services must be registered with Strate as a South African central securities depository participant. Strate is South Africa’s central securities depository responsible for the safekeeping of the legal and digital records of owners of securities. Strate is a critical financial market infrastructure that is regulated by the Financial Sector Regulation Act. It links a variety of stakeholders such as brokers (of investors), custodians, securities exchanges (such as the JSE), and regulators.
When a retirement fund, on behalf of its members, decides to invest in 1 000 shares of company ABC, the fund needs to use a registered brokerage to fulfil the transaction. The retirement fund pays the purchase sum to its broker. Once the transaction has been settled, meaning the seller has received his money and the fund its shares, the retirement fund doesn’t receive a printed share certificate anymore, but rather the shareholding is registered, via the custodian of the shares, with Strate. We call these dematerialised share certificates, which are held in electronic format.
Now, suppose that six months after the share purchase, company ABC’s board of directors declares a dividend of R10 per share. The dividend will be paid into the custodian’s bank account. The custodian will also let company ABC know that the retirement fund is exempt from paying the 20% dividend tax.
Questions to ask when choosing a custodian service provider
Fees: All custodian service providers charge a fee based on the value of the underlying assets. For example, a fee of 1% on the first R3 million value of the portfolio and 0,8% on the value above that.
Registered: All custodian service providers must be participants of the central securities depository, Strate, and must be registered as a financial services provider with the Financial Sector Conduct Authority (FSCA). You can search for registered providers on the FSCA’s website.