Research Note: Security Custody Arrangements
Custody Arrangements For Different Security Types in Trust Operations
Stocks and Exchange-Traded Securities
The majority of publicly traded stocks and exchange-traded securities are held in "street name" at the Depository Trust Company (DTC), with the trust company's custodian bank maintaining the beneficial ownership records. Major institutional custodians like BNY Mellon, State Street, Northern Trust, and JPMorgan operate omnibus accounts at DTC where they aggregate holdings across their trust clients. The trust accounting system maintains the detailed sub-accounting of which trust accounts own which securities. This structure provides efficient settlement through DTC's electronic book-entry system while maintaining clear beneficial ownership records at the custodian and trust accounting levels. Global custody for international securities typically involves similar arrangements with international central securities depositories like Euroclear and Clearstream.
U.S. Government Securities and Treasury Bonds
Treasury securities are held in book-entry form at the Federal Reserve through the custodian banks' accounts in the Fed's securities transfer system. The Fed maintains the official ownership records at the custodian bank level, while the custodian maintains the beneficial ownership records for their trust clients. Trust companies typically access Treasury securities through their custodian's Fed account rather than maintaining direct Fed accounts. The trust accounting system tracks the beneficial ownership at the individual trust account level. This structure is particularly important for trust companies given the large allocations to Treasury securities in many trust portfolios.
Mutual Fund Custody
Mutual fund custody differs from other securities as positions are typically held directly with the fund's transfer agent rather than through DTC. The major mutual fund transfer agents (like BNY Mellon, SS&C/ALPS, and Computershare) maintain the official ownership records. Trust companies may hold fund positions in omnibus accounts at the transfer agents or in separate accounts for each trust. Fund supermarkets and custody platforms like Schwab and Fidelity provide consolidated access to multiple fund families through a single relationship. The trust accounting system must maintain accurate position records that reconcile with the transfer agents' records. Dividend reinvestment, capital gain distributions, and tax reporting are typically handled directly by the transfer agents.
Custody Integration and Reconciliation
Regardless of where securities are physically custodied, trust companies must maintain robust interfaces between their custody providers and internal trust accounting systems. Daily position and transaction reconciliation between custody records and trust accounting records is critical. Most trust platforms support automated reconciliation with major custodians through standardized data feeds. Corporate actions like stock splits, mergers, and tender offers must be properly reflected across custody and trust accounting records. The trend is toward real-time integration between custody and trust accounting systems to support intraday trading and improve operational efficiency.
Cash Management and Sweep Programs
An important aspect of custody arrangements is the handling of cash balances. Most trust companies establish automatic sweep arrangements where idle cash is moved into interest-bearing vehicles like money market funds or bank deposit products. These sweep programs may be operated by the custodian bank or third-party providers. The trust accounting system must track both the trust account's underlying cash position and the sweep investment position. Some trust companies maintain separate custody relationships for securities versus cash/banking services to optimize returns and services for their clients.