A custodian is a financial institution that holds customers` financial assets (e.g. money) for safekeeping in order to minimize the risk of their theft or loss. A custodian holds securities and other assets in electronic or physical form. Since they are responsible for the safety of assets and securities that may be worth hundreds of millions of dollars, custodians generally tend to be monitored and audited by reputable firms and work only with AAA rated banks. They are closely monitored by deferral as well as local authorities to avoid fraud, errors, and insolvency. Custodians do not engage in commercial and traditional banking services or give out interests or credits to its clients.
Large institutions, hedge funds, high net worth investors and private individuals choose to have a custodian relationship that is separate from Broker trade execution services in order to benefit from greater safety of their funds, while still being able to use the services of an FX Broker to trade selected assets from his personal trading account.
For brokers, fund managers and individuals seeking deposit protection against the risk of their broker becoming insolvent and only getting back cents on the dollar, we strongly recommend opening a custodial account (through a Tri-Party contract agreement). Essentially, a custodial account is a financial escrow account established in the client’s name and administered by a responsible person or entity, known as a custodian, who has a fiduciary obligation to the beneficiary. For qualified counterparties, this offers a secure client funds solution through a deposit or custodial bank account. In this structure, a deposit or custody account is opened in Client’s name and maintained for the benefit of the client. The account operates under a tripartite agreement between the client, depository or custodial bank and broker. Under the terms of the agreement, the broker is authorized to debit or credit the account for trading gains or losses within 24 hours of the close of the trading day (or next business day).
What are the benefits of having a tripartite agreement?
- Safeguarding from unforeseen events – the agreement adds protection to the money of the account holder in the unanticipated event that their broker becomes insolvent.
- Real separation of customers` funds – all client equity is secure and fully segregated at all times in the Client’s name and the client funds are not co-mingled with the broker’s funds or those of any other client. The money is held by an independent custodian company or Bank, who administers the assets for the protection of the client.
- Added service worth – security of funds is a primary concern to clients, especially in light of recent events. More and more clients are choosing to work with the institutions offering the maximum security for the funds on deposit in their accounts such as Custodian accounts, insurance on their deposit, segregation of client funds and others.
Had investors been using this type of secured funds strategy while trading with any of the brokers that became bankrupt during the January 15, 2015, CHF event, their deposits would have remained untouched even after their financial partners had closed doors for existing and new clients.
As of June of 2016, traders are still waiting to get compensated for their losses from big regulated brokers like Alpari UK, Global FM, Refco Inc.