What is the Difference Between Depository and Custodian?

The main difference between a depository and a custodian lies in their responsibilities, client relationships, and control over client assets. Here is a comparison of their key differences:

Depository:

1. Depositories are managed and monitored by the Federal Reserve, subject to higher compliance standards, hefty capitalization requirements, and stricter codes of conduct.
2. They hold electronic versions of securities and provide transfer services.
3. Depositories have a more passive relationship with clients, exercising greater control over client investments aligned with the client's objectives.
4. Depositories may take full or partial responsibility for any losses incurred.
5. Their clients are restricted to investment funds.

Custodian:

1. Custodians focus on the operational side of the safekeeping and settlement of securities.
2. They have a more dynamic relationship with clients, where clients lead investment decisions, including buying/selling and asset allocation.
3. Custodians hold limited liability on losses incurred by clients.
4. They can hold financial assets for a much wider range of businesses and individuals, not just investment funds.

In summary, depositories have a more passive role and greater control over client investments, while custodians focus on the operational side of safekeeping and settlement of securities and have a more dynamic relationship with clients.

Comparative Table: Depository vs Custodian

Here is a table comparing the differences between a depository and a custodian:

In summary, a depository holds electronic versions of securities and provides transfer services, while a custodian holds physical securities and assets for safekeeping. Depositories have legal ownership and controlling power over the assets, whereas custodians do not have legal ownership but safeguard assets. Custodians focus on administrative tasks and executing client instructions, while depositories may take more responsibility for losses incurred.