How to Execute Security Transactions
When you buy a stock, bond, or any other security, your broker executes the transaction on your behalf. The broker handles the paperwork, records the agreed-upon price, and arranges the exchange of cash for the security.
Transactions are often settled within two business days in the United States, so by the settlement date, you and the other party will complete your part of the deal, which is the exchange of cash for the assets.
Failure to deliver or settle can result in fines, fees, and regulatory issues. That’s why brokers are the ones who conduct the transactions. When you have a brokerage account, the broker completes the transaction on your behalf so that your purchases and exchanges happen smoothly or with minimal issues.
When you look at your account after executing a trade, you’ll see that the money has been withdrawn immediately and that the shares are listed in your account ledger. However, that’s not exactly what happens in reality.
Note: Brokers and banks often operate in the same way when transferring capital and assets. You will see the transactions occur in your brokerage account, but they are not finalized until the settlement date.
Your online broker takes the shares you recently purchased on your behalf and sends your payment to the other party. However, your name is not placed on the stock. It is said that your stock is held “in street name,” which is the name of your broker.
Most shortcomings of investing for small investors are addressed using brokerage firms. For example, if your brokerage firm goes bankrupt and is a member of the Securities Investor Protection Corporation (SIPC), you have no reason to worry, as account balances are protected up to $500,000 ($250,000 in cash) against the firm’s failure. However, if you have more than $500,000 in your accounts, you have reason to worry. Amounts over that are not protected by SIPC insurance. Here, a global custody account can help you.
Global Custody System
The global custody system was established in the 1970s after a series of brokerage firm failures that sparked panic among people and sent shockwaves through the financial community.
For those with over $500,000, having one of these accounts (preferably with a bank trust department) is much safer than traditional accounts or storing assets with your broker.
Among the advantages available in this system is that all of your assets are held in one place, and you can employ a registered investment advisor. You can invest in limited partnerships, and you can hold U.S. Treasury bonds and other valuable assets without worrying about the $500,000 insurance limit.
Note: Global custody accounts are designed to reduce the risks of institutional failure that can cause significant losses when investing their funds.
You can even pay to have all positions registered in your name through a Direct Registration System (DRS). Set up a money market, cash, or another liquidity account to fund all your purchases or receive all your income distributions. Then, direct the global custodian to accept any buy or sell orders coming from authorized brokers.
The broker executes any buy or sell orders you tell them when they believe you will fulfill your side of the deal. Since they no longer hold the securities, they must check with the custodian to ensure you will honor your side of the transaction. The custodian then sends the money or receives the assets.
Asset Servicing
After sending the money or obtaining the assets, the custodian performs other tasks known as “asset servicing.” These tasks often include providing the price history of the assets so you can see the value of your holdings over time and ensuring the receipt of dividend and interest payments according to corporate announcements.
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You will also be notified of corporate actions such as stock splits, tender offers, or merger proposals, and any necessary paperwork will be handled. You will also ensure that the costs imposed on your accounts are tracked.
Depending on the custodian, they may also need to provide liquidity snapshots, create an audit trail to prevent fraud and theft, facilitate securities lending, and provide compound annual growth rate figures over time.
Note: Global custody accounts add some additional benefits for those who hold assets outside of the United States. Cash balances can be tracked, and settlements can be handled in global currencies in many international stock exchanges.
Establishing a base currency for reporting allows you to know the value of foreign assets and currencies at any given time so that you know your purchasing power in your home country. The global custodian also takes care of tax treaty matters and identifies foreign tax credits that you will need when it comes time to file your tax returns with the IRS.
Custody Account Providers and Services
Bank of New York Mellon, State Street, Fidelity, and Charles Schwab are some of the main providers of global custody accounts in the United States. In Switzerland, Credit Suisse and UBS are among the largest banks offering this service. In Europe, Hongkong and Shanghai Banking Corporation (HSBC) is a major global custodian.
Costs of Global Custody Accounts
Like investment management services, global custody services are often contracted on a negotiated basis depending on the level of assets you own and the complexity of your needs. Stocks and bonds are level one assets, interest rates or currency swaps are level two assets, and mortgage-backed securities or complex derivatives are level three assets.
It is common for municipal pension funds, for example, to receive services that require half a basis point (0.005%) annually for each position of U.S. stock, along with very small fees at the time of trading. Smaller-sized accounts may have annual fees ranging from a few hundred to several thousand dollars or fixed fees per position plus a few basis points.
For those with millions of dollars, the costs associated with a global custody account may be worth the convenience of having all investments in one place. High-net-worth individuals value these accounts, as they know they will be less exposed to institutional failures.
Source: https://www.thebalancemoney.com/how-does-global-custody-work-358169
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