The financial investment landscape in Ghana has seen massive improvement over the last couple of years. A lot more people are warming up to understand the entire value chain, as well as the key industry players. For many investors, the moment they buy or sell their securities on the primary or secondary market, it ends there. However, there is more to the investment activity that is not recognised.
An investor, whether a direct retail or corporate investor, a contributor to a pension fund, an investor in a Collective Investment Scheme (Mutual Fund/ Trust Fund) or any other type of investor - investing in financial assets be it equity, debt or a hybrid, needs to understand the servicing around these assets i.e. how the institution that holds or safe keeps the asset manages the corporate actions on these instruments; income payments (dividend or interest), voting on resolutions that affect the issuing entities’ actions or other actions the investor needs to participate in for holding the security including responding to an offer by the issuer to exchange the security for another, the settling of a sale or purchase within the investment portfolio, etc. This is where banks offering Securities Custody become crucial.
I have worked in the financial sector for over a decade and I dare say, not much is known about the significant role custodial banks have played and continue to play in the safekeeping and protection of assets in the Financial Markets. Custodians provide all of the services mentioned above and more, taking over assets services, corporate actions, transactions settlements, investment position reporting and all these relevant securities services activities to enable the other providers within the financial service sector like Fund and Asset Managers to concentrate on the building of the investment portfolio on behalf of the investor. In this article, the focus is to examine the role a custodial bank plays to ensure an investor is protected.
Global Custody Outlook
Even though the global market for custody is dominated by ‘big’ banks, they are not the only entities that provide custody services; thus, defining the market for custody services solely by reference to the Asset Under Custody (AUC) held by banks may not depict the true picture. According to a report published by the Clearing House in the United States of America some 6years ago, the top 20 global custodians AUC had hit over $133.7trillion. It is likely this figure has doubled by now. The top global custodians include the likes of Bank of New York Mellon, Citigroup, JP Morgan Chase, State Street Bank and Trust, BNP Paribas, Northern Trust Corporation, HSBC, Societe Generale Securities Services, Brown Brothers Harriman (BBH) & Co.
As per a market report published by Report Linker in May 2021, the global custody service market is expected to grow from $24.42 billion in 2020 to $26.79 billion in 2021 at a compound annual growth rate (CAGR) of 9.7%. The growth is mainly due to most companies resuming their operations and adapting to the new normal while recovering from the COVID-19 impact, which had earlier led to restrictive containment measures involving social distancing, remote working, and the closure of commercial activities that resulted in operational challenges. The market is expected to reach $36.75 billion in 2025 at a CAGR of 8%.
Evolution within Ghana’s Custodian Banks
Following the establishment of the Ghana Stock Exchange in the early 1990s, it took some two years before it became operational. In early 1995 the custody business was introduced to the Ghanaian Market by the then Barclays Bank Ghana limited now called Absa Ghana. The next year, Stanbic Bank Ghana Limited stormed the market shores of Ghana and started custody operations. In fact, they were first regulated by the Central Bank of Ghana before the Securities and Exchange Commission (SEC) was setup in September 1998 as an independent regulator of the capital market in Ghana. Thereafter, the capital markets fell under the mandate of SEC to regulate.
The custody market was dominated by Barclays Bank Ghana and Stanbic Bank until 2010 when then Barclays sold its Africa Custody business including the Ghana operations to Standard Chartered Bank Ghana PLC. Over the last 11years the custody market continues to be dominated by these two banking giants. The custody industry in Ghana cannot be mentioned without recognising the contribution of Mr. Augustine Kwakye Agyekum who was inducted into the Securities Hall of Fame in London, by Global Custodian on 1 October 2009. In his book “Against All Odds (An inspirational life story)” Augustine talks about a few of his contributions to custody services in sub-Saharan Africa, how through his seeking answers to his interactional clients’ questions he helped bring positive changes to some markets making those markets attractive to international capital market investors, and introduced international best practices in the markets. Augustine personally helped to train forerunners in the Custody industry like Mark Amenu, William Sowah and Beverly Frimpong, who have helped shape the industry to what we see today.
The rollout of pension reforms in 2010 and the establishment of National Pension Regulatory Authority by an Act of parliament saw more of our local banks go into custody Services. As at December 2020, newest entrance includes the likes of First National Bank and Access Bank Ghana Limited bring the total number of licensed custodians to Seventeen (17).
The Ghana Capital market was physical until the early 2000’s when the idea of establishing a depository in Ghana originated from the Ghana`s Financial Sector Strategic plan (FINSSP) developed in the early 2000`s to reform the financial system to attract investors to the Ghanaian Economy. As a result, the national bond committee was established. The National Bond Market Committee was among other objectives mandated to identify the constraints in the development of the corporate Bond market of Ghana and recommend policies to facilitate the smooth development of the bond market. Fast forward, in January 2014, the Ghana Stock Exchange which was running a depository for listed equities and the Central Securities Depository (CSD) that was solely for fixed income securities merged to form one Central Securities Depository (GH) Ltd (CSD) which is currently running as the sole depository in Ghana.
Source: 2019 National Pensions Regulatory Authority (NPRA) Annual Report
Custodians and their services
In the broader scheme of things, Custody services generally can be classified into two main categories: the Core custody services, and Ancillary services; and other administrative and value add services.
Back in the days when Ghana ran a physical market and had no Depository, securities were generally represented by individual paper certificates for which custodian’s safe keep these instruments in vaults on behalf of their investor clients. With the introduction of automated trading and establishment of securities Depository, securities instruments are held in dematerialised form on the Depository. The result is that banks providing custody services no longer hold individual paper certificates, but “safe keeps” an electronic book-entry notation in your securities account representing the relevant number of share. Some of the key activities that help protect you include:
Safe Keeping and recording keeping service
This is first and foremost the most important activity of any custodian Bank in protecting an investor. While the safekeeping of securities has evolved beyond the safeguarding of paper certificates which was done years ago, your custodian bank continues to carry out safekeeping responsibilities and they do this by properly recording the number or principal amount of your securities deposited. They also ensure to frequently reconcile the securities in your holdings with the position on the Depository to confirm that the correct number of securities is held and can be delivered pursuant to your instruction. Typically, your custodian bank will segregate your securities from the custodian’s own proprietary assets and that of the assets of its other clients.
In the case where investments are held with Custodians, they perform certain administrative activities on the assets for an on behalf of the investor. Such services include the reconciliation and reporting of assets held under custody, receipt and processing of income from investment held, advising of corporate actions events that are falling due and other such relevant activities.
Transaction Processing and services
Whenever you engage in the purchase or sale of a security (using a broker-dealer and market execution mechanisms), your custodian bank facilitates the delivery or receipt of the security and the related cash consideration. As earlier indicated, it is the Depository that holds the electronic book entries represent issuances of dematerialized or uncertificated securities, and consequently it is the relevant depository that ultimately settles the transaction on its books. The role of a custodian in settling your securities transactions is typically a post-trade role. After the execution of your trade by an investment manager through its broker-dealer and notification of the custodian by the client or investment manager, the custodian will transmit the purchase or sale settlement instructions directly to the depository which will effect the settlement and credit or debit the custodian’s account with the cash as applicable and settle the securities in the relevant investor’s depository account under the safekeeping of the Custodian.
A custodian typically also provides cash management services, such as end-of-day balance reporting and sweep arrangements and short-term investment products, which allow for client cash balances to be reinvested in securities, including interests in money market funds or other investment vehicles. In this regard, the securities in which the client’s cash is invested become part of the securities held in custody for clients for as long as the cash is reinvested
Corporate Action Services
Being informed and getting to know market developments is very important. Corporate action by your custodian involves processing services that include notifying you of forthcoming corporate actions that may affect the securities you hold, such as exchange offers, mergers and acquisitions, rights offerings, and regular and extraordinary meetings of the securities holders at which various matters may be put to a vote of the holders. In this connection, custodians offer proxy voting services, which include delivering proxy notifications and agenda to their clients for their review and action. Clients may then send the custodian voting instructions for onward transmission to the issuer or its agent
In addition to their core custody services, custodians also offer other financial services that are ancillary to the custody function. Some of this include agency securities lending, foreign exchange services and Liquidity Management. Although a wide range of providers offer these ancillary services, the business model of custodians positions them well to offer such services to their custody clients.
In conclusion, the services provided by Custodians occupy a unique space and play a critical role in the global financial market with respect to safekeeping and servicing investor assets and, through provision of these services, helping investors build and maintain wealth. The custody services facilitate access to and participation in the financial ecosystem, which includes asset managers, broker-dealers, Fund Managers, etc. In providing such services, custodians help to connect investors and enable capital to be deployed efficiently, thereby helping to support overall economic growth and the accumulation of retirement and other long-term savings.
The next time you decide to make any huge investment in financial securities, take a pause, and find out who the custodian of your fund is and whether they have been licensed by the Securities and Exchange Commission to protect the assets in the fund. Engaging the service of a custodian helps deepen the securities market.
Start today! Thank you for reading.
Disclaimer: The views expressed are personal views and doesn’t represent that of the media house or institution the writer works.
Credit: Clearing House-USA, Lawyer Miriam Amoako, Beverly Frimpong, Hilda Odame-Gyenti, Report Linker, Augustine Kwakye Agyekum
About the writer
Carl Odame-Gyenti, PhD is a Finance and Investment professional, Country Head (Ag) Client Coverage of an International Bank in Sierra Leone. Contact: [email protected] , Cell: +232 33240467