When an investor buys a stock or bond, the security does not sit in their safe—it is recorded in a multi-tier custody system. Who holds the assets, under whose law, and through which chain of intermediaries directly affects their protection, accessibility, and exposure to sanctions. This infrastructure is called custody.
What is custody
A custodian ensures the safe keeping of securities and their servicing: settles trades, credits dividends and coupons, processes corporate actions, assists with reclaiming excess withholding tax, and produces reports. The securities themselves are held separately from the custodian's balance sheet, so in the event of its bankruptcy they typically remain the client's property.
How the custody industry emerged
The multi-tier system grew out of the crisis of the late 1960s. On Wall Street, trading volumes outpaced the capacity of paper processing: certificates physically could not move from seller to buyer in time, exchanges shortened trading hours and closed on Wednesdays to clear the backlog. This became known as the paperwork crisis. The response was immobilization—certificates were brought to a central depository and stopped being moved around, and the transfer of rights was reduced to account entries. The next step was dematerialization, when the paper certificate disappeared altogether.
In the United States, this logic gave rise in 1973 to the Depository Trust Company, whose nominee holder Cede & Co. is still listed as the owner of most American shares. In Europe, two international depositories emerged to serve the Eurobond market: Euroclear, launched in 1968 by the Brussels office of Morgan Guaranty Trust, and Cedel, founded in Luxembourg in 1970 and renamed Clearstream in 2000. This pair of ICSDs has been handling cross-border settlements ever since.
The custody chain
Between the investor and the issuer there are usually several links: the broker maintains the client's account, the global custodian holds the assets and connects through local sub-custodians to depositories in each country. The longer the chain, the more intermediaries whose law and solvency matter. The largest global custodians are BNY, State Street, JPMorgan and Citi; Pershing (part of BNY) serves American brokers and independent advisors.
Global custodian and sub-custodians
A retail investor almost never opens an account directly with a depository. Between them, their broker and the (I)CSD stands a global custodian—a bank that maintains a single client account and through its own network of sub-custodians accesses local markets: in each country a local agent operates with access to the national CSD. The market is concentrated. The "Big Four"—BNY, State Street, JPMorgan and Citi—hold around $180 trillion in assets under custody and administration in total; the largest, BNY (formerly Bank of New York Mellon), reached nearly $60 trillion in assets under custody and administration by the end of 2025.
What the service includes
Custody is just the foundation. The custodian settles trades, processes corporate actions (dividends, coupons, splits, tenders), collects income and files for reclaim of excess withholding tax under treaties, provides proxy voting at meetings, facilitates securities lending and currency conversion, and produces reports for the client and regulator. For private wealth, an inheritance dimension is added: upon the owner's death, it is through the custody chain that access to the foreign portfolio is unlocked.
CSD and ICSD
At the top are the depositories. A national central securities depository (CSD) maintains the record of a country's securities and conducts settlements—in the United States this is DTC within the DTCC group. For cross-border securities and Eurobonds, international central securities depositories (ICSDs) operate: Euroclear Bank in Brussels and Clearstream Banking in Luxembourg. Their scale is enormous: assets under custody at Euroclear reached €40.7 trillion at the end of 2024, and at Clearstream around €20 trillion.
Segregation and risk
The key protection question is exactly how assets are recorded. In an omnibus structure, the securities of many clients are held in a single account at the sub-custodian; this is cheaper but complicates identification in the event of a failure. A segregated account separates a specific client's assets, providing better protection at a higher cost. Although securities are held separately from the custodian's balance sheet, a long sub-custodial chain and omnibus accounting add operational and legal risk.
Geopolitical risk
Custody is subject to the law of the jurisdiction where the assets are physically and legally located. This was most clearly demonstrated by the immobilization of the Bank of Russia's assets: around €190 billion recorded at Euroclear were frozen after 2022. For a private owner, the lesson is simple—the choice of depository and country of custody determines not only convenience but also sanctions vulnerability.
Regulation
In the EU, the infrastructure is governed by CSDR (Regulation EU 909/2014): it licenses and supervises depositories and introduces settlement discipline. Since February 1, 2022, cash penalties have been charged for failed settlements. The mandatory buy-in mechanism has been suspended and, following the CSDR Refit reform (Regulation EU 2023/2845), is applied only as a last resort—if penalties fail and financial stability is at risk.
The safeguarding of client assets is also enshrined in sectoral regimes. The UCITS V and AIFMD directives impose on a fund's depositary liability for the loss of financial instruments: it must return the equivalent even in the event of a sub-custodian's bankruptcy. In the United States, a similar role is played by SEC Rule 15c3-3 (Customer Protection Rule), which requires a broker-dealer to segregate clients' securities and cash from its own. The same framework is subject to AML/KYC requirements and automatic data exchange under CRS.
Where custody is heading
The main vector is settlement acceleration. The United States, Canada and Mexico moved to T+1 on May 28, 2024; the EU, United Kingdom and Switzerland are synchronously targeting October 11, 2027. Compressing the window to one day leaves less time for reconciliation across the entire chain and raises the bar for automation for custodians and sub-custodians. In parallel, the infrastructure itself is being digitized: in the EU, the DLT Pilot Regime for settlement of tokenized securities has been in effect since March 2023, and major custodians are launching custody of digital assets and tokenized instruments.
This material is for informational and analytical purposes only and does not replace individual investment, legal or tax advice.
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