CUSTODIAN BANK

the crucial role of a custodian bank in safeguarding institutional

investors' assets. The factors to consider when choosing a custodian
bank are highlighted, emphasizing reputation, security measures, [Document subtitle]
global reach and network, service offerings including technology
capabilities and pricing structure. The importance of regulatory
compliance and client support services is emphasized alongside
expertise and industry recognition. Furthermore, the document
addresses potential risks faced by custodian banks such as credit risk,
market risk, liquidity risk, operational risk legal & regulatory risks;
cybersecurity & technology risks along with corresponding risk
management systems implemented by these institutions. In summary,
this document offers valuable insights into how custodian banks earn
fees through essential services while providing guidance on selecting
the right institution based on various considerations. Additionally, it
sheds light on potential risks that custodians face in their operations,
and the strategies used for mitigating such risks effectively.
CONTENTS
1.1What is custodian bank.......................................................................................................................................1
1.2 Types of Custodian Banks.................................................................................................................................1
1.2.1 Global Custodians:........................................................................................................................................1
1.2.2 Local Custodians:..........................................................................................................................................1
1.2.3 sub-custodian...............................................................................................................................................1
1.4 Evolution of custodian bank..............................................................................................................................2
2.Service provided by custodian..................................................................................................................................3
2.1. Safekeeping of Assets........................................................................................................................................3
2.2. Trade Settlement and Clearance......................................................................................................................4
2.3. Income Collection and Reporting....................................................................................................................4
2.4. Corporate Actions and Proxy Voting..............................................................................................................4
2.5. Tax and Regulatory Support............................................................................................................................4
2.6. Performance Measurement and Reporting.....................................................................................................4
2.7. Additional Services for High-Net-Worth Individuals and Institutions........................................................5
3.Benefits of Custodians Banks....................................................................................................................................6
3.1Risk Mitigation and Asset Protection................................................................................................................6
3.2. Enhanced Transparency and Reporting.........................................................................................................6
3.3 Streamlined Operations and Reduced Costs...................................................................................................6
3.4 Access to a Wide Range of Investment Products and Services......................................................................6
3.5. Strengthened Investor Confidence...................................................................................................................6
4.Challenges and Future Trends in the Independent Custodian Industry..............................................................6
4.1Regulatory Changes and Compliance Requirements......................................................................................6
4.2Technological Advancements and Cybersecurity Risks..................................................................................6
4.3 Increasing Competition and Consolidation......................................................................................................7
4.4 Evolving Client Needs and Expectations..........................................................................................................7
4.5 Future Trends in the Custodian Industry:.......................................................................................................7
5.How Does a Custodian Bank Make Money?...........................................................................................................8
5.1.A brief story to illustrate how a custodian bank would earn its fees from individual.................................9
5.2.A brief story to illustrate how a custodian bank would earn its fees from instructional investor............10
6.Factors to Consider on Choosing Best Custodian Bank......................................................................................12
7.Risks Associated with Custody Services................................................................................................................13
7.1Transaction Risk................................................................................................................................................13
 7.2 Compliance risk................................................................................................................................................14
7.3 Credit Risk........................................................................................................................................................14
7.4 Strategic Risk....................................................................................................................................................15
7.5 Reputation Risk................................................................................................................................................15
8.Risk Management....................................................................................................................................................16
8.1 Operational Controls.......................................................................................................................................16
8.1.1 Separation of Duties..................................................................................................................................17
8.1.2 Dual Control..............................................................................................................................................17
8.1.3 Accounting Controls.................................................................................................................................17
8.2 Account Acceptance and Monitoring.............................................................................................................17
8.2.1 Procedures.................................................................................................................................................17
8.2.2 Assessment of New Business.....................................................................................................................17
8.2.3 Agreements................................................................................................................................................18
8.3 Management Information Systems.................................................................................................................18
9.Ethiopian Regulatory Frame Work for Custodian..............................................................................................18
10.Top Custodian Banks............................................................................................................................................23
10.1 Organizational Structure of BNY MELLON......................................................................................................24
Summery...................................................................................................................................................................27
1.Introduction of custodian bank

1.1WHAT IS CUSTODIAN BANK

A custodian bank is a financial institution that safeguards and manages assets on behalf of
institutional investors such as mutual funds, pension funds, and insurance companies. Its primary
role is to provide safekeeping services for these clients' securities and other valuable assets.

In the past, the custodian bank purely focused on custody, safekeeping, settlement, and
administration of securities as well as asset servicing such as income collection and corporate
actions. Yet, in the modern financial world, custodian banks have started providing a wider range
of value-adding or cost-saving financial services, ranging from fund administration to transfer
agency, from securities lending to trustee services.

Custodian” shall have the meaning provided for under Article 2 (16) of the ECMA.
Proclamation. Custodian” means a financial institution that holds customers' securities for safe-
keeping or convenience as per the provisions of Capital market Proclamation.No.1248/2021

1.2 TYPES OF CUSTODIAN BANKS

1.2.1 G LOBAL CUSTODIANS:
These are large multinational banks with extensive networks that operate globally. They have the
infrastructure, technology, and expertise to handle complex transactions across multiple markets.
Global custodians offer a wide range of services including asset servicing (such as settlements,
cor porate actions processing), fund accounting, risk management, reporting, and compliance
support.

1.2.2 LOCAL CUSTODIANS :

Local custodians operate within specific countries or regions. They focus on providing custody
services in their local market or region rather than having an expansive global presence like
global custodians. Local custodians often have strong relationships with domestic regulators and
knowledge about local regulations which can be beneficial when dealing with specific market
requirements.

|P a ge
1.2.3 SUB-CUSTODIAN
A sub-custodian bank, also known as a sub-custodian or local custodian, is a financial institution
that provides custody services for securities in a specific market or region on behalf of another
custodian bank. The primary role of a sub-custodian bank is to hold these assets securely on
behalf of the main custodian, who may be operating in a different jurisdiction.

Sub-custodians typically have an established presence and expertise in their local markets. They
are responsible for maintaining records of ownership, processing corporate actions (such as
dividends or stock splits), facilitating settlement transactions with local counterparties, and
providing reporting services to the main custodian.
1.4 EVOLUTION OF CUSTODIAN BANK

Custodian banks have played a vital role in the financial industry for many years, providing
essential services to institutional investors and facilitating efficient asset management. The
concept of custodial banking can be traced back to ancient times when temples acted as secure
repositories for valuable assets.
However, the modern-day custodian bank emerged in response to the increasing complexity of
investment portfolios and regulatory requirements. In the mid-20th century, as global markets
expanded and institutional investors sought ways to safeguard their assets, specialized banks
began offering custody services.
The first custodian bank is widely believed to be The Bank of New York (now BNY Mellon),
which established its custody division in 1906. Over time, other major financial institutions
recognized the demand for such services and entered this market segment, leading to increased
competition and innovation within the industry.
With advancements in technology and globalization, custodian banks evolved beyond traditional
safekeeping functions. They started offering additional value-added services like trade
settlement, corporate actions processing, fund administration, performance measurement
reporting, risk management solutions, compliance support, and more.
Furthermore, custodians today act as intermediaries between issuers or securities exchanges and
investors by holding securities on behalf of clients while ensuring proper record-keeping and
transaction settlements. They provide transparency with real-time reporting capabilities that
enable clients to monitor their investments effectively.
Moreover, as international capital flows grew rapidly over time; so did the need for cross-border
custody solutions offered by global custodians who possess extensive networks across multiple
jurisdictions. These providers offer expertise in navigating complex regulatory landscapes
worldwide while mitigating operational risks associated with investing abroad.
In conclusion, the history of custodian banks showcases their evolution from simple storage
facilities into sophisticated institutions that offer comprehensive asset servicing solutions tailored
to meet diverse investor needs. Their ability to adapt to changing market dynamics has been
instrumental in supporting global investment activities while enhancing transparency and
investor confidence.

In 1961, U.S. President John F. Kennedy established a Committee on Corporate Pension Plans. 2
years later, Studebaker Auto Manufacturer shuttered its business and operations, and it failed to
provide pensions to the approximately 7,000 employees affected. Hence, in 1974, U.S. President
Gerald Ford proposed an Employee Retirement Income Security Act (ERISA Act), protecting
the employee benefit plans' standards.

Since the Act has become effective, employers could not hold and keep their pension fund assets.
Instead, they are obligated to appoint external custodians to safe keep the assets. Also, they are
required to appoint trustees and depositories to ensure the pension funds are operated in the best
interest of the pension holders and aligned to the investment mandates.

And now, more banks have developed a wide range of custody and related services (securities
services), and have been keen on developing new technologies (e.g. block chain, API, distributed
ledger) and aligning with the fast-moving regulatory requirement, such as digital assets

2.SERVICE PROVIDED BY CUSTODIAN

2.1. SAFEKEEPING OF ASSETS
Custodian banks play a crucial role in providing secure storage and management of financial
assets on behalf of their clients. These institutions act as trusted intermediaries, responsible for
safeguarding various types of securities, such as stocks, bonds, and other valuable documents.
One primary function of a custodian bank is to ensure the physical protection of these assets.
They maintain secure vaults or digital storage systems with advanced security measures to
prevent unauthorized access or theft. This includes employing technologies like biometric
authentication, video surveillance, and robust fire prevention systems.
Additionally, custodians implement strict internal controls and procedures to track and monitor
all asset movements accurately. They maintain detailed records that document each transaction
involving client holdings. This transparency provides clients with peace of mind knowing that
their assets are being diligently accounted for.
2.2. TRADE SETTLEMENT AND CLEARANCE
Another critical aspect handled by custodians is the settlement process. Whenever a trade occurs
in the market, whether it be buying or selling securities, the custodian ensures prompt transfer
ownership from seller to buyer while maintaining accuracy throughout this process. By
efficiently settling transactions within specified timeframes (T+2 being common), they reduce
counterparty risk and enhance market integrity.
2.3. INCOME COLLECTION AND REPORTING
Independent custodians collect and distribute income generated by clients' investments, such as
dividends and interest payments. They also provide regular reporting on clients' portfolio
performance, enabling clients to make informed investment decisions.
2.4. CORPORATE ACTIONS AND PROXY VOTING
Custodians manage corporate actions, such as stock splits, mergers and acquisitions, ensuring
that clients receive their entitled benefits. They also facilitate proxy voting, allowing clients to
exercise their voting rights in company decisions.

2.5. TAX AND REGULATORY SUPPORT

Independent custodians assist clients in navigating complex tax and regulatory requirements,
helping them remain compliant with relevant laws and regulations. This support may include tax
reporting, withholding, and the management of tax-related documentation.

2.6. PERFORMANCE MEASUREMENT AND REPORTING

These services provide valuable insights into the performance of an investor's portfolio or
specific investment strategies.
Performance Measurement: Custodians use various methodologies to measure the performance
of investments. They track key metrics such as returns, risk-adjusted returns, volatility, and other
relevant benchmarks. By comparing these metrics over different time periods, custodians help
investors assess how well their investments have performed relative to their objectives.
Reporting Services: Custodians generate detailed reports that summarize the performance of a
client's investment portfolio. These reports typically include information on asset allocations,
sector allocations, individual security holdings, transaction history, income generated from
dividends or interest payments, fees incurred by the investor, and overall portfolio valuation.
The reporting services provided by custodians are crucial for several reasons:

1. Transparency: Investors receive comprehensive information about their investments'

financial health and progress towards achieving their goals. Detailed reports allow them
to make informed decisions based on accurate data.
2. Benchmarking: Performance reports often compare an investor's portfolio against
relevant market indices or peer groups. This benchmarking helps identify whether the
portfolio is outperforming or underperforming its designated benchmarks.
3. Risk Assessment: Reporting services also provide insights into risk exposure within an
investment portfolio by analyzing factors such as asset diversification and concentration
risks across different sectors or geographies.
4. Compliance Monitoring: Custodial reporting plays a vital role in ensuring compliance
with regulatory requirements related to investment portfolios held by institutional
investors such as pension funds or mutual funds.

5.Investment Strategy Evaluation: The analysis provided through performance measurement

allows investors to evaluate the success of specific investment strategies employed within their
portfolios over time.
By offering performance measurement and reporting services alongside custody solutions,
Custodians enable clients/investors (individual’s/asset managers/institutions) to gain a
comprehensive understanding of their investment performance, make informed decisions, and
meet compliance obligations. These services enhance transparency, risk management
capabilities, and ultimately contribute to the overall investor experience.

2.7. ADDITIONAL SERVICES FOR HIGH-NET-WORTH INDIVIDUALS AND INSTITUTIONS

custodians may offer specialized services tailored to the needs of high-net-worth individuals and
institutions. These services can include customized reporting, access to exclusive investment
opportunities, and sophisticated risk management solutions.

3.BENEFITS OF CUSTODIANS BANKS

3.1R ISK MITIGATION AND ASSET PROTECTION
Independent custodians provide an added layer of security for clients' assets by segregating them
from the custodian's own assets. This separation minimizes the risk of loss due to fraud,
insolvency, or mismanagement, ensuring that clients' investments are protected.

3.2. ENHANCED TRANSPARENCY AND REPORTING

Custodians contribute to market transparency by providing clients with accurate and timely
reporting on their assets. This information allows clients to monitor their investments, assess
performance, and make informed decisions about their portfolios.

3.3 S TREAMLINED OPERATIONS AND REDUCED COSTS

By centralizing and automating various administrative tasks, independent custodians help clients
streamline their operations and reduce costs. This efficiency allows clients to focus on their core
investment strategies and goals.

3.4 ACCESS TO A WIDE RANGE OF INVESTMENT PRODUCTS AND SERVICES

Independent custodians offer clients access to diverse investment products and services. This
access enables clients to build well-diversified portfolios tailored to their specific needs and
objectives.

3.5. STRENGTHENED INVESTOR CONFIDENCE

Independent custodians foster investor confidence by providing a secure and transparent
environment for asset management. This confidence, in turn, supports market stability and
encourages further investment and growth in the financial industry.

4.CHALLENGES AND FUTURE TRENDS IN THE INDEPENDENT CUSTODIAN INDUSTRY

4.1R EGULATORY CHANGES AND COMPLIANCE REQUIREMENTS
Compliance with evolving regulatory requirements poses a significant challenge for custodians.
They must navigate complex rules, such as anti-money laundering (AML), know-your-customer
(KYC) regulations, adapting to new rules and compliance requirements and data protection laws,
which require substantial investments in technology, processes, and expertise.

4.2TECHNOLOGICAL ADVANCEMENTS AND CYBERSECURITY RISKS

As technology continues to advance, independent custodians must adapt to new systems and
processes while managing potential cybersecurity risks. This evolution requires ongoing
investment in technology and robust risk management practices.

4.3 I NCREASING COMPETITION AND CONSOLIDATION

The independent custodian industry faces increasing competition and consolidation, driving
firms to differentiate themselves through innovative services and cost-effective solutions. The
competitive landscape puts pressure on fee structures within the custody industry. To remain
profitable while providing quality services, custodians must strike a balance between cost
management initiatives and delivering value-added solutions.

4.4 EVOLVING CLIENT NEEDS AND EXPECTATIONS

Client needs and expectations continue to evolve, necessitating that independent custodians
remain agile and responsive to shifting market dynamics and client preferences. Maintaining
operational efficiency while managing large volumes of transactions can be challenging for
independent custodians. Streamlining processes through automation and leveraging emerging
technologies like artificial intelligence (AI) can help enhance efficiency.

4.5 FUTURE TRENDS IN THE CUSTODIAN INDUSTRY :

1. Digital Transformation: The integration of digital technologies will continue to transform

how independent custodians operate by automating manual tasks, improving
transparency, enhancing reporting capabilities, enabling self-service platforms for clients,
and facilitating real-time access to information.
2. Data Analytics & Artificial Intelligence (AI): Utilizing data analytics tools combined
with AI can provide enhanced insights into investment patterns and risks associated with
assets held under custody. Advanced analytics enable proactive decision-making based
on comprehensive analysis rather than relying solely on historical data.
3 ESG Integration: Environmental, Social, Governance (ESG) factors are gaining prominence
among investors globally due to growing sustainability concerns. Independent custodians will
play an important role in integrating ESG considerations into their services by offering ESG
reporting, monitoring, and compliance solutions.

1. Enhanced Client Experience: Providing a seamless and personalized client experience

will be crucial for custodians to differentiate themselves in the market. This includes
offering user-friendly digital platforms, self-service options, real-time reporting, and
tailored analytics to meet clients' evolving needs.
2. Collaboration with Fintech Startups: Collaborating with fintech startups can help
independent custodians leverage innovative technologies and accelerate their digital
transformation journey. Partnerships can facilitate the adoption of new solutions while
mitigating implementation risks associated with developing proprietary systems.
3. Globalization & Cross-Border Services: As investment opportunities span across borders,
independent custodians must expand their global reach to cater to international clients
effectively. This requires building strong networks with local partners or establishing
subsidiaries in key markets worldwide.

In conclusion, challenges such as regulatory compliance, cybersecurity risks, operational

efficiency, and cost pressures persist within the independent custodian industry. However, future
trends like digital transformation, data analytics/AI integration, ESG considerations, enhanced
client experience focus, collaboration with fintech startups, and globalization/cross-border
services present opportunities for growth and innovation within the sector. By adapting to these
trends while addressing potential challenges proactively, independent custodians can position
themselves strongly in an increasingly competitive landscape while delivering value-added
services that meet evolving client expectations.

5.HOW DOES A CUSTODIAN BANK MAKE MONEY ?

Bank of New York Mellon (BK), with $1.8 trillion in assets under management, is one of the
world’s largest asset managers. The bank primarily generates its revenues via the following:

 investment services
  asset and issuer servicing
 treasury services
 clearance and collateral management
 asset and wealth management

Based on all the Bank of New York Mellon’s services, fees are the primary revenue source for
any custodian bank. The bank generates revenue from fees collected for the above services that
each bank coordinates.

Compare that to the traditional bank, which generates most of its income from deposits and
loans. A traditional bank earns income from the difference in interest rate spreads between
lending and borrowing.

The traditional bank looks at creating better spreads from loans, whether mortgages, auto, or
personal, by offering better terms to the customer and encouraging more borrowing. The same
applies regarding deposits; offering better savings rates attracts more customers, and the higher
volume helps the bank earn more.

Also, in many cases, traditional banks earn money from fees similar to custodian banks’ services
but on a much smaller scale. Many of the bigger commercial banks, such as JP Morgan and
Wells Fargo, offer these custodial services to their clients, and these segments earn fees for those
services.

5.1.A BRIEF STORY TO ILLUSTRATE HOW A CUSTODIAN BANK WOULD EARN ITS FEES

FROM INDIVIDUAL

According to your account number, the checks are payable and deposited into the custodial
account when Andrew deposits his money to any account. The custodial bank might or probably
will charge Andrew a fee, known as a custodial fee, for his money’s safekeeping. In addition to
his money’s safekeeping, the bank will let him know quarterly or annually the status of his
money, all part of the service offered to him.
Let’s say Andrew is tired of his investment in Apple and wants to sell his shares; the custodian
bank will assist in that transaction. Because we live in the electronic world, the buyer and seller
never meet, but the bank ensures that the money goes to the exact person and vice versa.

After Andrew informs the bank he wishes to sell his shares of Apple, the custodian will arrange
to find a buyer for his shares of Apple and trade his stock for money. The custodial bank will
charge Andrew a transaction fee to buy or sell his Apple shares.

Let’s say that Andrew’s Disney (DIS) shares announce a dividend offering.

Andrew needs to ensure he receives that dividend. The custodian bank will make all the
arrangements to receive his dividend. The custodian bank will also file all paperwork necessary
to report those dividends to the IRS.

The above illustration highlights how a custodian bank makes money, primarily through client
services fees.

The custodial fees are the primary source for assets under management and transaction fees.
Therefore, the larger the assets under management for a custodial bank, the better.

5.2.A BRIEF STORY TO ILLUSTRATE HOW A CUSTODIAN BANK WOULD EARN ITS FEES

FROM INSTRUCTIONAL INVESTOR

Here's a brief story to illustrate how a custodian bank would earn its fees:
Once upon a time, in the bustling city of Finfine, there was a renowned custodian bank called
CBO Trust. The bank had established itself as a trusted partner for institutional investors,
pension funds, and asset managers looking for safekeeping and management of their financial
assets.
One day, an esteemed pension fund manager named Mr. Gemechu approached CBO Trust
seeking its services. He had recently won a contract to manage the retirement savings of
thousands of employees from various companies across the country.
Impressed by CBO Trust's reputation and expertise in custodial services, Mr. Gemechu
entrusted the custody of his clients' assets to them. These assets included stocks, bonds, mutual
funds, and other investment instruments worth billions of dollars.
CBO Trust took on the responsibility with utmost care and diligence. They ensured that all
securities were properly recorded and maintained in secure electronic systems while adhering to
strict regulatory compliance standards.
As part of their comprehensive suite of services, CBO Trust provided daily valuation reports to
Mr. Gemechu's team so they could have accurate information about their portfolio holdings at
any given time. This helped them make informed investment decisions based on real-time market
data.Additionally, when dividend payments or interest income were received on behalf of the
pension fund's investments held at CBO Trust Custody Services (CBOCS), the bank promptly
collected these earnings on behalf of Mr. Gemechu's clients.
Moreover, whenever corporate actions such as mergers or stock splits occurred within their
portfolio holdings, CBOCS proactively facilitated these transactions according to predefined
instructions from Mr. Gemechu's team—ensuring smooth execution without disrupting the
fund’s operations.
Furthermore, CBO Trust also acted as an intermediary between issuers and investors during
initial public offerings (IPOs) or secondary market placements—an additional value-added
service offered by CBOCS. In return for providing these crucial custody services along with
their dedicated team of professionals, CBOTrust earned fees based on the value of assets under
custody. These fees were typically calculated as a percentage of the market value of the assets
held by CBOCS.
With CBO Trust's reliable and efficient custodial services, Mr. Gemechu had peace of mind
knowing that his clients' assets were well-protected and professionally managed.
In this story, we see how a custodian bank like CBO Trust earns its fees by providing essential
services such as safekeeping, record-keeping, asset valuation reporting, income collection,
corporate action facilitation, and more. By taking care of these vital functions for institutional
investors and asset managers alike; custodian banks play a crucial role in safeguarding financial
assets while contributing to the smooth operation of global capital markets.

For example, one of the largest custodian banks out there, Bank of New York Mellon, earned,
per their latest 10-k from 2022:

 Total Revenue – $16,377 million

 Fee Income – $12,873 million
 o 78.6% of income from fees

Likewise, as the main driver of its earnings is services or fees, the vast majority of its expenses
are via staffing and other management expenses such as:

 Professional services
 Software and equipment
 Legal

6.FACTORS TO CONSIDER ON CHOOSING BEST CUSTODIAN BANK

When choosing the best custodian bank, there are several factors to consider. Here are some key
factors that should be taken into account:

1. Reputation and Reliability: Consider the custodian bank's reputation in the industry and
its track record of reliability. Look for established banks with a strong financial standing
and a history of providing secure custody services.
2. Security Measures: Evaluate the security measures implemented by the custodian bank to
protect your assets. This includes physical security at their storage facilities, as well as
cybersecurity protocols to safeguard against data breaches.
3. Global Reach and Network: If you require international custody services, assess whether
the custodian bank has a global presence with an extensive network of correspondent
banks or branches in relevant jurisdictions where you have investment exposure.
4. Service Offerings: Review the range of services offered by the custodian bank, including
safekeeping and settlement of securities, corporate actions processing, collateral
management, reporting capabilities, and any value-added services such as tax reclamation
or proxy voting support.
5. Technology Capabilities: Consider whether the custodian bank utilizes advanced
technology platforms that offer efficient trade processing, real-time reporting options,
online access to portfolio information, and other digital solutions that can streamline your
asset management activities.
 6. Pricing Structure: Evaluate the fee structure associated with custody services provided by
different banks to ensure transparency and cost-effectiveness while also considering any
additional charges for specific transactions or ancillary services required.
7. Regulatory Compliance: Ensure that the custodian bank adheres to local regulatory
requirements in all relevant jurisdictions where they operate as this helps minimize
compliance risks associated with cross-border investments.

8.Client Support Services: Assess how responsive and accessible their client service team is for
addressing inquiries promptly while offering personalized assistance when needed.
9.Experience & Expertise: Consider if they have experience working with clients similar to your
needs (e.g., institutional investors or fund managers) along with specialized expertise related to
your asset class or investment strategy.

1. Industry Recognition: Look for any awards, certifications, or industry recognition that the
custodian bank has received, as this can be an indicator of their commitment to
excellence and service quality.

By considering these factors comprehensively, you can make a well-informed decision when
choosing the best custodian bank that aligns with your specific requirements and provides
reliable custody services for your assets.

7.RISKS ASSOCIATED WITH CUSTODY SERVICES

For purposes of the OCC’s discussion of risk, the OCC assesses banking risk relative to its
impact on capital and earnings. From a supervisory perspective, risk is the potential that events,
expected or unexpected, may have an adverse impact on a bank’s capital or earnings. The OCC
has defined nine categories of risk for bank supervision purposes: credit, interest rate, liquidity,
price, foreign currency translation, transaction, compliance, strategic, and reputation. These
categories are not mutually exclusive; any product or service may expose a bank to multiple
risks. For analysis and discussion, however, the OCC identifies and assesses the risks separately.
The primary risks associated with custody services are: transaction, compliance, credit, strategic,
and reputation. These risks are discussed more fully in the following paragraphs.
7.1TRANSACTION RISK
Transaction risk is the current and prospective risk to earnings or capital from fraud, error, and
the inability to deliver products or services, maintain a competitive position, and manage
information. Risk is inherent in efforts to gain strategic advantage, and in the failure to keep pace
with changes in the financial services marketplace. Transaction risk is evident in each product
and service offered. Transaction risk encompasses product development and delivery, transaction
processing, systems development, computing systems, the complexity of products and services,
and the internal control environment.
Transaction risk is also referred to as operational risk. This risk is inherently high in custody
services because of the high volume of transactions processed daily. Experience in the custody
field has shown that errors in corporate action, settlement, foreign exchange (FX), and operating
(suspense) account processing are common causes of losses attributable to custody activities.
These losses, individually and in the aggregate, may be material. Effective risk identification and
control can greatly mitigate these errors. Effective policies and procedures, a strong control
environment, and efficient use of technology are essential risk management tools. Meaningful
reporting, based on accurate and reliable data, is needed to provide management with monitoring
tools. The risks may be magnified in a global custody operation where transactions occur around
the clock in a variety of different markets. A global custodian must consider a variety of
additional factors including differing market rules and conventions, the degree of automation in
the foreign market, different types of securities, capital or currency restrictions,and the
availability and communication of timely and accurate information.
7.2 COMPLIANCE RISK

Compliance risk is the current and prospective risk to earnings or capital arising from violations
of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and
procedures, or ethical standards. Compliance risk also arises in situations where the laws or rules
governing certain bank products or activities of a bank’s clients may be ambiguous or untested.
Compliance risk exposes the institution to fines, civil money penalties, payment of damages, and
the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced
franchise value, limited business opportunities, reduced expansion potential, and an inability to
enforce contracts.
Custody services are contractual in nature, and a bank must ensure compliance with the
provisions of all applicable agreements. A strong compliance program should include monitoring
the variety of laws and regulations that may affect a custodian’s business and reporting any
material changes to the customer. Global custodians in particular must be aware of the regulatory
environments in which they operate. Compliance risk may be heightened in foreign markets
because different markets have different rules and regulations. These differences make
supervision challenging
7.3 CREDIT RISK
Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s
failure to meet the terms of any contract with the bank orotherwise to perform as agreed. Credit
risk is found in all activities that depend on counterparty, issuer, or borrower performance. It
arises any time funds are extended, committed, invested, or otherwise exposed through actual or
implied contractual agreements, whether reflected on or off the balance sheet.
The U.S. market settlement practice of delivery versus payment (DVP) virtually eliminates
counterparty credit risk in the settlement process. However, a custodian may be exposed to credit
risk if it advances funds to settle trades for a customer. In addition, securities lending activities
may expose a bank to counterparty credit risk. For further information on credit risk please refer
to the Comptroller’s Handbook. Global custodians may be exposed to credit risk from several
sources. First, if a sub-custodian fails, the custodian may have difficulty obtaining its customers’
securities. Second, not all markets settle transactions DVP, so there is risk if the custodian
delivers securities without receiving payment or pays without receiving securities. Third, in some
markets a custodian may offer contractual settlement. In this case, a custodian makes the entries
to its customer’s account on the contractual settlement date even if the custodian hasn’t actually
received the cash or securities needed to settle the trade. Here, the credit risk is with the global
custodian’s customer. Contract provisions should provide for reversal of the transaction if the
trade fails or a
specified amount of time passes
7.4 S TRATEGIC RISK
Strategic risk is the current and prospective risk to earnings or capital arising from adverse
business decisions, improper implementation of decisions, or lack of responsiveness to industry
changes. This risk depends on the compatibility of an organization’s strategic goals, the business
strategies
developed to achieve those goals, the resources deployed toward these goals, and the quality of
implementation. The resources needed to carry out business strategies are both tangible and
intangible. They include communication channels, operating systems, delivery networks, and
managerial capacities and capabilities. The organization’s internal characteristics must be
evaluated against the impact of economic, technological, competitive, regulatory, and other
environmental changes. A bank’s decision to participate in the custody business, and its ability to
be competitive if it does, is a source of strategic risk to the bank. The industry has seen increased
competition in recent years, which has reduced margins and forced industry consolidation. To
compete, a custodian must be able to achieve a size that creates an economy of scale, and
continually invest in systems and technology.
7.5 REPUTATION RISK
Reputation risk is the current and prospective impact on earnings and capital arising from
negative public opinion. This affects the institution’s ability to establish new relationships or
services or to continue servicing existing relationships. This risk may expose the institution to
litigation, financial loss, or a decline in its customer base. Reputation risk exposure is present
throughout the organization and includes the responsibility to exercise an abundance of caution
in dealing with its customers and community.
The importance of a custodian’s reputation cannot be overstated. The ability of the bank to
deliver services as promised is critical to maintaining its reputation. The transaction-oriented
custody services business makes a bank’s failure to perform a contracted service highly visible to
its customer. Virtually any problem that the bank encounters in its custody business line can
affect its reputation if it is made public.
A bank’s custody customers may also be exposed to interest rate, liquidity, price, credit, and
foreign currency translation risk through the assets they hold in their custody accounts. Although
any related losses are not direct risks to the bank providing custody services, some customers
may hold the bank at fault for them. The possibility that these customers will make their claims
or allegations public presents some reputation risk.

8.RISK MANAGEMENT
Examiners should determine whether a bank has adequate systems in place to identify, measure,
monitor, and control risks in the custody services area. Such systems include policies,
procedures, internal controls, and management information systems governing custody
services.Effective internal control is essential to a bank’s management of the risks found in
custody services. A properly designed and consistently enforced system of internal controls will
help management safeguard assets under custody, produce reliable financial reports, and comply
with laws and regulations. For additional discussion of the internal control environment.
8.1 OPERATIONAL CONTROLS
The importance of operational controls in the custody services area cannot be overemphasized.
Custody is a volume-driven, transaction-processing business, and much of the risk associated
with it is operational in nature. For this reason, strong operational controls are essential to
effectively manage transaction risk.

8.1.1 S EPARATION OF DUTIES

Control can best be achieved through a division of duties. A bank first segregates administrative
and operational functions, and then it segregates duties (both physical and logical access) within
the operating system itself. It is the responsibility of management to assess the control
environment and ensure that an appropriate system of internal control, including separation of
duties, is in place.
8.1.2 DUAL CONTROL
Assets under custody should be properly controlled and safeguarded at all times. Dual control
procedures should ensure that one person, acting alone, does not have the ability to complete all
phases of a transaction, or move custody assets. Procedures should require dual control in
processing of all custody assets, including securities, cash, income payments, and corporate
actions.
8.1.3 ACCOUNTING CONTROLS
Independent control processes should ensure the accuracy of a custodian’s records and
accounting systems. Accounting controls are used to monitor and measure transactional work
flows and their accuracy. Accounting controls include blotters, reconcilement of cash and asset
movements, and suspense accounts.

8.2 ACCOUNT ACCEPTANCE AND MONITORING

The account acceptance process is the first step in risk management. The risks associated with an
individual account should be addressed prior to acceptance. A custodian’s acceptance process
should provide an adequate review of the customer’s needs and wants. During the acceptance
process, the custodian should also assess whether its duties are within its capabilities, are lawful,
and can be performed profitably.

8.2.1 PROCEDURES
A properly documented account acceptance process will provide sufficient information for the
bank to make an informed decision. Risk-based procedures should provide sales personnel with
"front-end guidance" related to the review and acceptance of new accounts, and should include a
bank’s requirements related to customer due diligence and required documentation.

8.2.2 ASSESSMENT OF NEW BUSINESS

The due diligence process should ensure that the services the customer wants the custodian to
perform are legal (in the relevant jurisdictions) and within the custodian’s capabilities. The
account acceptance process should include an assessment of the proposed relationship including
a review of the products and services needed by the customer, likely transactions (type and
volume), and customer information necessary to facilitate custody transactions (such as tax
information related to foreign tax relief). The due diligence process should include a review for
compliance with anti-money laundering rules. When accepting new business, the bank should
consider the operational needs of the account. The bank should consult all applicable
departments (including legal, accounting, operations, credit, and compliance) to determine
whether it has the capacity to serve the customer without incurring unreasonable costs.

8.2.3 AGREEMENTS
Custody relationships are contractual in nature and are essentially directed agencies. The
customer is the principal, and the custodian is the agent. The custody agreement is important as a
risk management tool. The agreement should clearly establish the custodian’s duties and
responsibilities. Custody agreements should be standardized when possible, and any deviations
from the standardized agreement should be reviewed prior to acceptance.

8.3 MANAGEMENT INFORMATION SYSTEMS

A management information system (MIS) is a system or process that provides the information
necessary to manage an organization effectively. MIS and the information it generates are
generally considered essential to internal control. A primary objective of custody services MIS is
the management of transaction risk. Sound MIS produces information that is accurate, timely,
consistent, complete, and relevant. It allows a bank to measure operational performance to
designated benchmarks. While a custodian’s MIS enables a bank to determine whether its
operations are profitable, it should also inform management about other essential matters, such
as whether internal controls are working.

9.ETHIOPIAN REGULATORY FRAME WORK FOR CUSTODIAN

a regulatory framework that will allow for an effective and efficient licensing and supervision
framework is necessary for the operation of Capital Market Service Providers. The Ethiopian
Capital Market Authority issues the Capital Market Service Providers Licensing and Supervision
Directive in in accordance with Articles 6, 39 (2), 39 (3), 56 (1), 56 (3),107 (2) and 108 (2) of the
Capital Market Proclamation No.1248/2021 This directive includes functions and authorized
activities, and the terms and conditions that accompany them.

The Directive include the requirement of Custodian bank in the section XI FROM 77 to 86 Lets
discuss this Articles one by One

77.Eligibility

Only a share company or a private limited company that has a valid certificate of commercial
registration and/or investment permit issued by the appropriate government organ shall be
eligible to apply for a Custodian License.

78.Additional Licensing requirements

In addition to the requirements specified under Article 6 (1) of this Directive and prior to the pre-
certification inspection, an applicant for a Custodian License, shall provide a sample of a
custodial agreement to be executed by its clients and shall comply with Article 84 of this
Directive.

79. Authorized Activities of Custodians

A Custodian shall perform the following functions:

(1) Maintain accounts of securities on behalf of clients;

(2) Keep clients informed of the actions taken or to be taken by the issuer of securities, having a
bearing on the benefits or rights accruing to the client;
(3) Collect the benefits, entitlement or rights accruing to a client in respect of securities;

(4) Maintain records of the services rendered to the clients;

(5) Transfer, exchange or deliver in the required form and manner securities held on behalf of
clients upon receipt of proper instructions from the client, investment adviser or fund manager;
and

(6) Other activities as defined by the Authority from time to time.

80. Prohibition of Delegations

A Custodian shall not assign or delegate its functions as a Custodian to any other person unless
such person is a Custodian licensed in line with this Directive or depository of securities and has
the written consent of the client to do so.

81. Termination of a Custodian Service Agreement

(1) A custodian service agreement may be terminated in writing by either:

a. A client; or

b. A Custodian, subject to the approval of the Authority, by giving a notification of termination

in writing to the client. The notice period given by the Custodian to the client shall be for a
minimum of five (5) business days.

(2) Upon receipt of the notice referred to in Sub-Article (1) (a) of this Article by the Custodian,
the service agreement entered into between the Custodian and the client shall be deemed to have
been terminated with immediate effect.

(3) Following the termination of the service agreement pursuant to Sub-Article (2) of this
Article, the Custodian shall:

a. Within five (5) business days confirm from the client where the assets should be transferred to;

b. Within two (2) business days of receipt of the information in Sub-Article (3) (a) of this
Article, transfer all the client’s assets, documents and funds held by the Custodian accordingly.
(4) Such client’s assets, funds and other relevant documents transferred further to Sub- Article
(3) (b) of this Article shall be filed with the Authority not later than five (5) business days after
the transfer.

(5) The provisions of this Article shall not apply to custodian service agreements with Collective
Investment Schemes.

81. Termination of a Custodian Service Agreement

82. Related Functions

(1) A Custodian shall:

a. Ensure reconciliation of clients’ accounts and Securities in relation to trades executed on

clients’ instruction or corporate actions of issuers of securities; and

b. In relation to a Collective Investment Scheme, take reasonable care to ensure that all activities
carried out by a Collective Investment Scheme Operator are carried out in accordance with the
provisions of the constitutive/applicable scheme documents;

(2) A Custodian shall only provide custodial services and where a Custodian carries on any
activity besides that of acting as Custodian, then:

a. All activities relating to its business as Custodian of securities shall be separate and segregated
from all other activities; and

b. Its officers and employees engaged in providing custodial services shall not be engaged in any
other activity carried on by it.

83. Custodial Agreements with Clients

Every Custodian shall enter into a written agreement with each client on whose behalf it is acting
and every such agreement shall, at minimum, provide for the following matters:

(1) The manner of acceptance and release of securities;

(2) The alternatives for the acceptance 0or release monies from the custody account;
(3) The circumstances under which the Custodian will receive rights or entitlements on the
securities;

(4) The manner of registration of securities in respect of each client;

(5) Details of the insurance (if any) to be provided by the Custodian;

(6) Related fees and reporting obligations of the Custodian;

(7) Manner in which securities under custody can be used as collateral;

(8) Treatment of non-market related losses in relation to assets under custody;

(9) A statement that the terms and conditions of the agreement are in conformity with the
provisions of the Proclamation and this Directive;

(10) Dispute resolution clause; and

(11) Other matters relevant and/or material to the custody contract.

84. Use of a Nominee Account

A Custodian who intends to use a nominee account shall comply with the requirements specified
in Article 12 (3) of this Directive.

85. Discretion on Clients Accounts

(1) No Custodian or Appointed Representative of a Custodian, shall exercise any discretionary

power on any client’s account, or accept orders for an account from any person other than the
client without first obtaining written authorization from the client

(2) A Custodian shall open and operate a separate custody account in its record for each client, in
the name of the client whose securities are in its custody and shall not commingle assets of one
client with those of another client.

86. Relinquishment of a Custodian License

(1) A Custodian seeking to relinquish its Custodian License shall, in addition to the provisions of
Article 36 of this Directive:
a. Furnish the Authority with records of all of its clients’ accounts and assets under management,
and details of arrangements made to transfer its clients’ accounts to another licensed Custodian
(hereinafter referred to as the “succeeding Custodian”) including information about the
succeeding Custodian;

b. Enter into an agreement with the succeeding Custodian. The agreement shall, among others,
state the terms of succession, and the outstanding obligations and liabilities to be borne by the
succeeding Custodian;

c. Notify its clients of its intention to relinquish its Services License. The notice of its exit,
subject to the approval of the Self-Regulatory Organization, shall state that clients are required to
transfer their accounts and other assets to a Custodian of their choice (“hereinafter referred to
as “target Custodian”) within a maximum period of fourteen (14) days after the end of the one
(1) month notice given;

d. Appoint a succeeding Custodian to manage the client’s accounts and assets where a client fails
to indicate its preferred target Custodian to which to transfer his/her account;

e. Prepare a schedule containing all the details of its clients, inclusive of their securities portfolio,
share certificates, and other assets, details of the applicable target and/or succeeding Custodian,
and the cash balance in each client’s account;

f. Carry out all pending clients’ requests prior to the relinquishment of the Services License.
Where the Custodian is not able to carry out its clients’ mandate before it exits the market, the
Custodian shall in writing state the procedures to be adopted in carrying out the clients’ requests
by the succeeding Custodian;

g. Transfer to the client’s target Custodian or the succeeding Custodian, the schedule prepared by
the Custodian pursuant to Sub-Article (1) (e) of this Article; and

h. Ensure a seamless transfer of all the required documents pertaining to its clients’ accounts and
assets to the succeeding Custodian.

(2) The Custodian shall be required to notify the Central Securities Depository of its intention to
exit the market. Such notice shall accompany the application filed with the Authority.
(3) The succeeding Custodian referenced in Sub-Article (1) of this Article shall conduct
enhanced due diligence on the transferred clients’ accounts in their custody, confirming the
status of the account with the respective client

10.TOP CUSTODIAN BANKS

The best world custodian bank refers to a financial institution that provides custody and related
services for institutional investors, such as asset managers, pension funds, and sovereign wealth
funds. While there are several reputable custodian banks globally, it is subjective to determine
the absolute "best" as it depends on specific criteria and client requirements.
However, some of the leading global custodians known for their extensive expertise and
comprehensive service offerings include names like State Street Corporation, The Bank of New
York Mellon (BNY Mellon), JPMorgan Chase & Co., Citigroup Inc., and Deutsche Bank AG.
These institutions have established themselves as industry leaders by offering secure asset
safekeeping, efficient settlement processes, robust reporting capabilities, technology-driven
solutions, regulatory compliance adherence, and exceptional client servicing
In addition to the above According to the Asset under Custody League Table by Global
Custodian, custodian banks' assets under custody and/or administration (AUC/AUA) are:

N.b Name of Custodian Asset In Custody

1 BNY Mellon 43.0 trillion 30 June 2022
2 State Street 38.2 trillion 30 June 2022
3 Morgan Chase 28.6 trillion′ 30 June 2022
4 Citi 26.8 trillion 30 June 2022 10.1 ORGANIZATIONAL
6 HSBC 15.7 trillion 31 December 2021 STRUCTURE OF BNY
7 BNP Paribas 13.9 trillion 30 June 2022
8 Northern Trust 13.7 trillion 30 June 2022 MELLON
9 CACEIS 7.8 trillion 31 December 2021 Overview of BNY Mellon
10 Society General 5.0 trillion 30 June 2022
Established in 1784 by
Alexander Hamilton, they were the first company listed on the New York Stock Exchange
(NYSE: BK). With a history of more than years, BNY Mellon is a global company dedicated to
helping its clients manage and service their financial assets throughout the investment lifecycle.
Whether providing financial services for institutions, corporations or individual investors, BNY
Mellon delivers informed investment and wealth management and investment services in 35
countries.
BNY Mellon has three business segments, Securities Services, Market and Wealth Services and
Investment and Wealth Management, which offer a comprehensive set of capabilities and deep
expertise across the investment lifecycle, enabling the Company to provide solutions to buy-side
and sell- side market participants, as well as leading institutional and wealth management clients
globally.

The diagram below presents our three business segments and lines of business, with the
Remaining operation in the other segment

.
 President and CEO

CEO investment Solution CEO Gov Security

and Wealth Mgt $service Corporation

President & Head of

Head of Lending
US Market wealth
Deposit
Mgt
CEO Treasury Service

CEO BNY Mellon Pershing

CFO&COO Treasury Service

CEO BNY Market CEO Asset Servicing and Issues

Servicing

Head of
Financing & Liq Head of Block Chain CEO of Digital Asset

CEO Asset Servicing

COO Global Market Infrastructure

Chief Operation & Technology Chief Financial Officer of BNY

Officer Mellon

Senior Executive Vice Global Head of Enterprise Execution and

President and Chief Chief Corporate Affairs Officer.
 Global Head of Investor Solutions
Global Head of Enterprise
Initiatives at BNY Mellon

Head of Responsible
Global Head of Campus Recruiting & Early Investing Talent Programs
Career Talent Programs

SUMMERY
The document discusses various aspects related to a custodian bank, specifically focusing on
how it earns its fees and factors to consider when choosing the best custodian bank. It starts with
a brief story illustrating the role of a custodian bank in safeguarding financial assets for
institutional investors.
The story highlights the responsibilities of Secure Trust, a renowned custodian bank, in
providing safekeeping and management services for clients' assets. These services include
record-keeping, valuation reporting, income collection, corporate action facilitation, and more.
Secure Trust earns fees based on the value of assets under custody.
Next, the document lists out factors to consider when selecting a custodian bank. It emphasizes
reputation and reliability as key considerations along with security measures implemented by the
bank. Factors such as global reach and network, service offerings including technology
capabilities and pricing structure are also outlined.
The importance of regulatory compliance is highlighted alongside client support services
provided by the custodian banks. The document suggests considering their experience &
expertise along with industry recognition as additional factors during decision-making.
Lastly, potential risks faced by custodian banks are discussed along with corresponding risk
management systems. Credit risk, market risk liquidity risk operational risk legal & regulatory
risks; cybersecurity & technology risks are identified as common risks that require mitigation
strategies within these institutions.