What it means
Many people and businesses prefer to leave valuable items with a trusted institution rather than keep them at home or in the office. The institution takes the items into custody, stores them securely and gives the customer a certificate as a receipt.
The certificate is evidence that the institution is responsible for the items while they are in its care. A typical certificate describes the assets, names the owner and the custodian, and carries a reference number.
It may state the date of deposit and the terms under which the items can be withdrawn. Some certificates also record the value declared at the time, which can matter for insurance.
The certificate differs from a title document. Ownership of the assets comes from the underlying records, such as the share register or the purchase agreement, while the safekeeping certificate shows only that the custodian holds them.
It is therefore important to keep both sets of records. Businesses use safekeeping arrangements for original contracts, share certificates, bearer instruments, gold bars and valuable collections.
Banks usually charge a fee that depends on the type and value of the items and the length of time they are held. Customers should check the terms, including who is liable if the items are lost or damaged.
Today many securities are held electronically, so paper certificates are less common for shares and bonds. The idea remains the same in custody statements, which serve as modern proof that a custodian holds the assets for the client.
The legal position varies by country and by type of asset. In some places the custodian is liable for loss unless it can show it took reasonable care, while in others the agreement limits its liability to a stated amount.
It is sensible to read the custody terms, ask about insurance and keep a record of the valuation of what you deposit.
In practice
Real-world examples.
Example
A family business places the original share certificates for its holding company in a bank vault. The bank issues a safekeeping certificate listing each certificate by number.
Example
An investor buys physical gold bars worth $200,000 and stores them with a specialist custodian. The custodian issues a safekeeping certificate with the bar serial numbers and weights.
Example
A law firm deposits the original signed copy of a sale agreement with a bank during a long property deal. The certificate confirms the agreement is held securely until completion, and the bank releases it only against written instructions from both parties.
Formula
Calculation
Annual safekeeping fee = Value of assets held x Fee rate.
Suppose a company places $500,000 of securities and documents in safekeeping with a bank that charges 0.2% a year. The annual fee is $500,000 x 0.002 = $1,000. Over five years, the total cost is $1,000 x 5 = $5,000, assuming the value and the rate stay unchanged. If the value of the assets grows to $600,000, the same fee rate gives $600,000 x 0.002 = $1,200, so the cost rises with the value of what is held.Case study
Seen in the real world.
Greenfield Imports is an entirely fictional trading business that keeps its original import licences and a set of bearer bonds in a safe at the owner's home. In this illustrative story, a burst water pipe damages the papers and the owner realises that the loss is not covered by his policy.
His accountant recommends moving the items to a bank safekeeping arrangement. The bank charges a modest annual fee and issues a certificate listing each item.
The owner also keeps copies of the certificate in the company's records and tells his lawyer where the items are. The illustrative lesson is that custody reduces physical risk, but the paperwork showing where the items are stored matters as much as the storage itself. A year later the bank sends a statement confirming the items, and the accountant adds it to the annual audit file.
Watch out
Common mistakes.
- Treating the certificate as proof of ownership, when it shows only that the custodian holds the items.
- Losing the certificate and the records of what was deposited, which can make it slow and costly to recover the items.
- Not checking who is liable if the items are lost or damaged while in custody, or whether the custodian carries insurance for them.
Questions
People also ask.
What is the difference between safekeeping and a safe deposit box?
In safekeeping the institution takes custody and records the items, while with a safe deposit box the customer keeps access and the bank does not know the contents.
Who issues a safekeeping certificate?
Banks, brokers and other custodians that hold assets on behalf of clients, usually under a written custody agreement that sets out fees and duties.
Do I still need one for electronic securities?
Usually a custody statement serves the same purpose, so keep the statements and check them against your own records each quarter.
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