Custodian Banks and Intermediated Securities : The Legal Nature of Securities Accounts and Similarities and Differences with Current Accounts

Current accounts and securities accounts have more in common than meets the eye. Both are organised in a hierarchical fashion, with the ‘best’ instruments at the top, and 'derivative' instruments lower down. Both change the nature of what the “depositor” holds from what he/she has delivered. Credit risk is not zero in the case of securities accounts; if the custodian goes insolvent, securities account holders may suffer losses pari passu and on a pro rata basis if there is a shortfall. On the other hand, unlike the customer-bank relationship, which is one of debt, the customer-intermediary relationship is, insofar as the law of England and Wales is concerned, one of trust; unlike currency and their matching liability (deposits), securities held on ‘custody’ and securities accounts are held off-balance sheet; unlike depositors, securities account holders are protected from claims of other creditors, while bank depositors rank with the same preference as creditors in general. Finally, unlike the loan and debt contracts/assets of credit institutions (which they enter into/acquire as principals), CSDs engage in securities lending in an agency capacity, the loans are over-collateralised, and the CSD explicitly guarantees the return of the lent securities or their cash equivalent to the lender should the borrower default