September 8, 2025

What is the Difference Between Custodian and Depository? A Complete Guide

During a board review at a mid-sized investment firm, a key question lingered in the air: “If the bank is holding our fund’s securities, does that also mean it actually owns them?” The silence that followed revealed a common misunderstanding. Custodians and depositories definitions are often treated as interchangeable, yet they differ in one crucial way: the depository holds legal ownership of assets, while the custodian only safeguards them.

This distinction determines accountability, investor protection, and regulatory oversight. Knowing what is the difference between custodian and depository, and who owns and who merely safeguards assets, can shape decisions for fund managers, compliance teams, and investors alike.

This article explains the difference between a custodian and a depository, with clear definitions and distinction for anyone working in the capital markets.

Definitions: Custodian and Depository

Custodian

A custodian is a financial institution responsible for safeguarding investors’ assets, both securities and cash. Beyond safekeeping, custodians provide services such as trade settlement, corporate action processing (e.g., dividends, rights issues), tax reporting, and compliance support. They interact directly with investors, maintaining client-level accounts. Prominent custodians include BNY Mellon, State Street, HDFC Securities, Charles Schwab, and Fidelity.

This makes the role of custodian bank critical in ensuring investor assets remain safe, properly settled, and accurately recorded. Today, platforms like IntellectAI’s Custody Plus and Custody Edge powered by eMACH.ai are enhancing these functions with intelligence.

Depository

A depository is a central financial institution that holds securities electronically, usually in dematerialized form. It ensures safekeeping of securities and records the legal ownership of assets. Depositories also facilitate settlement between market participants but do not deal directly with individual investors. Examples include NSDL and CDSL in India, DTC in the U.S., Euroclear in Europe, Dubai CSD in the UAE, and QCSD in Qatar.

These institutions provide depository services that form the backbone of capital markets.

Difference between Custodian and Depository

A useful way to frame what is the difference between custodian and depository:

• Custodian = safekeeping + settlement
• Depositary = safekeeping + oversight + legal ownership

The Relationship between Custodians and Depositories

Custodians and depositories form two connected layers of market infrastructure. Investors never interact with the depository directly; instead, they open accounts with custodians. These custodians, in turn, maintain omnibus accounts with the depository.

When a trade is executed, the depository updates its central ledger to reflect the legal transfer of ownership between custodians’ omnibus accounts. Custodians then update their own books to show which investor owns what.

This two-step process keeps the system efficient and secure: the depository maintains the integrity of ownership records at the market level, while the custodian ensures accurate record-keeping and services at the client level. It’s comparable to the banking system, where central banks hold accounts for commercial banks, while commercial banks serve individual customers.

Are Depositories Also Custodians?

A useful way to understand the hierarchy is this: every depository performs a custodial role, but not every custodian is a depository. Depositories safeguard securities at the systemic level, recording legal ownership and ensuring settlement. In that sense, they act as the “custodian of custodians.”

Custodians, however, only safeguard and service assets on behalf of their clients. They do not hold legal ownership, nor do they operate as the ultimate registry of securities. This means while depositories inherently perform custody functions, custodians cannot take on the role of depositories.

Why Legal Ownership Matters

The shift in ownership has far-reaching consequences:

• Regulatory assurance: Since depositories legally own securities, regulators hold them responsible for oversight. This ensures market stability and prevents misuse of assets.
• Investor protection: If a fund manager mismanages assets, a depository can intervene. Custodians, by contrast, only follow instructions; they don’t have authority over how assets are used.
• Accountability and liability: Custodians’ liability is contractual; they are responsible only for errors in safekeeping or settlement. Depositories carry statutory liability, which means they are accountable to both regulators and investors if assets are lost or mishandled.

Final Thoughts: Custodian vs. Depository

The difference between a custodian and a depository isn’t just a technicality, it shapes how investors can safely hold and transfer their assets. Depositories are the legal owners that maintain the official record of securities, while custodians make this structure usable by investors, ensuring safekeeping, settlement, and handling of everyday activities like dividends and corporate actions.

Both roles are essential. Without depository services, markets would lack a single, trusted ledger of ownership. Without custodians, investors would have no practical way to interact with that ledger. Together, they create the foundation of security and trust in capital markets.

So while custodian vs depository are often mentioned in the same breath, the distinction matters. Recognizing how they complement one another is key to understanding how modern markets truly function, and how institutions can best prepare for the future.

Author:

Monisha Parthasarathy
Assistant Manager – Marketing