Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

Which three groups do custodian banks generally look after securities on behalf of?

1. Individual investors, Retail banks, Mutual funds

2. Fund managers, Pension funds, Insurance companies

3. Corporations, Hedge funds, Credit unions

4. Private equity, Family offices, Venture capital

The correct answer is: Fund managers, Pension funds, Insurance companies

Custodian banks play a crucial role in the financial ecosystem by safeguarding assets and ensuring the smooth operation of investment transactions. The focus of custodians is primarily on institutional investors and large investment entities rather than individual or small retail investors. Fund managers, pension funds, and insurance companies are essential clients for custodian banks. Fund managers require custodial services to ensure proper handling, reporting, and settlement of securities on behalf of the funds they manage. Pension funds rely on custodians to administer their investment portfolios, which comprise significant assets intended for the retirement of individuals, necessitating meticulous management and oversight. Insurance companies also depend on custodial services to manage their investment portfolios securely, as they often hold large amounts of capital in various securities to back their policies. While the other groups mentioned in the choices include various types of investors and institutions, they either tend to focus on different types of investment strategies or do not typically engage custodians primarily for asset protection and management in the way that institutional investors like fund managers, pension funds, and insurance companies do. Therefore, the combination of these three groups represents the most common clientele for custodian banks, emphasizing their role in managing significant investment assets.