Depository

A depository is an organisation that maintains custody accounts and records on them who owns which securities. A private investor's share or bond is not a paper certificate in a safe but an entry on such an account. Ownership exists exactly in the form in which the depository has recorded it.

How the record-keeping works

A custody account resembles a bank account, except that instead of roubles it holds securities: by issue, by quantity, with flags for any blocking or encumbrance. The depository itself neither buys nor sells securities; it records the consequences of trades. The broker executes the order, and clearing determines the mutual obligations of the parties. Then, on the settlement date, the depository debits the securities from the seller's account and credits them to the buyer.

The record-keeping is built in tiers. At the top sits the central securities depository, which in Russia is the National Settlement Depository. It holds the accounts of other depositories. Below it are the depositories of brokers and banks, which keep their clients' accounts. A lower-tier depository acts as a nominee holder: the tier above sees the securities on its account, but only the lower-tier depository knows how they are split among individual owners. That is why ownership is evidenced by a custody account statement. Moving securities to another broker is a depository transfer between two depositories, not a trade.

Example: who receives the dividends

The upcoming record dates for shares on the exchange:

The issuer itself does not know who its shareholders are on the record date. The list is compiled from the bottom up: each depository reports how many securities its clients hold at the end of that day. The money travels back the other way. The issuer transfers it to the central securities depository, which passes it down the chain, and the payment reaches the investor as a payment via a nominee holder. The dividend goes to whoever is shown in the records on the record date, not to whoever pressed "buy" that day. A purchase that has not yet settled by the record date does not make it onto the list.

What a depository is confused with

The most common mix-up is to treat the depository as part of the brokerage account. In many companies the broker and the depository really do sit under one roof, but they are different lines of business with separate records. The brokerage account shows cash and positions for trading, while ownership of the securities is recorded on the custody account. Hence the separate line in the fee schedule — the custody fee: it may be charged for safekeeping and transactions even when no trades were made.

The second confusion is with the registrar. A registrar keeps the issuer's register of shareholders, whereas a depository keeps the accounts of its own clients. For securities bought on the exchange, the register usually shows not the investor but the central securities depository as nominee holder. The investor sees their own name only in the records of their depository.