Advances by custodian for settlement: Overview, definition, and example
What are advances by custodian for settlement?
Advances by custodian for settlement refer to the temporary provision of funds by a custodian (a financial institution or a third party responsible for safeguarding and managing assets) to facilitate the completion of a securities transaction. When a transaction is taking place, such as the purchase or sale of securities, the custodian may advance the necessary funds to ensure that the transaction is completed on time, even if the full payment has not yet been made or received. These advances are typically repaid once the funds from the buyer or seller are transferred and the settlement process is finalized.
For example, if an investor is purchasing securities, but the settlement payment is delayed, the custodian might advance the payment to ensure the transaction proceeds without delay, and later recover the advanced funds once the investor’s payment is received.
Why are advances by custodian for settlement important?
Advances by custodian for settlement are important because they help ensure the timely and smooth execution of financial transactions, particularly in securities markets where settlements need to occur within specific timeframes. By advancing the necessary funds, custodians enable transactions to proceed as scheduled, minimizing the risk of delays or failures to settle, which could otherwise lead to financial losses or a breakdown in market efficiency.
These advances help maintain trust between parties involved in the transaction, including buyers, sellers, brokers, and other financial institutions, by ensuring that funds are available when needed. It also facilitates liquidity in markets by allowing transactions to proceed without waiting for all parties to settle their payments immediately.
Understanding advances by custodian for settlement through an example
Consider an investor who has sold a large quantity of stocks and is awaiting the payment from the buyer. The buyer, however, has not yet transferred the required funds by the settlement date. To ensure that the sale is processed and that the seller receives the proceeds, the custodian steps in and advances the funds for the settlement. Once the buyer’s payment is received, the custodian recovers the advanced funds and completes the settlement process.
In another example, a broker is involved in a securities trade where the payment for the securities is due from the buyer. If the buyer’s payment is delayed, the custodian might advance the required amount to the seller to ensure the securities are transferred and the settlement is completed. After the buyer's payment arrives, the custodian recoups the advanced funds.
An example of an advances by custodian for settlement clause
Here’s how an advances by custodian for settlement clause might appear in an agreement:
“In the event that the payment for a securities transaction is delayed, the Custodian may advance the necessary funds to facilitate the settlement of the transaction. The Custodian will recover the advanced funds from the Buyer upon receipt of the full payment. The Custodian will notify all parties of the advance and the expected repayment timeline.”
Conclusion
Advances by custodian for settlement are temporary fund transfers made by custodians to ensure the smooth and timely execution of financial transactions, particularly when payments are delayed. These advances play a crucial role in maintaining liquidity, market efficiency, and trust in the financial system. By ensuring that transactions are settled on time, custodians help prevent disruptions in the market and protect the interests of all parties involved in the transaction.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.