How we keep assets safe: from physical to digital custody

Post-trading services such as settlement and custody are the backbone of every transaction on the stock market. After buy and sell positions have been matched and cleared successfully, and cash and securities have been exchanged (settlement), efficient custody assures that investors’ securities are safe, secure and available whenever and wherever they are needed across the globe.

Traditionally, securities such as stock certificates were written or printed on paper with basic security features such as signatures, watermarks or embossing to demonstrate authenticity. These securities records were physically stored in a vault and therefore had to be transported from owner to owner when bought and sold. 

Today’s custody has a much lower transport carbon-footprint! More and more securities are held either in intangible or electronic form (without any related physical certificates) or as a book entry (represented by one or more physical global certificates). The remaining physical securities are immobilised, meaning that even if they are bought and sold, the physical security stays in the same place and is not transported from safekeeper to safekeeper. 

Today, securities are held in custody at central securities depositories (CSDs). Beyond pure safekeeping, CSDs also take care of asset servicing tasks, such as dividend payments. Clearstream, Deutsche Börse Group’s provider of post-trading services, operates the CSDs for Germany and Luxembourg as well as an international CSD (ICSD). Its post-trade infrastructure covers securities from almost 60 markets and more than 100 currencies.

No, there’s more! Every time investors buy Xetra-Gold shares, a gold-backed security issued by Deutsche Börse Commodities, one gram of gold is deposited in Clearstream’s central vault for each unit certificate. The safe custody of the gold reserves at Clearstream meets high security standards and saves investors the costs of the transporting and storing physical gold. Private investors can obtain the underlying gold in physical form from their bank if desired.

Over the past 20 years, custody has steadily moved from physical to electronic: Clearstream’s German CSD still holds over 25 million securities in the vault, but this is only about an eighth of what was held when electronic records began in 2001. The future of custody will likely be digital, meaning that no physical certificate will be needed at all. New technologies such as blockchain are a decisive factor here. Of course, digital securities need the right regulatory framework in place to ensure that existing and future markets remain secure, transparent, and characterised by integrity – with increased flexibility and efficiency.