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International Banks in Puerto Rico May Provide Global Custody Services

Posted by: Christian Reeves
Category: Sin categoría

International banks in Puerto Rico may provide global custody services but are prohibited from providing brokerage or trading services. In addition, banks licensed in Puerto Rico require a special permit from regulators prior to offering custody services. 

In its most basic form, this means that international banks in Puerto Rico may hold client assets or securities but may not trade those assets or securities on behalf of these clients. Trades and transactions should be executed by a licensed Broker-Dealer. I note that this limitation applies to all US banks as well as international banks licensed in Puerto Rico. 

To delve a bit deeper, a custodian bank is one that takes on the responsibility of safeguarding a brokerage firm’s or individual’s financial assets. The role of an international bank in Puerto Rico which provides custodial services would be to:

  • hold in safekeeping assets/securities such as stocks, bonds, commodities such as precious metals and currency (cash), and, in the case of Puerto Rico, digital assets such as cryptocurrency and bitcoin, both domestic and foreign
  • arrange settlement of any purchases and sales and deliveries in/out of such securities and currency as instructed by the client
  • collect information on and income from such assets (dividends in the case of stocks/equities and coupons (interest payments) in the case of bonds) and administer related tax withholding documents and foreign tax reclamation
  • administer voluntary and involuntary corporate actions on securities held such as stock dividends, stock splits, business combinations (mergers), tender offers, bond calls, etc.
  • provide information on the securities and their issuers such as annual general meetings and related proxies
  • maintain currency/cash bank accounts, effect deposits, and withdrawals, and manage other cash transactions
  • perform foreign exchange transactions

Custodian banks are often referred to as global custodians if they safe keep assets for their clients in multiple jurisdictions around the world, using their own local branches or other local custodian banks (“sub-custodian” or “agent banks”) with which they contract to be in their “global network” in each market to hold accounts for their respective clients. 

The major benefit of a Puerto Rico license over a US license is that International banks in Puerto Rico may provide truly “global” custody services. While US banks provide global custody services for their US clients as described above, international banks in Puerto Rico may open accounts for persons anywhere in the world. They open accounts for anyone in the United States as well as anyone in a non-sanctioned country. They may thus provide truly global custody services where a US bank is usually limited to providing those services to US citizens or residents. 

As stated above, international banks in Puerto Rico may provide custody services only with the permission of OCIF, their primary regulator. Custody services require a special permit and that permit will detail the services which may be provided and the assets which may be taken into custody. 

For example, a few banks in Puerto Rico have been granted permission of providing custody for digital assets including cryptocurrency and bitcoin. For a sample press release, see FV Bank.

International banks in Puerto Rico are regulated by OCIF on the island and generally follow the rules set out by the Federal Reserve and the Office of the Comptroller of the Currency (OCC). However, international banks are not FDIC insured and generally do not deal with the FDIC nor the Consumer Financial Protection Bureau.

When customer assets are held by an international bank in Puerto Rico, they are typically registered in the bank’s name or a Special Purpose Vehicle the bank has set up for this purpose. Securities held by a bank in custody for customers are kept separate and apart from the bank’s assets, are not included on the bank’s balance sheet, and are not subject to the claims of that bank’s creditors. This does not apply to cash held in a custody account. 

That is to say, even though the custodian bank is registered as the holder of the asset, and holds the securities in a fiduciary arrangement for the ultimate security holders, the ultimate security holders are still the legal owners of the assets. They are not merely beneficiaries of the custodian as a trustee. The custodian does not become at any point the owner of the securities or the asset but is only a part of the registration chain linking the owners to the securities. 

Because banks are prohibited from acting as a brokerage and from trading securities, they usually offer custody as a stand-alone product. This can allow clients who use more than one broker-dealer or investment advisor more flexibility and may reduce costs. Bank custodians typically do not charge trade-away fees. Additionally, using a single bank custodian for multiple accounts can save significant costs for advisors’ clients. By executing block trades, advisors can instruct the custodian to settle one trade in multiple accounts and only be charged one commission.
I hope that this article on the fact that international banks in Puerto Rico may provide global custody services be helpful. For more information on forming a new bank in Puerto Rico, please contact me at info@banklicense.pro.