What is a depository and why is it needed in exchange trading

Probably, every investor has thought at least once – what will happen to his shares if the broker suddenly disappears – goes bankrupt or even closes? We hasten to dispel your fears – nothing will happen to the shares, because they are kept not by the broker, but by the depositary.

What is a depository?

The depositary in simple words is vault for securities. This is not some top-secret fortified bunker, as one might think. The custodian is an ordinary legal entity or company.

When an investor buys stock from a company, no one takes these shares and takes them to the vault. As you know, all turnover on stock exchanges takes place electronically. When buying shares, the intermediary registrar transfers the shares to the depository, which makes an entry in a special register about the ownership of the securities by the investor who bought them.

If the transaction for the purchase and sale of shares takes place between two investors, the depository simply changes the information about the owner of the shares in this register.

The functions of a depository in Russia can be performed by any legal entity licensed by the Central Bank of the Russian Federation. At the end of last year, 285 companies had this license. As a rule, each large Russian broker has its own depository.

Why do you need a depository?

The depository makes the life of investors much easier and easier. Since each issuer works with its own registrar, when buying shares of Sberbank, Rosneft and Rusal, one would have to open accounts with each registrar. The depository allows you to buy securities with only one account. This account is a depo, it opens automatically at the moment when an investor opens an account with a broker.

Depository functions:

  • keeping records of ownership of securities in the electronic register;
  • custody account control;
  • mediation in various transactions by the issuer and the investor: accrual of dividends on shares, coupons on bonds, payment of taxes, participation in voting, buyback.
Depository function in trading. Source: Moscow Exchange

Types of depositories

There are four main types of depositories in total:

  • Brokerage. The main clients of such depositories are private investors, credit institutions, dealers and brokers. They perform all the standard functions inherent in depositories, simultaneously combining them with the provision of brokerage services.
  • Custodian. Designed for individual work with each client. It cannot perform the functions of a broker, but, instead, can provide the client with credit funds to complete the transaction.
  • Centralized. The main function of this depository is to serve securities between registrars and depositories. In Russia, such a depository is NSD (National Settlement Depository), which is part of the Moscow Exchange Group.
  • Specialized depository of a mutual fund. As the name suggests, the depository is designed to work with securities that are part of a mutual fund.
depository in simple terms
The main function of NSD. Source: Moscow Exchange

What will happen to the shares when the depository is closed

If it happens that, for some reason, the depository where your securities are stored loses its license and stops its work, you will not lose anything. According to the requirements of the Bank of Russia, that its license has been canceled, the depository is obliged to inform its clients one month in advance. This period is used so that each investor can transfer his assets to another depository, for which a special order needs to be issued. The depository is given no more than 10 days to execute the asset transfer order.

It is worth noting that the investor will have to pay a certain amount for the transfer of assets from one depository to another.

How much does a depositary service cost for a private investor?

On average, the services of a depository will cost a private investor 100-200 rubles per month. Payment to the depositary is made if at least one transaction was recorded during the month. Brokers who have their own depositories may introduce additional conditions. For example, free depository services are provided with a brokerage account balance of more than 100 thousand rubles, etc.

As we said above, the transfer of assets from one depository to another is paid. For one name of a security, you will need to pay about 300-400 rubles, while the number of securities does not play any role.

That is, for the transfer of 1000 shares of Sberbank, worth 300 thousand rubles, you will need to pay 400 rubles, and for the transfer of 1 share of Sberbank, 1 share of the Moscow Exchange and 1 share of VTB, you will have to pay 1200 rubles. Therefore, before changing the depository, it is necessary to calculate whether it will be profitable to transfer them or it is better to sell them and then buy them again after the transition to a new depository.

About the depository in an informative video.

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