DEFINITION of Custodial Receipt
A custodial receipt is an ownership interest in receipt form representing a security held by a custodian or transfer agent. As such, it represents ownership of the security by the depositor. A security in custodial receipt form is usually non-transferable and is considered an indirect ownership interest. Banks and investment companies use custodial receipts to create financial securities that would otherwise be unavailable to investors because of a variety of ownership restrictions. As a wrapper or investment vehicle, the receipt creates a synthetic ownership interest with the added benefit of custodial safeguarding.
BREAKING DOWN Custodial Receipt
In the municipal bond market, custodial receipts refer to securities that represent the right to receive future principal and interest payments on municipal obligations underlying these receipts. In a typical custodial receipt arrangement in this market, an issuer or owner of a municipal obligation deposits it with a custodian in exchange for two or more classes of receipts.
Financial services entities use a custodian bank to keep custody of stock certificates and other assets of a mutual fund, individual or corporate client. This helps to minimize the risk of their theft or loss. A custodian can hold securities and other assets in electronic or physical form.
Based on the concept of the American depositary receipt (ADR), in the mid-90s Deutsche Bank developed the first transferable custody receipt (TCR). As a way for domestic investors to purchase the securities of foreign companies without having to deal with foreign currencies, establish foreign custody accounts, or trade and settle securities on foreign exchanges, TCRs are an ownership interest in the shares of a foreign company trading on a local, domestic stock exchange.