What Is a Depository?
The term depository refers to a facility in which something is deposited for storage or safeguarding or an institution that accepts currency deposits from customers such as a bank or a savings association. A depository can be an organization, bank, or institution that holds securities and assists in the trading of securities. A depository provides security and liquidity in the market, uses money deposited for safekeeping to lend to others, invests in other securities, and offers a funds transfer system. A depository must return the deposit in the same condition upon request.
As mentioned above, depositories are buildings, offices, and warehouses that allow consumers and businesses to deposit money, securities, and other valuable assets for safekeeping. Depositories may include banks, safehouses, vaults, financial institutions, and other organizations.
Depositories serve multiple purposes for the general public. First, they eliminate the risk of holding physical assets to the owner. For instance, banks other financial institutions give consumers a place to deposit money into time and demand deposit accounts. A time deposit is an interest-bearing account and has a specific date of maturity such as a certificate of deposit (CD), while a demand deposit account holds funds until they need to be withdrawn such as a checking or savings account. Deposits can also come in the form of securities such as stocks or bonds. When these assets are deposited, the institution holds the securities in electronic form also known as book-entry form, or in dematerialized or paper format such as a physical certificate.
These organizations also help create liquidity in the market. Customers give their money to a financial institution with the belief the company holds it and gives it back when the customer wants it back. These institutions accept customers' money and pay interest on their deposits over time. While holding the customers' money, the institutions lend it to others in the form of mortgage or business loans, generating more interest on the money than the interest paid to customers.
- A depository is a facility or institution, such as a building, office, or warehouse, where something is deposited for storage or safeguarding.
- Depositories may be organizations, banks, or institutions that hold securities and assist in the trading of securities.
- They provide security and liquidity, use the money deposited to lend to others, invest in securities, and offer a funds transfer system.
Watch Now: What Is a Depository?
Transferring the ownership of shares from one investor's account to another account when a trade is executed is one of the primary functions of a depository. This helps reduce the paperwork for executing a trade and speeds up the transfer process. Another function of a depository is the elimination of risk of holding the securities in physical form such as theft, loss, fraud, damage, or delay in deliveries.
An investor who wants to purchase precious metals can purchase them in physical bullion or paper form. Gold or silver bars or coins can be purchased from a dealer and kept with a third-party depository. Investing in gold through futures contracts is not equivalent to the investor owning gold. Instead, gold is owed to the investor.
A trader or hedger looking to take actual delivery on a futures contract must first establish a long (buy) futures position and wait until a short (seller) tenders a notice to delivery. With gold futures contracts, the seller is committing to deliver the gold to the buyer at the contract expiry date. The seller must have the metal—in this case, gold—in an approved depository. This is represented by holding COMEX approved electronic depository warrants which are required to make or take delivery.
Types of Depositories
The three main types of depository institutions are credit unions, savings institutions, and commercial banks. The main source of funding for these institutions is through deposits from customers. Customer deposits and accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits.
A depository's institutional function or type determines which agency or agencies are responsible for its oversight.
Credit unions are nonprofit companies highly focused on customer services. Customers make deposits into a credit union account, which is similar to buying shares in that credit union. Credit union earnings are distributed in the form of dividends to every customer.
Savings institutions are for-profit companies also known as savings and loan institutions. These institutions focus primarily on consumer mortgage lending but may also offer credit cards and commercial loans. Customers deposit money into an account, which buys shares in the company. For example, a savings institution may approve 71,000 mortgage loans, 714 real estate loans, 340,000 credit cards, and 252,000 auto and personal consumer loans while earning interest on all these products during a single fiscal year.
Commercial banks are for-profit companies and are the largest type of depository institutions. These banks offer a range of services to consumers and businesses such as checking accounts, consumer and commercial loans, credit cards, and investment products. These institutions accept deposits and primarily use the deposits to offer mortgage loans, commercial loans, and real estate loans.
Depository vs. Repository
A depository is not the same thing as a repository, although they can often be confused. A repository is where things are kept for safekeeping. But unlike a depository, the items kept in a repository are generally abstract such as knowledge. For instance, data can be kept in a software repository or a central location where files are housed. Investopedia is also considered a repository—in this case, it's a repository for financial information.
Example of a Depository
Euroclear is a clearinghouse that acts as a central securities depository for its clients, many of whom trade on European exchanges. Most of its clients comprise of banks, broker-dealers, and other institutions professionally engaged in managing new issues of securities, market-making, trading, or holding a wide variety of securities.
Euroclear settles domestic and international securities transactions, covering bonds, equities, derivatives, and investment funds. Domestic securities from more than 40 markets are accepted in the system, covering a broad range of internationally traded fixed and floating rate debt instruments, convertibles, warrants and equities. This includes domestic debt instruments, short- and medium-term instruments, equities and equity-linked instruments, and international bonds from the major markets of Europe, Asia-Pacific, Africa and the Americas.