What Is a Depository?

A depository is a facility such as a building, office, or warehouse in which something is deposited for storage or safeguarding. It can refer to an organization, bank, or institution that holds securities and assists in the trading of securities.

The term also refers to an institution that accepts currency deposits from customers such as a bank or a savings association.

Depositories are needed for several reasons. First, they provide security (by cutting back the risks of the bearer holding the physical security) and liquidity in the market, they use money deposited for safekeeping to lend to others, invest in other securities, and offer a funds transfer system. A depository must also return the deposit in the same condition upon request.

Understanding Depositories

Depositories serve multiple purposes for the general public. As banks and other financial institutions, they give consumers a place to come in order to make deposits—both time or demand deposits. A time deposit is an interest-bearing account and has a specific date of maturity such as a certificate of deposit, while a demand deposit account holds funds until they need to be withdrawn such as a checking or savings account.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 they 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.

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. So, for instance, Investopedia is considered a repository for financial information.

A depository's institutional function or type determines which agency or agencies are responsible for its oversight.

Functions of 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.

Depository services also include checking and savings accounts, and the transfer of funds and electronic payments through online banking or debit cards. Customers give their money to a financial institution with the belief the company holds it and gives it back when the customer requests the money.

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 mortgages or business loans, generating more interest on the money than the interest paid to customers.

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.

Key Takeaways

  • A depository is a building, office, or warehouse in which something is deposited for storage or safeguarding.
  • Depositories may be organizations, banks, or institutions that hold securities and assists in the trading of securities.
  • Depositories provide security and liquidity, use money to lend to others, invest in securities, and offer a funds transfer system.

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 FDIC insured up to certain limits.

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. The 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, during a fiscal year, 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.

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.

Example of a Depository

Euroclear is a clearinghouse that acts as a central securities depository (CSD) 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. Over 190,000 national and international securities 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.