What Is a Safekeeping Certificate?

In finance, the term "safekeeping certificate" refers to a legal document stating the beneficial ownership of securities held by an institution on behalf of their owner. 

In modern financial markets, these kinds of safekeeping relationships are commonly used by investors, who rely on brokerage firms and other intermediaries to buy, sell, and safely store assets on their behalf.

Key Takeaways

  • A safekeeping certificate is a legal document that clarifies the ownership of a security.
  • Although their format has changed over time, they remain an essential method for maintaining the chain of custody over financial assets.
  • Most retail investors rely on brokerage firms to hold their assets on their behalf, registering those assets "in street name" and listing the investor as the beneficial owner.

How Safekeeping Certificates Work

In the past, investors who stored their securities with a trusted financial firm would obtain physical certificates outlining the nature of the assets being stored and their status as the beneficial owner. Today, this same legal relationship still holds, except the certificates are now held digitally rather than as physical copies. 

Specifically, the modern equivalent of the safekeeping certificate is the contract between a brokerage customer and the brokerage firm that is established prior to the creation of the investor's account. Through this agreement, it is made clear that any securities purchased and stored by the broker on behalf of the investor are the legal property of that investor. 

Like investors, brokerage firms also obtain their own version of safekeeping certificates, often relying on third-party financial institutions for their own asset-storage needs. These kinds of custodian services are commonly offered by large banks such as JPMorgan Chase (JPM), Citigroup (C), and The Bank of New York Mellon (BK). 

Important

Whereas some investors might derive satisfaction from holding physical stock certificates rather than owning them through a brokerage firm, doing so would involve additional holding costs due to bank safe deposits and additional insurance premiums. For most investors, the convenience and safety of safekeeping through brokerage firms makes the in street name system the preferred means of ownership today.

Real World Example of a Safekeeping Certificate

One of the most common examples of safekeeping certificates used in modern finance are those used by retail investors and discount brokerage firms. Today, shares purchased through a brokerage firm are technically registered "in street name," which involves using the name of the brokerage firm itself. Nevertheless, the legal ownership of those shares remains in the hands of the investor, because the brokerage firm will always list the investor as the shares' beneficial owner.

The proper management of safekeeping certificates is essential for maintaining a clear chain of custody for the world's financial assets. Without these processes, it would be impossible to allow for the nearly-instantaneous transaction speeds we now enjoy, along with historically low brokerage costs. For these reasons, the procedures used by financial firms in storing and transferring these certificates is closely watched by regulatory and government bodies.