What are Securities Services

What is a Security?

A security is really any financial asset that can be bought and sold on exchanges and places like the stock market. There are plenty of different kinds of securities with some of the most well-known being stocks, bonds, and options.

Common Securities:

• Stocks: An investor gives a company money in exchange for a tiny piece of ownership in a company. The ownership gives you claims to any dividends the company may pay out from its profits. This ownership right can be resold on a public stock exchange via the stock market.
• Bonds: An investor loans the company money and the company promises to pay back the investor at the end of the agreed term. These loans typically come with promised interest payments (fixed and/or variable). The rights to the interest payments and loan payback can be resold to other debt investors.
• Options: An option is a contract that allows an investor to buy or sell a certain asset at a specific price within a specific window of time. The value of options changes depending on the value of the asset on the live market relative to the specified price and the remaining about of time left on the contract.

The security price goes up and down based on how many people want to buy or sell the security (supply vs demand). The government has established organizations like the Securities and Exchange Commission (SEC) to make sure that market participants are following the rules to keep trading fair and honest. 

What are Securities Services?

In simple terms, securities services cover the behind-the-scenes factory operations behind a client’s investment account. For large banks, these clients are typically financial institutions, central banks, pension funds, sovereign wealth funds, multinational corporations, and any other organizations that might hold and manage a large number of securities.

These services are performed within a division of a bank and they are typically referred to as custodian and issuer services. 

Let’s break these services down into three main categories:

• Holding & Custody: Securities are held and are properly accounted for in the client account. If for example, the client owns certain stocks, they may receive a dividend that must be processed by the securities teams. Likewise, if the client owns a bond and receives a periodic coupon payment, that payment is processed and added to the account.
• Clearing and Settlement: The securities team makes sure transfers are properly executed and settled between two transacting parties. So the buyer receives the exact amount of securities and the seller receives the exact amount of cash agreed upon in the transaction.
• Other Services: The team may also manage shareholder meetings, process asset tax claims, report on account performance and risk indicators, etc.

So what does this look like?

Example: Let’s say a customer decides to place an order to purchase shares of Tesla, and the order has been executed on the stock market. The securities services team has one sole task in this scenario: ensure this purchase is liquidated (sold) correctly and that the securities are properly deposited in the customer's securities account in their bank.

This setup allows the customer to focus on making investment decisions without having to worry about the logistics of such a “simple” transaction. Securities services play a critical role in this process by handling the post-trade settlement, clearing, and custody of the assets. This includes ensuring that the correct number of shares are transferred, verifying the ownership of the shares, and safeguarding the assets for the customer. By providing these operational tasks, securities service providers allow customers to confidently and securely invest in the stock market and other securities.

Why It’s Important

It’s important to understand the operations behind securities management if you plan on working in finance and investments. This is similar to looking at someone who own’s a clothing company and how they should consider understanding how their products are stored in the warehouse, how products are delivered to customers, and how customer payments are processed and delivered to the company bank account.

If you’re interested in working in the banking industry, you must have a basic understanding of securities services and all other aspects of finance. Understanding the roles of Asset Management, Investment Banking Front Office Divisions, and other finance teams are not only expected by Wall Street employers but can also help give you a leg up when trying to land a finance internship.

Those interested in developing their technical finance and valuation knowledge should consider checking out our Complete Finance & Valuation Course which has helped our students land competitive roles at Goldman Sachs, EY, UBS, Bloomberg, and other top-tier companies!

Services Offered by Securities Services

Banks that offer security services traditionally offer these services, among others:

Alternative Investments: Manage and support complex transactions for assets held by hedge funds, private equity firms, commercial real investors, and more.

Clearing, Settlement, and Custody: Manage the safekeeping and servicing of investments with platforms designed to provide scale, automation, and controls focused on asset safety.

Fund Accounting and Administration: Leverage the bank’s scale and processing power with integrated accounting platforms that deliver valuations across many different financial instruments and securities (stocks, bonds, options, etc.).

Middle Office: A full range of post-trade execution services designed to support investment transactions.

Investment Information Services: Provide modern analytics to help you understand investment performance within and across your portfolio, including risk factors, associated exposures, and adherence to your investment rules. 

Clearly, there is a wide range of complex and niche securities that require their own set of unique expertise and operational knowledge. This makes it quite difficult for companies to take on the securities services business as the required staffing and operational infrastructure needed to run this service would typically only be found in large banks and financial institutions.

How do Securities Service Teams Make Money

As noted above, security service teams provide a wide range of complex services which are often linked to a service fee. Here are some of the common ways in which security service teams generate revenue for the bank:

• Transaction Fees: Security service teams may charge a transaction fee based on a percentage of the value of assets in the transaction.
• Net Interest Income: Banks can reinvest sitting cash in the account at a rate above the interest rate promised to the client. The net difference between the two rates generates a profit for the bank.
• Stock Lending: Some clients may want to borrow or lend out stocks and other securities. Borrowers typically ask for a form of interest payment and the security service team charges a fee for facilitating these lending transactions.

Top Securities Service Banks

Some of the top firms with strong securities service teams include JP Morgan, Goldman Sachs, Deutsche Bank, and many more. Most major banks have a securities services division as they already have the built-out operational infrastructure needed to support other teams and their own internal trading operations.

Key Takeaways

• Securities services are a vital component of the banking industry, providing support and liquidity for financial institutions, pension funds, sovereign wealth funds, central banks, and multinational corporates.
• Banks can offer either the entire suite of securities services or purely the traditional custodian services, using their own infrastructure to sell a range of services.
• Security services provide significant fee income opportunities with clients that don’t require the bank to put up a large amount of its own capital.

Additional Resources

Consider checking out our Excel for Business & Finance Course and our Complete Finance & Valuation Course to learn the technical skills you’ll need to compete for competitive roles at top-tier finance and investment firms!

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