What Is a Depository?
The term depository can refer 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 also can be an organization, bank, or institution that holds securities and assists in the trading of securities. Deposits placed in a depository must be returned in the same condition upon request.
Depositories provide security and liquidity in the market. They use money deposited for safekeeping to lend to others, they invest in other securities, and they provide a funds transfer system.
Key Takeaways
- A depository can be a facility or institution, such as a building, office, or warehouse, where something is deposited for storage or safeguarding.
- Depositories also may be organizations, banks, or institutions that hold currency or securities and assist in the trading of securities.
- They provide security, liquidity, and a means of transferring funds.
Understanding Depositories
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 owner's risk of holding physical assets by providing a safe place to store them. For instance, banks and other financial institutions give consumers a place to deposit their money by offering time deposit and demand deposit accounts.
A time deposit is an interest-bearing account with a specific date of maturity, such as a certificate of deposit (CD). A demand deposit account holds funds until they need to be withdrawn, such as with a checking or savings account.
Deposits can also be securities, such as stocks or bonds. When these assets are deposited, the institution holds the securities, either in electronic form, also known as book-entry form, or in paper form, such as a physical stock certificate.
Depository organizations also help create liquidity in the market. Customers give their money to a financial institution; the company holds it for a time and returns it 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 loaned than the interest they paid to customers.
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 are 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.
Special Considerations
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 the risk of holding the securities in physical form. These risks can include 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.
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 savings 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.