Definition
The term safekeeping refers to the responsibility of a financial institution to keep the assets of a client in a secure area. Custodians have a legal responsibility to keep their client's assets in safekeeping.
Explanation
The banking and financial services industries are founded on the concept of safekeeping. When a customer deposits funds with a financial institution, they have a legal obligation to hold these assets in safekeeping. This means the assets must be returned to the client upon demand. For example, a local bank will hold the funds of a customer in safekeeping when they place their money in a certificate of deposit.
In the same manner, a brokerage firm may also hold the assets of a client in safekeeping. But unlike a bank, which can use the funds on deposit to write loans, stockbrokers are not permitted to use these funds to generate their own profits. Without the concept of safekeeping, clients would not be willing to risk allowing a financial institution to hold onto their assets.
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