Certified Anti-Money Laundering Specialist Certification (CAMS) Practice Exam

In financial terms, what does 'custody' refer to?

1. Investing in financial products

2. Safeguarding and administering assets

3. Trading stocks and bonds

4. Liquidity management

The correct answer is: Safeguarding and administering assets

'Custody' in financial terms specifically pertains to the safeguarding and administering of assets. This involves the responsibility of an institution to hold and protect financial assets on behalf of clients, ensuring that these assets are secure and properly managed. Custodians offer services such as maintaining records, executing trades, collecting dividends, and managing other administrative functions associated with the assets. The significance of this role is paramount in the finance industry, especially for institutional investors, as it helps maintain the integrity and safety of investments. This concept stands apart from activities related to trading, investing, or liquidity management, which involve different aspects of financial operations. Trading stocks and bonds focuses on the buying and selling of securities, while investing in financial products pertains to the allocation of funds into various investment vehicles, and liquidity management addresses how a company or institution manages its cash flow. Each of these functions plays a crucial role in finance, but they don't encompass the core responsibilities associated with custody.