How safe are shares held in Stockbrokers' nominee accounts?

[Jim2007]

A liquidator will aggressively try every and any legal means to get his or her hands on any assets in the vicinity of a liquidation. That is their job. They are often very good at it.

And that is the point, if the shares are in some way the legal property of the brokerage, no liquidator is going to wash their hands of them since it would expose them to claims by the creditors. In such a situation you have no documentation that identifies a particular block of shares as belonging to you, a liquidator opposing you and of course the former brokerage staff have other priorities.

The best advice is to register significant positions for the long term in your name.

 

[Jim2007]

It doesn't matter what the name used. Street name is the name of the entity used with dealers, custodians, transfer agents etc. I do a trade with a Davy's. They go and buy shares from Morgan Stanley. They don't do a trade between Sunny and Morgan Stanley. They do a trade between their nominee or omnibus account and Morgan Stanley. What they call it doesn't matter. The trade is still between Davy and Morgan Stanley as far as MS is concerned. MS don't care who the beneficial owner is. That is Davy's problem.

I can’t comment on Davy, but in the cases I have worked on that is not what actually happens. If the brokerage firm has a sufficient holding with their nominees to cover your trade, then no physical transaction will take place, just a paper transaction on the books of the broker.

 

[Zenith63]

In such a situation you have no documentation that identifies a particular block of shares as belonging to you, a liquidator opposing you and of course the former brokerage staff have other priorities.

I contacted CREST recently to see if there were other firms in Ireland offering Personal Member Accounts (where your own name appears on the share register of companies you buy stocks in), which is what I had with Campbell O'Connor previously. This is about as close as you get to holding the physical share certificates yourself at the moment. Part of their response was -
If firms are not willing to offer you Personal Membership then please note that in the coming months (at the least by the end of the year), firms subject to new CSDR regulations, will be obliged to offer you account segregation, should you wish. This may not be in the form of the Personal Member you have now, whereby you receive your own CREST participant ID, and your name appears on the legal register. It is more likely that firms will offer this segregation as a sub-account ('Member Account') in CREST. In this model the name of the stockbroker (or nominee company) would appear on the legal register, but your shares would be segregated from those of other underlying clients of the stockbroker/nominee in CREST.

I'm not sure if that would help with "documentation that identifies a particular block of shares as belonging to you"?



While looking around for a new broker, this is the info I found for some of the Irish brokers. This is purely from their websites, if others have spoken to the firms and have more info it would be great to flesh this out and maybe add it to your original post @Brendan Burgess?

• DeGiro - No CREST personal accounts or physical certificates offered. All shares held in a separate entity (either Stichting DEGIRO I or DEGIRO II), unclear how that entity holds the shares, but I'd guess pooled in a CREST account
• Davy - No mention of CREST personal accounts. Shares are held in a separate entity which uses one CREST account per client, presumably the new model Crest/Euroclear mentioned to me in their mail. "Our nominee company is a member of CREST and its name appears on the share registers for these assets. Our nominee company operates individually designated CREST accounts for all clients who hold CREST eligible securities through Davy. This means that there are separate accounts within CREST for each Davy client. Client accounts are segregated from each other as well as from those of the firm."
• Goodbody - No clear statement on website, but there are CREST transfer forms available with "Goodbody Nominees" as the recipient entity, so looks like they use CREST to hold shares, but their name goes on the share register, so again a form of nominee account, unclear if pooled or per-investor.
• InteractiveInvestor - No mention of CREST personal accounts either, appears to be a separate entity that holds the shares in a CREST account in their name. No mention of separate CREST accounts per investor.
• Merrion Capital - No mention of CREST personal accounts on their site, but their share transfer form is pre-filled to a CREST nominee entity, so looks like this is a pooled nominee account similar to many of the brokers above.
  
• Cantor Fitzgerald - There are a number of mentions of CREST personal accounts on their site as well as a form for creating one, so looks like these guys are the closest analogue to Campbell O'Connor and that would make sense as they were the recommended option for transferring your shareholding to.

Note CREST is only relevant for UK/Irish shares, which is fine if all you're doing is buying and holding the likes of iShares ETFs. Who knows the effect Brexit will have on it, though it is owned by a Belgium based JPMC company.

 

[EmmDee]

But the theory is no good. That did not apply in Murroughs or in Beaufort.

And whom do you instruct?

Brendan

Once an administrator or liquidator is appointed, they run the operations as normal. You would send your instruction in exactly as you do now.

I'd have to look at the two cases but I would guess that in both cases they were small operations where the "seniors" overrode the checks and balances and essentially moved client assets into company accounts. That would be illegal

I love this. Have you ever met a liquidator, and I don't mean over a sherry.

Telling a liquidator that "these" assets are excluded is like telling a shark in a feeding frenzy that it can only eat those fish, it cannot eat these fish.

A liquidator will aggressively try every and any legal means to get his or her hands on any assets in the vicinity of a liquidation. That is their job. They are often very good at it.

How can you have confidence that the regulations are drawn tightly enough to safeguard assets in the face of a liquidators onslaught, and if the regulations are sufficient to safeguard assets that have been held correctly how sure can you be that the assets were in fact held correctly in such a way that they can avail of the regulations. That the regulatory package is watertight and that the assets have been correctly placed in the regulatory package.

The cases quoted above seem to suggest that assets are not always safe. You will never know until the tide goes out.

Yes I have met a liquidator. I've been involved with liquidators on both sides. I'm very familiar with both large custodians and the operations of large broker dealers (not small family run shops). I currently look after about $400bn worth of client assets.

A liquidator won't touch assets designated as "client assets". It's not even a conversation. The problem occurs if client assets have been moved to firm asset accounts. That's when it gets messy (or where client assets have been pledged to the firm and therefore become property of the firm)

The regulations are pretty strict. But like anything, policing them is a problem. Generally larger firms will be a lot more stringent about it than small ones. The cases quoted seem to be small shops where pressure for liquidity or assets "persuaded" management to "borrow" from clients - not dissimilar to cases where legal firms had been found to be using client funds illegally.

 

[cremeegg]

A liquidator won't touch assets designated as "client assets".

Good to know.

The problem occurs if client assets have been moved to firm asset accounts.

Does that happen ?

Is it legal ?

How would a client know?

That's when it gets messy (or where client assets have been pledged to the firm and therefore become property of the firm)

How does this process even exist?

Are clients informed?

 

[EmmDee]

Good to know.



Does that happen ?

Is it legal ?

How would a client know?



How does this process even exist?

Are clients informed?

The last question is easiest to answer - yes. If you are borrowing to buy stock, that stock is usually pledged back as collateral (along with extra margin). In many cases the broker is entitled to use that collateral as they wish e.g. lending it out. Though as soon as you no longer need to provide collateral it should be replaced back in segregated accounts. Similarly any assets in a margin account would be treated the same way.

On your middle question - yes it does happen (e.g. Morrogh and Custom House). In both cases, assets were moved out of client accounts to cover liabilities or commitments of the firm or the individuals involved without the knowledge or consent of the clients. Is it legal - No. How would clients know - that's a good question. In both those cases, the firms produced false client statements to hide the activity. So short of doing personal site visits (and knowing what and who to ask) I'm not sure a reasonable person would have known. I would be wary of small operations where a lot of the "mystique" is around named individuals - there is a lot of trust being placed in people rather than process

Somebody mentioned Beaufort - that seemed to be a different case where the company was frozen by regulators because of suspicion that the firm was being used for money laundering. The cost of investigation and delay involved seemed to have eroded value in the accounts - though maybe some assets were moved - I'm not sure

 

[Ravima]

Should it not be similar to a solicitor going bust. No one would agree to a liquidator finding deeds in the safe and then selling them to pay fees????

 

[joe sod]

I'm not sure a reasonable person would have known. I would be wary of small operations where a lot of the "mystique" is around named individuals - there is a lot of trust being placed in people rather than process

well on that basis, degiro being a very large international operator and also being faceless in that their are no "big personalities", you are lucky to even get a person on the phone, seems to pass the above test. Its not exactly seanie fitzpatrick or david drumm territory, there was alot of "mystique" around those guys before the banking crisis.

 

[Jim2007]

I currently look after about $400bn worth of client assets.

Right so you are responsible for an AUM equivalent to over half the AUM of DB, UBS or CS.... well having spent 31 years in the sector in mainland Europe, I have Never met any one person with responsibility remotely close to that kind of figure. Having consulted at all three and a few more, I’d say it would make a complete farce of risk management for a start.

 

[EmmDee]

Right so you are responsible for an AUM equivalent to over half the AUM of DB, UBS or CS.... well having spent 31 years in the sector in mainland Europe, I have Never met any one person with responsibility remotely close to that kind of figure. Having consulted at all three and a few more, I’d say it would make a complete farce of risk management for a start.

I'm not quite sure if you meant the sarcastic tone. But I'll answer your points.

I run a line of business for a large institution. I don't have sole control of client assets. There are about 300 people working in it across 4 regions. I am well aware of managing risk

The number is actually quite small for large global custodians. You may be mixing up Assets Under Management (AUM) with Assets Under Custody (AUC). The large global custodians (BoNY, JPM, State Street) have trillions AUC.

DB, UBS and CS may have significant asset management arms but aren't significant global custodians: DB sold their global business, UBS mainly services domestic clients and outsources it's global custody business. CS is more of a prime broker than a global custodian.

 

[WaterWater]

I recently got a letter from Link Asset Services asking me did I recently sell shares in an Irish company. That they had received an instruction to transfer shares out of my name. Their letter heading basically said "Protecting your shareholding against fraud".

Is this normal to receive a letter like this. I have held these shares for over 20 years and decided to sell them because of the Campbell O'Connor closing down situation.

 

[jpd]

It looks like the Link Asset Services were doing a good job - as the were confirming that you wanted to sell/transfer the shares

 

[EmmDee]

I recently got a letter from Link Asset Services asking me did I recently sell shares in an Irish company. That they had received an instruction to transfer shares out of my name. Their letter heading basically said "Protecting your shareholding against fraud".

Is this normal to receive a letter like this. I have held these shares for over 20 years and decided to sell them because of the Campbell O'Connor closing down situation.

Link are the old Capita registrar business - they did the share register work for virtually all of the main companies. So if you sold shares which were in physical cert form it would go to the registrar for re-registration. It may be that it is an anti-fraud measure.

Do they ask for you to take any action or is it just a notice - a bit like the notifications you get if log into an email account from an unknown PC?

 

[joe sod]

Just a thought that crossed my mind on this topic, maybe it has been answered already, everyone is focusing on the issue of separating where shares are held away from the brokerage company in case the brokerage company goes bust. So most seem to hold shares in a separate entity or custodian. From reading another thread similar to this one it appears that most shares are held by big custodians like new York Mellon bank. But what happens if the custodian goes bust, surely that would affect shares held for many brokerage companies. I'm sure this has been answered but I haven't t picked up on it?

 

[Mez!]

I had a weird telephone conversation with De Giro.

"Who holds the shares?"
"It's just an SPV so they are held off balance sheet"
"What is the name of the SPV?"
"We have a non-disclosure agreement and so can't tell you"
"So it's not a third party custody account?"
"Yes, it is."
"So if you go bust I won't know where my shares are?"
"You will, we will tell you then and help you to get your shares back."

https://www.degiro.co.uk/data/pdf/uk/Client_Agreement_Investment_Services_Terms_and_Conditions.pdf

Found the above online. From my understanding, DeGiro holds shares under custody in two of its own Special Purposes Vehicles (aka “SPV”) called Stichting Degiro and Stichting Degiro II.

Am I interpreting this correctly? Surely the SPV would normally be a third party bank?

 

[Zenith63]

Am I interpreting this correctly? Surely the SPV would normally be a third party bank?

In the list of brokers I looked at (see a few posts up), not one appeared to use a third-party bank. So no that would not seem to be the norm for these retail brokers.

 

[Andrew365]

I assume they hold in a SPV to remove the assets from their balance sheet to lower capital costs and make Assets / Liability management easier on their own balance sheet. The SPV would be a separate entity. SPVs have a bit of a negative connotations because of past issues during the financial crisis with asset securitisation but they are a legitimate tool.

Regardless if they put it with a 3rd party custodian account, you are just passing the default risk onto another entity.

 

[Brendan Burgess]

A third party custodian whose only job is to hold shares is likely to be far more secure than a stockbroker. It should also mean that if the broker goes bust I could deal directly with the custodian without engaging with the liquidators.

That was the set up BCP used as far as I remember. I had no worries about the nominee back then.

Brendan

 

[Andrew365]

It doesn't matter what the name used. Street name is the name of the entity used with dealers, custodians, transfer agents etc. I do a trade with a Davy's. They go and buy shares from Morgan Stanley. They don't do a trade between Sunny and Morgan Stanley. They do a trade between their nominee or omnibus account and Morgan Stanley. What they call it doesn't matter. The trade is still between Davy and Morgan Stanley as far as MS is concerned. MS don't care who the beneficial owner is. That is Davy's problem.

I do not agree with this 100%, in the trade flow example Sunny --> Davy --> Morgan Stanley, Davy would be acting on an Agent basis i.e. transacting on behalf of their client. Morgan Stanley would look at this differently to if Davy was doing a trade for themselves i.e to hedge their own risk. Ultimately though Morgan Stanley would view the risk differently 1 on an agent basis and 2 direct Davy exposure.

 

[Drakon]

I'm sure I'm repeating what I've said in posts on this site going back through the years, but repeat it I will.
In the early 2000s I opened an account with Goodbody for the purchase of shares. It was a CREST account. At the time they were really pushing this as a positive, presumably because it was. However, that was soon forgotten when they decided to move from CREST to Nominee Accounts.

I discussed this with colleagues at the time. I was working in a financial services institution so they were all clued in regarding finances. I said that if Goodbody's ever went bust, my shareholding would be at risk now that the shares would be held in Nominee Account.
Oh how they laughed, those colleagues of mine.

"Goodbody's are owned by AIB; there is absolutely nothing to fear".