What happens to your shares if your broker goes bankrupt

What happens when your stockbroker goes bankrupt?

Previously we spoke about how to buy stocks in Singapore, the margin account, the difference in buying from from the primary stock market and the secondary stock market as well as the difference between a remisier and broker.

Essentially, the boring administrative side of investing. Boring but important enough to know when things happens.

The next question is, “What happens when your stockbroker goes bankrupt?”

Short answer is, “trouble but financial losses should be limited”.

Here comes the long answer.

What Happen to our Shares?

Decades ago, before the existence of computers and high-tech trading, one can only prove their ownership of a company via physical stock certificate, such as this one below.

What Happens When Your Stockbroker Goes Bankrupt - American_Express_Company_1865

Here you can see the stock certificate representing 24 shares of American Express Company. When you buy shares, you will be given a physical stock certificate as proof of ownership.

As technology creeps into the world, with increased trading volume and even intra-day trading, this action of delivering actual stock certificates has become redundant.

Therefore, everything has been done electronically. Shares are usually held by the brokers in a separate custodian bank (usually affiliated) or in a independent custodian entity such as The Central Depository.

What happens when your stockbroker goes bankrupt-infographics

Singapore CDP

In Singapore, local shares that we buy are not held by brokers, instead, they are held by The Central Depository (CDP). CDP is an a separate entity where shares are held on our behalf in our names.

Major brokers such as DBS Vickers, UOB Kay Hian, OCBC Securities and POEMS will transfer shares to your CDP accounts. They do not hold onto your shares.

If any of the broker goes bankrupt, it does not affect you as the brokers and CDP are independent of each other.

As a matter of fact, you can buy shares using DBS Vickers and sell the same shares using UOB Kay Hian. As long as your CDP account shows that you own those shares, you are fine.

Custody by Brokers

Shares can also be held in custody by the brokers themselves. For example, if you buy shares using Standard Chartered Online Trading account, your shares are held in custody by Standard Chartered Bank (Singapore) Limited.

It can also be possible when custody are held by another entity. For example, if you buy US shares using DBS Vickers, shares are held by Pershing LLC under the name of DBS Vickers Securities (Singapore) Pte Ltd.

If the stockbroker goes bankrupted, the shares are still yours. Your shares are held under the bank’s name, but it is the bank’s liability to you. The shares cannot be used by the bank to pay off their debt, it has to be returned to you.

Now what if the external party (Pershing LLC) goes bankrupt?

Well, the same answer applies. Think of Pershing LLC as a landlord and DBS Vickers Securities (Singapore) Pte Ltd as the tenant.

DBS Vickers Securities (Singapore) Pte Ltd rents a space in Pershing LLC to store all your US shares on your behalf.

If the landlord goes bankrupt, can the landlord repay their debt using tenant’s belongings?

The answer is no. Therefore, shares will still belong to you.

The most likely scenario is that your account and your holdings will be transferred to another broker. There will be some trouble for you, and it will take some time, but your shares are safe.

SIPC Members

American brokers such as TD Admeritrade and Charles Schwab offer brokerage services in Singapore and they are excellent brokers to access the US market.

In the US, to counter the disaster of the 70s where stockbrokers make off with monies that belongs to customers, the Securities Investor Protection Corporation (SIPC) was setted up. A non-profit organisation that helps investors restore their assets when stockbrokers collapses.

Stockbrokers that are member of SPIC will need to hand their accounts over to SIPC. SIPC will transfer accounts and assets over to another broker.

In the event that transfer is impossible, and liquidation of the broker commence, each account holder is protected by the SIPC up to US$500,000 with up to US$250,000 in cash.

This protection is also applicable if customers have any missing assets when account is transferred to another broker.

Good Track Record

SIPC has a good track record of moving assets back to customers of failed brokers. The good news is, brokerage failure is very rare. In the event that a failure occurs, the chance of SIPC having to step in to compensate shareholders is very low.

This is because reputable brokers, despite financial failure, are usually able to transfer their accounts to other brokers.

Therefore, only open an account with a legitimate and reputable broker.

It is confidence-boosting to know that the collapse of Bear Stearns and Lehman Brothers in 2008 has not resulted in customers losing assets.

The collapse of a stock broker spells trouble, but it should not be a financial disaster for you.

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