Of Custodians And Ringfencing

Occasionally there will always be a question popping up on the safety of having one’s securities in a custodian account. Time and again, some people will have the impression that if the brokerage who is holding their shares in custody goes under, there goes the shares. And I am quite surprised that due to this, a few investors would rather invest locally and have their shares custodised with the Central Depository, or CDP, which to me is a missed opportunity on diversifying into other markets outside of Singapore.

This thinking is not without basis. In 2011, a now-defunct U.S. based commodities brokerage firm MF Global had misused customers’ funds by using them to cover their liquidity shortfalls, and there were Singapore customers included. It was till 2016 that MF Global’s liquidators returned all the funds to the affected customers. Due to this experience, I have heard of at least one ex-MF Global client swearing off custodian accounts.

 

By legal right, the assets of investors are separated from the assets of the brokerage with whom the investors invest with. This is the “ringfencing” described in the title. In the rare event where the creditors are acting against the brokerage, they are going after its assets, not the investors’.

 

As the adage goes, however, anything can happen, and skeptics will argue the scenario of another “MF Global happening” and if so whatever safeguards and legal protections would be thrown into the wind. I do not dispute of such possibilities manifesting, since I acknowledge that there are many risks involved in investing, though in terms of probability, it is very rare.

 

Rather than restrict oneself from investing in overseas markets (or local markets if wanting cheaper transaction costs), why not diversify across different custodian brokerages? Recent years had seen several discount brokerages popping up, and adding a layer of safety and security is that they are (mostly, if not all) licenced by the Monetary Authority of Singapore. Perhaps these may convince those to try out (or retry) custodian brokerages, and from there, invest in the rest of the world?

 

 

References

 

Ross, Marc L. What Happened At MF Global? Investopedia. 17 Jan 2023. https://www.investopedia.com/financial-edge/0312/what-happened-at-mf-global.aspx (accessed 17 Sep 2023)