How safe are online brokers?

Hi,

I have just been hearing stuff about people losing money in accounts they had with MF global and I understand they dealt in derivatives, but I was just wondering what happens if an online broker like CommSec was to go under. Would I still be the owner of any shares that I buy through an online broker? What about any cash held in their accounts?

Thanks

bobrock said:

Hi,

I have just been hearing stuff about people losing money in accounts they had with MF global and I understand they dealt in derivatives, but I was just wondering what happens if an online broker like CommSec was to go under. Would I still be the owner of any shares that I buy through an online broker? What about any cash held in their accounts?

Thanks

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Commsec uses CHESS so you'd still be the owner of the shares. I believe their cash account is covered by the Government deposit guarantee. The issues arise when a broker goes into administration and the time it takes for administrators to sort through what they like to term "complications". A broker like Bell Direct holds your cash in the form of debentures, not in a "cash" account. Where you rank as a creditor in relation to debentures would be subject to lengthy court battles under the current adversarial administration system in Australia.

bobrock said:

Hi,

I have just been hearing stuff about people losing money in accounts they had with MF global and I understand they dealt in derivatives, but I was just wondering what happens if an online broker like CommSec was to go under. Would I still be the owner of any shares that I buy through an online broker? What about any cash held in their accounts?

Thanks

Click to expand...

You'll need to differentiate between the share holdings and your cash.
Make sure your broker deals through CHESS and the shares are unencumbered once you've paid for them.
If your cash is held in a bank account in your name, that side is also as safe as the bank behind it.

The only risk left, and I can't see a way to avoid it, is the "gap" of 3 days, during which a transaction is "in limbo", i.e. the time it takes to process your executed buy/sell, transfer the cash out of/ into your bank account, and reflect the changed ownership in the registry. During that time, the Broker will be holding the cash in question, and if you have sold $20,000 worth of shares a day or two before your broker goes belly-up, that amount may be at risk.

In addition to Pixel and Captain's insightful replies, I'd like to offer the following quotation which is an excerpt from the bottom of my most recent monthly CommSec account statement:

This Confirmation is issued by Commonwealth Securities Limited for a transaction or transactions that has or have taken place on the Sydney Futures Exchange Ltd ("SFE").
Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 is a wholly owned, but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124
and is a Participant of SFE and ASX Limited.

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This next quote is an excerpt from the Client Agreement that I was issued when I first established aforementioned account with CommSec:

...

(b) All monies deposited to the credit of that account shall be paid into a client segregated bank account....

...

(e) The Client acknowledges that individual client accounts are not separated from each other within the clients' segregated account and that the client segregated account provisions may not insulate an individual client's funds from a default in the client segregated account.

...

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I believe this highlights the importance of taking the time to read the fine print of all relevant Client Agreement/Product Disclosure documents before engaging the services of any financial provider in order to make a better informed assessment of counterparty risk (amongst other things). This way you may avoid some potentially unpleasant future surprises.

In summary "Caveat Emptor".