*Official* Shiny Things club - Part 2

[BBCWatcher]

I was one of the victim of the MF Global saga. That time I attended an advertised stock investment course T3B and followed their suggestion to open a CFD account with MF Global in order to adopt the method taught in the course. I had around 20K SGD in opened positions and cash when MF Global went into trouble. I remembered it took 2 years before I finally get back the money (not all) and the opened positions were closed at a price that we did not have any control of.

Please don’t do this (CFDs, course “method,” etc.)

I suspect there is a big difference between having your money tied up in derivatives when MF Global goes down, and having your money tied up in long positions if IBKR goes down.

Exactly. If a broker fails when you’re a long-term investor with positions that you’re already planning to hold for years or decades, all that really changes is that you find another broker for the next months’ saving/investing, and you wait for your positions to be transferred to the new broker. And you want a strong regulator involved and on your side.

Day traders, options traders, and others of that sort take huge risks, and not being able to close out their positions exactly when they wish if their broker fails is the least of those risks. Don’t take those risks, please.

Even if IB goes down, you need to accept some risks that you may not be able to sell or close your positions in time while waiting for the settlement or during the transfer process.

That’s right.

Every MF Global account holder made a full recovery at fair market value. Day/options/future traders aren’t necessarily going to be happy with fair market value.

If you insist on doing something exotic, you’re going to get killed on trading costs and commissions at every broker in Singapore — they just cannot compete — and you won’t have the SIPC going to bat for you if your broker were to fail. I suppose you can knock on the broker’s shuttered door more conveniently if you wish, but how’s that working out for Hyflux’s investors? Pick your poison.

For what it’s worth, here are two things I don’t do: (1) I don’t day trade, trade options, trade futures, trade currencies, or otherwise engage in anything exotic that I needed to attend a course to understand; (2) I don’t keep more than half my household’s wealth at any single custodian.

 

[iceblendedchoc]

For standard chartered, the investment you made are ringfenced.at least that was the case when I used them.

 

[BBCWatcher]

For standard chartered, the investment you made are ringfenced.at least that was the case when I used them.

Yes, that’s what’s supposed to happen. All brokers are supposed to do this. (Well, in reasonably well regulated markets, anyway.)

MF Global did, until they didn’t. They did something very improper just before they failed. Any broker could do something improper.

Standard Chartered isn’t a “CDP broker,” meaning that customer positions in Singapore (SGX) stocks aren’t individually recorded and held at the CDP. Standard Chartered has a CDP position, and then it’s supposed to keep a record of individual client positions.

Unfortunately, if they screw up, there’s no government insurer for any of it. There is no equivalent to the SIPC in Singapore. If Standard Chartered goes rogue (or is incompetent) and client funds are not fully recovered (at fair market value), there’s no government chartered agency or entity in Singapore that will make up the difference. Singapore simply has a weaker regulatory environment and zero government insurance for brokers than other jurisdictions.

I’m not predicting that any broker is going to fail, but if a broker is going to fail I’d want a stronger rather than weaker regulatory environment and as much government sponsored account insurance as possible, not zero. A sofa with red cushions is much less important to me, but maybe you think differently.

 

[FrostWurm]

A sofa with red cushions is much less important to me, but maybe you think differently.

There is no need for comments of this kind. Let's be more courteous in these forums

It's quite bizarre that you brought up a sofa with red cushions, when the original post mentioned nothing about that at all.

 

[hwckhs]

(2) I don’t keep more than half my household’s wealth at any single custodian.

That's a good advice.

 

[BBCWatcher]

It's quite bizarre that you brought up a sofa with red cushions, when the original post mentioned nothing about that at all.

The reference should have been clear enough, but OK, let’s decode together, shall we?

1. A sofa = something physical. Clients often sit on them in a “bricks and mortar” office for example.

2. Red = a color that appears in the expression “Little Red Dot.” It’s Singapore’s color.

Got it now?

I didn’t write “unimportant”; I wrote “much less important.” And those sentences seem perfectly courteous to me, especially in this forum.

 

[limster]

One should just get the facts and do your own due diligence. Contrary to the views of some experts, there is no single 'right answer'. If there was, then the financial industry wouldn't need to exist, we would only have one broker and one ETF.

Standard Chartered ringfences their clients holdings by using a custodian but the holdings are not insured

IBKR holds your shares instead of using custodian but probably need to contribute something to SIPC and there is SIPC protection for us$500k of your holdings.

Because IBKR holds your shares, it is cheap and easy for them to do share borrowing/lending (yield enhancement program). Yet I wonder why the experts have not mentioned that this may not be covered by SIPC

Securities Loaned Out By You May Not Be Protected by SIPC
The provisions of the Securities Investor Protection Act of 1970 may not protect you as a lender withrespect to securities loan transactions in which you lend your Fully-Paid Securities to IB.

Therefore,the collateral delivered to you (and indicated on your account statement) may constitute the only source of satisfaction of IB's obligation in the event that IB fails to return the securities.

https://gdcdyn.interactivebrokers.c...pleView?file=SecuritiesLendingDisclosure.html

 

[BBCWatcher]

Standard Chartered ringfences their clients holdings by using a custodian but the holdings are not insured

IB also “ringfences.” That’s what reputable, regulated brokers do. (IB will also tell you all the ways they ringfence better than other brokers do.)

In the case of MF Global, they promised they’d ringfence, they did, and then (just before they failed) they didn’t. They were naughty. Could any broker be naughty? Yes. Do you want that broker to be in a weak regulatory environment with zero account insurance, or a stronger regulatory environment with government-sponsored account insurance?

Because IBKR holds your shares, it is cheap and easy for them to do share borrowing/lending (yield enhancement program). Yet I wonder why the experts have not mentioned that this may not be covered by SIPC

The yield enhancement program is optional, on an opt-in basis. And it doesn’t apply to the London-listed ETFs that most investors in this forum are buying and holding. Moreover, IB and other posters who’ve mentioned this program — which is available only for U.S. listed and Canadian listed securities — explain carefully that SIPC defenses don’t apply.

In short, it’s moot for most (not for IWDA, EIMI, VWRD), and nobody is keeping this secret.

....Do we have Standard Chartered employees trolling here? I’m beginning to wonder. I think Standard Chartered is perfectly fine, but greater broker safety is certainly not one of its attributes. If you want to argue that, you’ve got it exactly backwards.

 

[limster]

like i said, some people think there is only 'one right answer', myself, I believe there are choices available. People are free to choose after doing their own due diligence.

Some may choose SCB, some IB, some Saxo, some DBS Vickers.

 

[tangent314]

That's why I like CDP; it can't go broke.

Too bad you can't hold IWDA in CDP....

 

[revhappy]

I find this perceived safety of explicit insurance coverage as a western mentality. While the eastern mentality is based on implicit trust.

I am not sure if insurance companies themselves will be solvent when something such as a too big to fail institution fails.

I think that is why eastern mentality goes with trusting institutions that are conservative such that you wont need insurance in the 1st place.

I am not sure, which one is better. Maybe we should look at history. US has a much longer history and US defaulted as well and went away from its gold standard and did gold confiscation and dollar devaluation etc. Singapore had the AFC and that provides some hints what happens during a crisis.

I am not drawing any conclusions at this stage. Just highlighting the differences.

 

[BBCWatcher]

like i said, some people think there is only 'one right answer', myself, I believe there are choices available. People are free to choose after doing their own due diligence.

OK, now you’re misrepresenting my point of view, certainly. I just posted, only moments ago, that I do not keep more than half my household’s wealth in the hands of any single custodian.

If you follow ST’s investment advice then that’ll also be true for you. You, as a typical Singaporean investor, would have:

1. Global stocks at IB;

2. Local stocks and a local bond fund at POSB Invest-Saver, Maybank Kim-Eng, Standard Chartered, FSMOne, POEMS, DollarDex, and/or (possibly) OCBC’s Blue Chip Investment Program (BCIP);

3. CPF assets;

4. Your owner-occupied HDB unit (in due course);

5. Some emergency reserve funds in a bank in Singapore (at or below deposit insurance limits) and in SSBs.

See any broker-related risks in that for a typical long-term investor living in Singapore? No, I don’t. If any particular custodian gets into trouble, this long-term investor following this formula should be just fine.

There is a reasonable argument that Leg #1 is absolutely vital because it’s the only part that is not subject to national existential risks. But Leg #1 will never be the only thing a typical investor in Singapore can do; that’s just not allowed. Leg #3 is required, for example.

Chill, basically.

 

[BBCWatcher]

I find this perceived safety of explicit insurance coverage as a western mentality. While the eastern mentality is based on implicit trust.

No, there’s no continental or regional bias required to explain this. Plenty of people are conditioned to think that their uncle or their neighbor is more trustworthy than a “far” entity, even if the latter is better regulated, insured, and, well, far. (“Far” is darn important if “near” ever has a systemic problem.) Everywhere in the world that happens, and everywhere in the world uncles and neighbors disappoint fairly often.

I am not sure if insurance companies themselves will be solvent when something such as a too big to fail institution fails.

SIPC, FDIC, and NCUA are not insurance companies. They are U.S. federal government guaranteed backstops. As long as the U.S. federal government is a going concern, they will be, too.

The U.S. has had “too big to fail” failures, already. Depositors and account holders were fully protected, up to coverage limits. Nobody has ever lost even a penny, on a fair market value basis, of insured deposits/holdings at SIPC, FDIC, and NCUA protected institutions.

You can’t say that about institutions in Singapore, I’m afraid.

I think that is why eastern mentality goes with trusting institutions that are conservative such that you wont need insurance in the 1st place.

Leaving aside the eastern/western notion which I reject completely, how’s that working out? Private institutions fail, and we’ve got a long string of such failures in Singapore.

We’ve also had at least one major custodial failure: the SGX’s Central Limit Order Book (CLOB). That happened only 20 years ago, in the midst of the Asian Financial Crisis. Anybody remember that?

US has a much longer history and US defaulted as well and went away from its gold standard and did gold confiscation and dollar devaluation etc. Singapore had the AFC and that provides some hints what happens during a crisis.

The proposal on the table seems to be to put all your assets in the hands of custodians in Singapore. Nobody is arguing that a resident of Singapore should place all his/her wealth outside Singapore.

I reject the proposal on the table completely. It’s risky. You should diversify at least reasonably well, including in your custodians. Arguing that IB is less safe than Standard Chartered — that specific broker safety comparison — is backwards, as it happens.

 

[little pupsky]

OK, now you’re misrepresenting my point of view, certainly. I just posted, only moments ago, that I do not keep more than half my household’s wealth in the hands of any single custodian.

-snip-

Chill, basically.

I don’t think limster misrepresented your point of view in any way. He didn’t explicitly agree with your view, and neither did he explicitly disagree with it. He’s basically saying consider all views and decide for yourself. How is that misrepresenting? Just because he didn’t lap up your view lock, stock and barrel?

Yes, please chill.

 

[peipei1]

Hey all, there is always concern for Ibkr being offshore brokerage, choose them over the Dbs, peoms or SC or even Saxo who is heavily promoting. Wrote to Sipc and their reply:
I think how they determine is by where your funds deposits are sent to, becausing clearing broker mah, which is the place where trades are settled, P/L and such.

For a bit of background, SIPC is a non-profit membership corporation created by U.S. law whose members consist of, with a very few exceptions, U.S. registered brokerage firms. SIPC’s sole mission is to protect customers with securities investment accounts at SIPC-member brokerage firms when those firms fail. SIPC protection relates to the "custody" of securities and related cash which a customer entrusts to the brokerage firm in order to invest in the securities markets. Thus, if a SIPC-member brokerage firm fails at a time when a customer had securities and cash in its custody, SIPC would work to ensure that the customer’s investments are returned. When necessary, SIPC asks a court to place the brokerage firm into liquidation and appoint a trustee to return customer property. If possible, accounts would be transferred to a new brokerage firm. The liquidation trustee would return customer property to customers with valid claims. Furthermore, in a liquidation proceeding under SIPA, SIPC may advance up to $500,000 per customer (including a $250,000 limit on cash in the account) in order to restore missing property. SIPC is not insurance and does not protect against market loss or many types of fraud or misrepresentation.



SIPC protects customers of SIPC-member brokerage firms such as Interactive Brokers LLC (IB LLC), regardless of whether or not those customers are U.S. citizens or residents. SIPC also protects investments in foreign securities, so long as those securities are held by a SIPC-member brokerage firm. Thus, SIPC would protect an investment in securities listed on the London Stock Exchange if those securities are held at a SIPC member. The liquidation trustee will review the debtor firm’s books and records in order to determine where the securities are held.



As you note, however, Interactive Brokers UK (IB UK) is a subsidiary of IB LLC, so it is not a SIPC member. If it failed, SIPC could not intervene to protect any investment it held in its custody for you. If you have an account with IB UK, you may still be eligible for some level of SIPC protection if IB UK acts as an introducing brokers which introduces your account to a SIPC-member clearing broker such as IB LLC. At the risk of oversimplification, the introducing broker provides front-end services, such as opening the account and taking your orders. The clearing broker provides back-end services, such as executing your orders and actually holding on to your investment. In other words, the clearing broker has custody of your investment, not the introducing broker. Because SIPC protects the custody of your investment, this clearing arrangement is important.


If IB UK is serving as the introducing broker and it fails, then SIPC cannot intervene, but your investment should still be in safe custody with the clearing broker (e.g., IB LLC). If the SIPC-member clearing broker failed, then SIPC would protect your account. You should check with Interactive Brokers UK or review your account documents to confirm whether Interactive Brokers LLC is the clearing broker, with Interactive Brokers UK as the introducing broker. From Interactive Brokers' website, it sounds like this may be the case, but because SIPC does not regulate the securities industry, we cannot independently confirm this arrangement. The securities regulator overseeing Interactive Brokers UK may also have more information about its clearing agreements and protections for your account.

 

[peipei1]

You mean local companies like Hyflux, Noble, and OSIM?

Sorry BBC, i was meaning brokerage and not companies.
I think why MFGlobal failed because they do their own trading, when lose money, they tapped into customers deposits, and that also lose money. I hope Ibkr have only a small inhouse trading desk.
I also think singapore brokerages are not too daring to play risky bets because like you say prevention is better than cure.

You also mentioned CLOB but i thought that was a Malaysia problem, so if Trump still win next year election and who knows what racist protectionism he may play his trump card on his favourite stock markets! Impose tariffs on Chinese investors, or all overseas investors! You are left with using Ibkr to hold your Iwda/eimi for sipc protection but heavily taxed, or transfer to Ibkr UK avoid Trump taxes but lousy Fca protection.

 

[ITlover886]

Too bad you can't hold IWDA in CDP....

Isn't the type of financial instruments that can be purchased depends on the Brokerage Account and not the CDP Account? The CDP Account however, is for only for SGX.

 

[happylcw]

Thank you very much for sharing your experience. I am a newbie and didn't know what MF Global is. Google sends me to this Wiki. Not sure if there is a list some where that lists all brokers that went broke in the past.

Do you mind to let us know how much you managed to get back (in terms of %) after liquidation?

The final amount that I got back is around 85% of the last dated daily statement. I must say that I was quite happy to be able to get back this amount. At one point of time, I had totally lost hope and written the money off, partly because the amount was not too big and I was still having salary income.

Just want to clarify that I am not saying SCB is safer than IB. I am not even saying that the chance of getting the money back from SCB is higher than IB in the event the unfortunate MFG history repeat itself.

The main reason that drives my decision is the process of dealing with a locally based liquidator and an oversea liquidator. I was asking myself how I would feel if I have few hundred thousand holdings with IB but unable to attend the briefing by liquidator which is held in New York due to the distance or personal health at that time.

I totally agree with what BBC said. On top of a fully paid for place to stay and medical insurance, we should have a few buckets of retirement funds such as emergency cash in bank, CPF, local stocks & bonds held in CDP and foreign stocks in custodian brokerage. Even if some low possibility tragedy were to happen, not all is lost.

I would also think it may be prudent to consider diversifying to more than one brokerage firm when one's holding is getting to a significant size. As what hwckhs said, "It's funny that we diversify so much with ETFs to reduce risks with a single stock/issuer, but if all holdings are held in the same broker, that becomes a significant risk." I personally think the risk is real.

 

[happylcw]

Maybe I will do a bit of summary based on what I read from this forum and some other sources. Please correct me if I am wrong.

I would say CDP is still the safest and Singapore is not the only country where shares bought by retail investors are kept in a central securities depository. Most of the newer national stock exchange have a central securities depository. Unfortunately CDP is only for shares listed in SGX so we can only use brokerage firms with custodian account when buying foreign shares.

Both SCB and IB kept the customer shares in segregated custodian account.

If the unfortunate event of MFG (this means not only the brokerage go bust, they also misuse customer fund in the segregated custodian account) happens to SCB, customer shares is not protected by any insurance (no SIPC), no one will step in to make up the difference. MAS will not, even though SCB is regulated by MAS.

If the unfortunate event of MFG happens to IB, SIPC will come into play regardless of citizenship. "A non-U.S. citizen with an account at a brokerage firm that is a member of SIPC is treated the same as a resident or citizen of the United States with an account at a SIPC member brokerage firm."

Since IB is a member of SIPC which protects up to 500k securities and cash, it is safer compared to SCB, even though there are a few caveats here:

1. Securities loaned out by you under the IB yield enhancement program may not be protected by SIPC. Anyone who think the gain is not worth the risk should not join the yield enhancement program.
   
   
2. While Interactive Brokers LLC (IB LLC) is a member of SIPC, Interactive Brokers UK (IB UK) is a subsidiary of IB LLC but it is not a SIPC member. The important thing is which entity is actually holding your investment.

Anyone has answer to no. 2 here since it seems quite crucial?

 

[Izumanyan]

Hi, I posted this in a different thread but hope you guys will allow me to repeat my question here.

I'm new to investment in general, so I'm hoping to get some advice about my future investment.
I was very keen on getting one of the roboadvisors for its simplicity and convenience but after reading more about its fees, I decided against it.

I initially wanted to choose a couple of stocks to invest for the long term (5-10 years) but I'm flooded by choices and not sure I'm heading in the correct direction or not. Might be too influenced by bloggers.

Currently, I'm thinking to split my investment as such:

- Hang Seng (2800): 20%
- CaptiaLand Retail China Trust: 5%
- S&P500: 25%
- NASDAQ: 15%
- Mapletree Commercial Trust: 10%
- Mapletree Logistics Trust: 10%
- Phillip Sing Income ETF: 10%
- Netlink Trust: 5%

Probably rebalance once a year.

Am I investing too much into US Tech? Would this portfolio be suitable for long term wealth growth?