Central depository for US/UK market

[stjoe1]

Is there any CDP-like independent entity for US and UK market where they will keep the shares we buy?

The arrangement using CDP in local market is much better than if the shares are kept with the brokerage firm which also acts as the custodian.

So far, with my limited knowledge on foreign market, the broker will also be the custodian. I believe Interactive Brokers also is the custodian if we buy the shares through them.

This is arrangement in a way is holding us ransom since we cannot sell through other brokers (unless we transfer the shares which typically the transfer cost is expensive and involves paperwork) and they can at anytime change the terms of commissions, custodian fee, etc. like what I experienced with DBS Vickers.

I bought some US shares through DBS Vickers (since in the past they did not have custodian fee), then they start charging ridiculous custodian fee (like $2 per counter per month regardless how much shares you have in each counter. So for me which had about 15 counters will cost $30 per month), so no choice got to sell the shares but again this had to be done through them with their ridiculous commission fee (min US$XX)

Anyone can help to share the info?

 

[Bedokian]

As far as I know, I don't think there is such a facility. In fact, I think the concept of a central pool of securities is alien to traders and investors in the US and UK.

Maybe Shiny Things can confirm this?

 

[stjoe1]

wow if that is really the case -- we have to give thumbs-up to the regulatory here who has implemented the central depository concept ..

As far as I know, I don't think there is such a facility. In fact, I think the concept of a central pool of securities is alien to traders and investors in the US and UK.

Maybe Shiny Things can confirm this?

 

[Shiny Things]

Is there any CDP-like independent entity for US and UK market where they will keep the shares we buy?

Basically the answer is no. If you trade with IBKR, or Merrill, or Schwab, or whoever, your account is held with them, and they are the custodian for your shares (except when they're not; a lot of brokers outsource the custody side to BoNY Mellon's Pershing custody arm or something like it). You still own the shares, they're just in an account at your broker.

It's exactly like a bank account: you still own the money, in every legal sense; it's just that the bank is holding onto it for you.

(But, nerdy side note, it's kinda-sorta yes! There is a thing called DTCC that actually holds All The Shares; you have an account with your broker, and your broker has an account with DTCC. Matt Levine, who is my favourite financial writer ever, sorry Michael Lewis and Bethany McLean, explains it all here, and you should totally read this.)

The arrangement using CDP in local market is much better than if the shares are kept with the brokerage firm which also acts as the custodian.

So on the one hand, it's better because you can buy with one broker and sell with another. That's totally fair. There are also reasons why it's worse. Here we go:

* Your broker doesn't know what you own. This is a massive headache for brokers, not least because it makes the simple act of selling a stock that you already own wildly complicated. Because they can't know whether you own the 500 million Blumont shares you're trying to sell, they have to put trading limits on everybody - so even if you own a stock free and clear, you still might not be able to sell it.
* As a corollary to this, the existence of CDP means it's basically impossible to prevent naked short-selling. How are they supposed to know that I don't own the 500 million Blumont shares I'm trying to sell, and how are they supposed to know I can't get a borrow for them?
* Margin lending becomes basically impossible. Stock margin lending is honestly pretty good business - you lend people money based on clearly visible collateral, and if the value of the collateral falls you can yoink it and sell it very quickly. But in a CDP-style setup, you can't see how much collateral you're lending against, and you can't stop the borrower from selling the collateral out from under your nose.
* And brokers don't - or shouldn't - go down that often. It never fails to amaze me how often people post on here saying "oh the {DBSV/Poems} web server fell over so I had to sell through {OCBC/Kim Eng/Bob's Friendly Discount Brokers of Outer Choa Chu Kang}". If my broker shat the bed that regularly I'd be a bit worried about the safety of my money.

Yeah, the example with DBSV whacking custody fees on sucks, and it's a pain in the ass to get your shares out, but the problem here is not with the lack of a central depository: the problem is that DBSV are greedy scumbags. IBKR charges me exactly zero fees for ACATS transfers out, and they settle in about four business days with no forms, no paper, no nothing. TD Ameritrade charges zero for partial outbound transfers. I've used central-custody and broker-custody systems, and trust me, broker custody is better.

 

[stjoe1]

Thanks Shiny Things for sharing this ..

Now I see the downside of having central depository approach ..

Basically the answer is no. If you trade with IBKR, or Merrill, or Schwab, or whoever, your account is held with them, and they are the custodian for your shares (except when they're not; a lot of brokers outsource the custody side to Bank of New York or something like it). You still own the shares, they're just in an account at your broker.

It's exactly like a bank account: you still own the money, in every legal sense; it's just that the bank is holding onto it for you.

(But, nerdy side note, it's kinda-sorta yes! There is a thing called DTCC that actually holds All The Shares; you have an account with your broker, and your broker has an account with DTCC. Matt Levine, who is my favourite financial writer ever, sorry Michael Lewis and Bethany McLean, explains it all here, and you should totally read this.)



So on the one hand, it's better because you can buy with one broker and sell with another. That's totally fair. There are also reasons why it's worse. Here we go:

* Your broker doesn't know what you own. This is a massive headache for brokers, not least because it makes the simple act of selling a stock that you already own wildly complicated. Because they can't know whether you own the 500 million Blumont shares you're trying to sell, they have to put trading limits on everybody - so even if you own a stock free and clear, you still might not be able to sell it.
* As a corollary to this, the existence of CDP means it's basically impossible to prevent naked short-selling. How are they supposed to know that I don't own the 500 million Blumont shares I'm trying to sell, and how are they supposed to know I can't get a borrow for them?
* Margin lending becomes basically impossible. Stock margin lending is honestly pretty good business - you lend people money based on clearly visible collateral, and if the value of the collateral falls you can yoink it and sell it very quickly. But in a CDP-style setup, you can't see how much collateral you're lending against, and you can't stop the borrower from selling the collateral out from under your nose.
* And brokers don't - or shouldn't - go down that often. It never fails to amaze me how often people post on here saying "oh my {DBSV/Poems} account collapsed so I had to sell through {OCBC/Kim Eng/Bob's Friendly Discount Brokers of Outer Choa Chu Kang}". If my broker shat the bed that regularly I'd be a bit worried about the safety of my money.

Yeah, the example with DBSV whacking custody fees on sucks, and it's a pain in the ass to get your shares out, but the problem here is not with the lack of a central depository: the problem is that DBSV are greedy scumbags. IBKR charges me exactly zero fees for ACATS transfers out, and they settle in about four business days with no forms, no paper, no nothing. TD Ameritrade charges zero for partial outbound transfers. I've used central-custody and broker-custody systems, and trust me, broker custody is better.

 

[lee_tired_sheep]

Broker visibility into holdings notwithstanding, I don't get the logic behind your initial statement.

What you were basically saying was - it's better to have CDP with guaranteed high transaction fees (SG ex SCB) than no central depository with the possibility of high fees (US/UK/SG SCB).

 

[stjoe1]

CDP-like approach will be better as we can buy/sell from any broker.

I think the problem with local market is that the players/brokers tend to "collude" when setting their transaction fee.

Unless the high transaction is due to CDP charging the brokers exorbitant fees which I don't think it is the case as CDP only charge 0.04%

Broker visibility into holdings notwithstanding, I don't get the logic behind your initial statement.

What you were basically saying was - it's better to have CDP with guaranteed high transaction fees (SG ex SCB) than no central depository with the possibility of high fees (US/UK/SG SCB).